Class #10: Executing Strategies – Growth Via Acquisitions

Remember A Company is a Portfolio of Distinctive Competencies? Consider the company as a portfolio of distinctive competencies rather than a portfolio of products Identify how those competencies might be leveraged to create opportunities Existing industries vs. existing competencies New industries vs. existing competencies

Consider the company as a portfolio of distinctive competencies rather than a portfolio of products

Identify how those competencies might be leveraged to create opportunities

Existing industries vs. existing competencies

New industries vs. existing competencies

Remember Establishing a Competency Agenda? Source: Reprinted by permission of Harvard Business School Press. From Competing for the Future: Breakthrough Strategies for Seizing Control of Your Industry and Creating the Markets of Tomorrow by Gary Hamel and C. K. Prahalad, Boston, MA. Copyright © 1994 by Gary Hamel and C. K. Prahalad. All rights reserved.

Options for Strategic Growth Integration Horizontal - Acquiring or merging with industry competitors Vertical integration - Expanding operations backward or forward along the value chain Strategic outsourcing Letting some value creation activities within a business be performed by an independent entity Diversification Adding new businesses that are distinct from established operations

Integration

Horizontal - Acquiring or merging with industry competitors

Vertical integration - Expanding operations backward or forward along the value chain

Strategic outsourcing

Letting some value creation activities within a business be performed by an independent entity

Diversification

Adding new businesses that are distinct from established operations

Some firms choose a mix of each Sony’s Mix of Corporate Level Strategies

Horizontal Integration – Acquiring or Merging With Competitors Pros Reduce costs Increase value Product bundling Cross selling Manage industry rivalry Increase bargaining power Cons Fail to create value Implementation is not easy and often controversial Fail to produce the anticipated gains Bring the company into conflict with antitrust law

Pros

Reduce costs

Increase value

Product bundling

Cross selling

Manage industry rivalry

Increase bargaining power

Cons

Fail to create value

Implementation is not easy and often controversial

Fail to produce the anticipated gains

Bring the company into conflict with antitrust law

Vertical Integration – Acquire Along the Value Chain Pros Builds barriers to entry Facilitates investments in specialized assets Protects product quality Improves scheduling Cons Causes cost disadvantages - Company-owned suppliers often have higher costs than external suppliers Reduces flexibility to make rapid technological change Increases unpredictability of demand – Hard to coordinate among vertically integrated activities Increases bureaucratic and administrative costs

Pros

Builds barriers to entry

Facilitates investments in specialized assets

Protects product quality

Improves scheduling

Cons

Causes cost disadvantages - Company-owned suppliers often have higher costs than external suppliers

Reduces flexibility to make rapid technological change

Increases unpredictability of demand – Hard to coordinate among vertically integrated activities

Increases bureaucratic and administrative costs

Diversification - Expanding Beyond a Single Industry Advantages of staying in a single industry Focus resources and capabilities on competing successfully in one area Focus on what the company knows and does best Advantages of moving beyond a single industry Reduce dependence on fortune of one industry, especially if volatile Exploit the opportunity to leverage resources and capabilities to other activities Create new opportunities to learn Hold a competitor in check that has either entered its industry or has the potential to do so

Advantages of staying in a single industry

Focus resources and capabilities on competing successfully in one area

Focus on what the company knows and does best

Advantages of moving beyond a single industry

Reduce dependence on fortune of one industry, especially if volatile

Exploit the opportunity to leverage resources and capabilities to other activities

Create new opportunities to learn

Hold a competitor in check that has either entered its industry or has the potential to do so

Diversification – Establishing A Multibusiness Model Part 1: Develop a business model for each industry in which the company competes Develop a higher-level multibusiness model that justifies entry into different industries Determine which competencies are important for establishing competitive advantage

Part 1:

Develop a business model for each industry in which the company competes

Develop a higher-level multibusiness model that justifies entry into different industries

Determine which competencies are important for establishing competitive advantage

Diversification – Establishing A Multibusiness Model Part 1 Develop a business model for each industry in which the company competes Develop a higher-level multibusiness model that justifies entry into different industries Determine which competencies are important for establishing competitive advantage Part 2 Consider how to transfer or leverage competencies Determine where there are opportunities to create economies of scale or share resources

Part 1

Develop a business model for each industry in which the company competes

Develop a higher-level multibusiness model that justifies entry into different industries

Determine which competencies are important for establishing competitive advantage

Part 2

Consider how to transfer or leverage competencies

Determine where there are opportunities to create economies of scale or share resources

Example: Transfer of Competencies at Philip Morris

Example: Sharing Resources at Procter & Gamble

What Can You Learn From How 3M Creates Innovation? Their success is due to: A culture that encourages risk taking A focus on solving customer problems The use of stretch goals Autonomy for employees to pursue their own ideas Considering technologies the property of 3M to be shared at will A process to share technologies and expertise A reward structure that recognizes innovators. Chapter 10: Strategy in Action When 3M creates new businesses, it uses concrete and specific mechanisms for encouraging innovation, sharing resources, and transferring competencies.

