• Share
  • Email
  • Embed
  • Like
  • Save
  • Private Content
Corporate Level Strategy: Creating Value through Diversification
 

Corporate Level Strategy: Creating Value through Diversification

on

  • 4,064 views

 

Statistics

Views

Total Views
4,064
Views on SlideShare
4,064
Embed Views
0

Actions

Likes
1
Downloads
69
Comments
0

0 Embeds 0

No embeds

Accessibility

Categories

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

    Corporate Level Strategy: Creating Value through Diversification Corporate Level Strategy: Creating Value through Diversification Presentation Transcript

    • Canadian Strategic Management: Edition Creating Competitive Advantages Gregory G. Dess G. T. Lumpkin Theodore Peridis Part 2: Strategic Formulation Chapter 6 Corporate-Level Strategy: Creating Value through DiversificationSTRATEGIC MANAGEMENTMcGraw-Hill Ryerson Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
    • Learning Objectives • After reading this chapter, you should have a good understanding of: 1. Why firms engage in diversification efforts and how managers can create value through diversification initiatives. 2. How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.Copyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-2
    • Learning Objectives • After reading this chapter, you should have a good understanding of: 3. How corporations can use unrelated diversification to achieve synergistic benefits trough corporate restructuring, parenting, and portfolio analysis. 4. The various means of engaging in diversification: mergers and acquisitions, strategic alliances and joint ventures, internal development.Copyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-3
    • Learning Objectives • After reading this chapter, you should have a good understanding of: 5. The value of real options analysis (ROA) in making resource allocation decisions under conditions of high uncertainty. 6. The reason for the failure of many diversification efforts.Copyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-4
    • Making Diversification Work • What businesses should a corporation compete in? • How should these businesses be managed to jointly create more value than if they were freestanding units?Copyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-5
    • Making Diversification Work • Diversification initiatives must create value for shareholders • Mergers and acquisitions • Strategic alliances • Joint ventures • Internal development • Diversification should create synergy Business Business 1 2Copyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-6
    • Key issues corporate versus business strategy CORPORATE STRATEGY: How to create a competitive advantage for the whole company • What businesses should we be in? • How should these be managed? • How to create value for the corporation as a whole? BUSINESS STRATEGY: How to create a competitive advantage in specific, individual product markets • Which customers to serve (who?) – segmentation • Which customers needs to satisfy (what?) – differentiation • Resources and value chain activities necessary to satisfying customer needs (how?) – “core competencies”Copyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-7
    • Synergy • Related businesses (horizontal relationships) • Sharing tangible resources • Sharing intangible resources Manufacturing Specialized Patents, facilities skills copyrights, etc. Production Distribution Favorable facilities channels reputation Business Business 1 2Copyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-8
    • Synergy • Unrelated businesses (hierarchical relationships) • Value creation derives from corporate office • Leveraging support activities Business Human Firm 2 resource mgmt infrastructure Technology Information Procurement development systems Business 1Copyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-9
    • Creating Value Related Diversification Leveraging core competencies • 3M leverages it competencies in adhesives technologies to many industries, including automotive, construction, and telecommunications Sharing activities • McKesson, a large distribution company, sells many product lines, such as pharmaceuticals and liquor, through its superwarehouses Pooled negotiating power • The Times Mirror Company increases its power over customers by providing “one-stop shopping” for advertisers to reach customers through multiple media—television and newspapers—in several huge markets such as New York and Chicago Vertical integration • Shaw industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input to its manufacturing process Exhibit 6.1 Creating Value through Related and Unrelated DiversificationCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-10
    • Creating Value Unrelated Diversification: Parenting, Restructuring, and Financial Synergies Corporate restructuring and parenting • The corporate office of Cooper Industries adds value to its acquired businesses by performing such activities as auditing their manufacturing operations, improving their accounting activities, and centralizing union negotiations Portfolio management • Novartis, formerly Ciba-Geigy, uses portfolio management to improve many key activities, including resource allocation and reward and evaluation systems Exhibit 6.1 Creating Value through Related and Unrelated DiversificationCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-11
    • Related Diversification: Economies of Scope and Revenue Enhancement • Economies of scope • Cost savings from leveraging core competencies or sharing related activities among businesses in the corporation • Leverage or reuse key resources  Favorable reputation  Expert staff  Management skills  Efficient purchasing operations  Existing manufacturing facilitiesCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-12