Their success is due to:

A culture that encourages risk taking

A focus on solving customer problems

The use of stretch goals

Autonomy for employees to pursue their own ideas

Considering technologies the property of 3M to be shared at will

A process to share technologies and expertise

A reward structure that recognizes innovators.

Understand the Limits and Management Challenges of Diversification Related diversification is only marginally more profitable than unrelated diversification Extensive diversification tends to depress rather than improve profitability Costs increase in large, complex organizations due to managerial inefficiencies Number of businesses in a company’s portfolio may result in information overload Coordination among businesses makes it hard to identify the unique profit contribution of a business unit

Related diversification is only marginally more profitable than unrelated diversification

Extensive diversification tends to depress rather than improve profitability

Costs increase in large, complex organizations due to managerial inefficiencies

Number of businesses in a company’s portfolio may result in information overload

Coordination among businesses makes it hard to identify the unique profit contribution of a business unit

There Are Strong Arguments for Using Acquisitions Achieves horizontal integration Achieves diversification when the company lacks important competencies Supports quick move Provides improved chance of larger scale positive returns Less risky than internal new ventures

Achieves horizontal integration

Achieves diversification when the company lacks important competencies

Supports quick move

Provides improved chance of larger scale positive returns

Less risky than internal new ventures

Yet Acquisitions Have Many Pitfalls Post-acquisition integration hard Economic benefits often overestimated, e.g. the illusive “synergy” Expensive to close the transaction Pre-acquisition screening often rushed, inadequate and incomplete, e.g. the surprise “oops” after the deal is closed

Post-acquisition integration hard

Economic benefits often overestimated, e.g. the illusive “synergy”

Expensive to close the transaction

Pre-acquisition screening often rushed, inadequate and incomplete, e.g. the surprise “oops” after the deal is closed

Understand Bower’s five kinds of M&As Overcapacity M&A Geographic Roll-up M&A Product or Market Extension M&A M&A as R&D Industry Convergence M&A

Overcapacity M&A

Geographic Roll-up M&A

Product or Market Extension M&A

M&A as R&D

Industry Convergence M&A

Joint Ventures are an Alternative and Attractive Way for Market Entry Generates scale economies Gains access to strategic market Overcomes trade barriers Acquires a needed asset or competency Avoids the risks and costs of building a new operation from the ground floor Uses complementary skills and assets that may increase the probability of success

Generates scale economies

Gains access to strategic market

Overcomes trade barriers

Acquires a needed asset or competency

Avoids the risks and costs of building a new operation from the ground floor

Uses complementary skills and assets that may increase the probability of success

Motivations for Alliances Continue to Change Produce with latest technology Market beyond borders Sell product Ensure constant streams of innovation Optimize costs Gain advantage in resource and knowledge Build industry position Consolidate position Gain economies of scope and scale 1970s 1980s Post 2000 Product-Performance Focused Learning and Capabilities Focused Position Focused Source: Harbison and Pekar, Smart Alliances , Jossey-Bass, 1998

Produce with latest technology

Market beyond borders

Sell product

Ensure constant streams of innovation

Optimize costs

Gain advantage in resource and knowledge

Build industry position

Consolidate position

Gain economies of scope and scale

Completing Acquisitions Across Country Lines Other Dimensions of Complexity What is the company’s overall strategy for globalization? What degree of local responsiveness and standardization is required? How much coordination across value chain activities is required as a company moves towards globalization or transnational strategies?

What is the company’s overall strategy for globalization?

What degree of local responsiveness and standardization is required?

How much coordination across value chain activities is required as a company moves towards globalization or transnational strategies?

There is a strong relationship between global strategy and appropriate structures

Key Take-Aways Diversification not an effective risk management strategy Stockholders can diversify their own portfolios at lower costs than the company can Research suggests that corporate diversification is not an effective way to pool risks Growth on its own does not create value

Diversification not an effective risk management strategy

Stockholders can diversify their own portfolios at lower costs than the company can

Research suggests that corporate diversification is not an effective way to pool risks

Growth on its own does not create value

Key Take-Aways Acquisitions are hard, but can be done well Plan ahead - Target identification Take time - Preacquisition screening Choose a bidding strategy - Hostile vs. friendly takeover Choose a bidding time - Sound businesses that are suffering from short-term or localized problems are usually undervalued Manage completely – Integration focused on areas of competitive advantage and excess or duplicate costs reduced quickly Learn from experience

Acquisitions are hard, but can be done well

Plan ahead - Target identification

Take time - Preacquisition screening

Choose a bidding strategy - Hostile vs. friendly takeover

Choose a bidding time - Sound businesses that are suffering from short-term or localized problems are usually undervalued

Manage completely – Integration focused on areas of competitive advantage and excess or duplicate costs reduced quickly

Learn from experience