    • Leveraging Core Competencies • Core competencies • The glue that binds existing businesses together • Engine that fuels new business growth • Collective learning in a firm  How to coordinate diverse production skills  How to integrate multiple streams of technologies  How to market diverse products and servicesCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-13
    • Three Criteria of Core Competencies • Three criteria (of core competencies) Superior Customer that lead to the creation of value and value synergy • Core competencies must enhance competitive advantage(s) by creating superior customer value • Develop strengths relative to competitors • Build on skills and innovations • Appeal to customersCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-14
    • Three Criteria of Core Competencies • Three criteria (of core competencies) Superior Customer that lead to the creation of value and value synergy • Different businesses in the firm must Businesses be similar in at least one important similar in way way related to the core competence related to core competency • Not essential that products or services themselves be similar • Is essential that one or more elements in the value chain require similar essential skills • Brand image is an exampleCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-15
    • Three Criteria of Core Competencies • Three criteria (of core competencies) Superior Customer that lead to the creation of value and value synergy • Core competencies must be difficult Businesses for competitors to imitate or find similar in way substitutes for related to core competency • Easily imitated or replicated core competencies are not a sound basis for sustainable advantages Difficult to imitate or find • Specialized technical skills substitutes for acquired only in company work experience are an exampleCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-16
    • Sharing Activities • Corporations can also achieve synergy by sharing tangible and value-creating activities across their business units • Common manufacturing facilities • Distribution channels • Sales forces • Sharing activities provide two payoffs • Cost savings • Revenue enhancementsCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-17
    • Cost Savings through Sharing Activities • Most common type of synergy • Savings obtained through • Eliminating duplicate jobs • Eliminating duplicate facilities • Eliminating related expenses • Savings may be offset by • Greater costs of coordinating shared activities • Costs of compromising design or performance of a shared activityCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-18
    • Enhancing Revenue through Sharing Activities • Acquiring firm and its target may achieve a higher level of sales growth together than either could have achieved on its own • Combined distribution channels can escalate sales of the acquiring company’s products • Enhanced effectiveness of differentiation strategies • Can have a negative effect on a given business’s differentiationCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-19
    • Pooled Negotiating Power • Similar businesses working together can Bargaining have stronger bargaining position relative to Bargaining Bargaining power power power • Suppliers • Customers • Competitors Business Business 1 2 • Abuse of bargaining power may affect relationships with customers, suppliers and competitorsCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-20
    • Vertical Integration • Benefits Dependency • Secure source of supply of • Suppliers raw materials • Customers • Secure distribution Business channels 2 Dependency • Protection and control over assets and services Dependency • Suppliers • Access to new business • Customers opportunities and Business technologies 1 • Simplified procurement and administrative proceduresCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-21
    • Vertical Integration • Risks • Costs and expenses associated with increased overhead and capital Business expenditures 2 Dependency • Loss of flexibility resulting from inability to respond quickly to changes in the external environment • Problems associated with Business unbalanced’ capacities or 1 unfilled demand along the value chain • Additional administrative costsCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-22
    • Vertical Integration: Benefits and Risks Benefits • A secure source of raw materials or distribution channels. • Protection of and control over valuable assets. • Access to new business opportunities • Simplified procurement and administrative procedures. Risks • Costs and expenses associated with increased overhead and capital expenditures • Loss of flexibility resulting from large investments. • Problems associated with unbalanced capacities along the value chain. • Additional administrative costs associated with managing a more complex set of activities. Exhibit 6.3 Benefits and Risks of Vertical IntegrationCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-23
    • Vertical Integration In making decisions associated with vertical integration, four issues should be considered 1. Are we satisfied with the quality of the value that our present suppliers and distributors are providing? 2. Are there activities in our industry value chain presently being outsourced or performed independently by others that are a viable source of future profits? 3. Is there a high level of stability in the demand for the organization’s products? 4. How high is the proportion of additional production capacity actually absorbed by existing products or by the prospects of new and similar products?Copyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-24
    • Analyzing Vertical Integration: The Transaction Cost Perspective Negotiating Search costs costs Negotiating Search costs Market costs transaction Enforcement Costs of costs written Monitoring contract contract costsCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-25
    • Unrelated Diversification: Financial Synergies and Parenting • Most benefits from unrelated diversification are gained from vertical (hierarchical) relationships • Parenting and restructuring of businesses • Allocate resources to optimize  Profitability  cash flow  Growth • Appropriate human resources practices • Financial controlsCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-26
    • Corporate Parenting • Parenting—creating Corporate value within business office units • Experience of the • Plans corporate office • Budgets • Procurement • Support of the corporate • Legal functions office • Financial functions • Human resource management Business Business Business unit unit unitCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-27
    • Corporate Restructuring • Find poorly performing Corporate office firms • With unrealized • Sell off parts potential • Reduce payroll • Change strategies • On threshold of • Change management significant positive • Infuse new technologies • Reduce unnecessary expenses change Business Business Business Business Business Business unit unit unit unit unit unitCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-28
    • Corporate Restructuring • Corporate management must • Have insight to detect undervalued companies or businesses with high potential for transformation • Have requisite skills and resources to turn the businesses around • Restructuring can involve changes in • Assets • Capital structure • managementCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-29
    • Portfolio Management Key Each circle represents one of the firm’s business units Size of circle represents the relative size of the business unit in terms of revenueCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-30
    • Portfolio Management • Creation of synergies and shareholder value by portfolio management and the corporate office • Allocate resources (cash cows to stars and some question marks) • Expertise of corporate office in locating attractive firms to acquireCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-31
    • Portfolio Management • Creation of synergies and shareholder value by portfolio management and the corporate office • Provide financial resources to business units on favorable terms reflecting the corporation’s overall ability to raise funds • Provide high quality review and coaching for units • Provide a basis for developing strategic goals and reward/evaluation systemsCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-32
    • Means to Achieve Diversification • Acquisitions or mergers • Pooling resources of other companies with a firm’s own resource base • Joint venture • strategic alliance • Internal development • New products • New markets • New technologyCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-33
    • Mergers and Acquisitions Value Created Value Destroyed Deal Year Since Combination Since Combination Manulife/John Hancock 2003 $ 12.7 billion _____ AOL/Time Warner 2001 _____ $148 billion Vodafone/Mannesmann2000 _____ $299 billion Pfizer/Warner-Lambert 2000 _____ $78 billion Glaxo/SmithKline 2000 _____ $40 billion Chase/J. P. Morgan 2000 _____ $26 billion Exxon/Mobil 1999 $ 8 billion _____ SBC/Ameritech 1999 _____ $68 billion WorldCom/MCI 1998 _____ $94 billion Travelers/Citicorp 1998 $109 billion _____ Daimler/Chrysler“The Numbers Don’t Lie,” Fast Company, September 2002, p. 80. and Thomson Datatream Source: K. H. Hammonds, 1991 _____ $36 billion Exhibit 6.2 Ten Biggest Mergers and Acquisitions of All Time and Their Effect on Shareholder WealthCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-34
    • Strategic Alliances and Joint Ventures Entering new • Introduce successful product markets or service into a new market • Lacks requisite marketing expertise  Doesn’t understand customer needs  Doesn’t know how to promote the product  Doesn’t have access to proper distribution channelsCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-35
    • Strategic Alliances and Joint Ventures Entering new • Join other firms to reduce markets manufacturing (or other) costs in the value chain Reducing • Pool capital costs in value • Pool value-creating activities chain • Pool facilities • Economies of scaleCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-36
    • Strategic Alliances and Joint Ventures Entering new • Develop or diffuse new markets technologies • Use expertise of two or more companies Reducing costs in value • Develop products chain technologically beyond the capability of the companies Developing acting independently diffusing new technologyCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-37
    • Unmet Expectations: Strategic Alliances and Joint Ventures • Improper partner • Each partner must bring desired complementary strengths to partnership • Strengths contributed by each should be unique • Partners must be compatible • Partners must trust one anotherCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-38
    • Real Options Analysis • Stock options (financial assets) • Real options ( real assets or physical things) • Investments can be staged • Strategic decision-makers have “tollgates” • Increased knowledge about outcomes at the time of the next investment decisionCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-39
    • Managerial Motives Can Erode Value Creation • Growth for growth’s sake • Egotism • Antitakeover tactics • Greenmail • Golden parachute • Poison pillsCopyright © 2006 by McGraw-Hill Ryerson, Inc. All rights reserved. 6-40