Competitive Advantage to Corporate Strategy Group 6 Sachin . Arun KA . Balaji . Swapnil . Arobinda

Corporate Strategy Darling of the contemporary management practice 2 basis level of strategies for any company Business Strategy Corporate Strategy 2 Questions answered by Corporate Strategy What business the corporation should be in ? How the corporate office should manage the array of business units How to measure diversification? Market values after mergers….short term!!! Main Objective --- to create shareholders value 17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy

Darling of the contemporary management practice

2 basis level of strategies for any company

Business Strategy

Corporate Strategy

2 Questions answered by Corporate Strategy

What business the corporation should be in ?

How the corporate office should manage the array of business units

How to measure diversification?

Market values after mergers….short term!!!

Main Objective --- to create shareholders value

Corporate Strategy Premises Competition occurs at the business unit level Diversification inevitably adds to costs & constraints Shareholders can diversify themselves Essential Tests The Attractiveness Test The Cost of Entry test The Better-off test 17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy Out of 33 major companies, >60% divested

Premises

Competition occurs at the business unit level

Diversification inevitably adds to costs & constraints

Shareholders can diversify themselves

Essential Tests

The Attractiveness Test

The Cost of Entry test

The Better-off test

How attractive is an Industry Industry with high return Diversification cannot create value for shareholders, unless have favourable structure If not, should consider restructuring of the firm Poor industry structure can lead to unhappy diversification Example: Dutch Shell’s unsuccessful acquisitions like Billiton (Mining) , Bechtel (Power generation) Don’t rush into fast-growing industries Mistook early growth for long term potential Example: Video Games, Personal Computers, Robotics 17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy

Industry with high return

Diversification cannot create value for shareholders, unless have favourable structure

If not, should consider restructuring of the firm

Poor industry structure can lead to unhappy diversification

Example: Dutch Shell’s unsuccessful acquisitions like Billiton (Mining) , Bechtel (Power generation)

Don’t rush into fast-growing industries

Mistook early growth for long term potential

Example: Video Games, Personal Computers, Robotics

Attractiveness Test Evaluation based on relative attractiveness 17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy Measures Weighting Ind. Rating Ind. Attract. Co. A Co. B Co. C Co. A Co. B Co. C Mkt size 0.10 6.0 2.0 5 0.6 0.2 0.5 Growth Rate 0.15 1.0 8.0 5 0.15 1.2 0.75 Intensity (comp) 0.30 2.0 9.0 5 0.6 2.7 1.5 Resource reqs 0.10 3.0 5.0 5 0.3 0.5 0.5 Strategic fit 0.15 6.0 8.0 5 0.9 1.2 0.75 Opps / threats 0.05 1.0 6.0 5 0.05 0.3 0.25 Social, political… 0.05 1.0 4.0 5 0.05 0.2 0.25 Degree of risk 0.05 1.0 4.0 5 0.05 0.2 0.25 Industry profitability 0.05 7.0 5.0 5 0.35 0.25 0.25 1.0 3.05 6.75 5.00

Evaluation based on relative attractiveness

Cost of Entry Test If cost of entry > expected returns ……. No shareholder value If the acquirer beats market prices, not reflecting the prospects…pressure Example: Philip Morris acquires 7-up (4 times the book value) More attractive an industry, more the cost of entry 17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy

If cost of entry > expected returns ……. No shareholder value

If the acquirer beats market prices, not reflecting the prospects…pressure

Example: Philip Morris acquires 7-up (4 times the book value)

More attractive an industry, more the cost of entry

Better-Off Test Corporation should bring in competitive advantage to the new unit or vice versa If the benefit is one-time, it is best to sell the unit once got the benefits…as does not add value to shareholders Example: Baxter Travenol and American Hospitality Supply 17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy

Corporation should bring in competitive advantage to the new unit or vice versa

If the benefit is one-time, it is best to sell the unit once got the benefits…as does not add value to shareholders

Example: Baxter Travenol and American Hospitality Supply

Concepts of Corporate Strategy Major reasons for diversification failures Failure to address the 3 tests Lack of clearness in the concept of corporate strategy Poor Implementation of the strategies 4 Major concepts of corporate strategy are Portfolio Management Restructuring Transferring Skills Sharing Activities 17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy Requires No Connection among Business Units Depends on connection among Business Units To create value through company’s each autonomous unit Exploits the relationship between businesses.

Major reasons for diversification failures

Failure to address the 3 tests

Lack of clearness in the concept of corporate strategy

Poor Implementation of the strategies

4 Major concepts of corporate strategy are

Portfolio Management

Restructuring

Transferring Skills

Sharing Activities

Portfolio Management Acquire sound, attractive companies with competent mangers who stay Companies acquired needs to be autonomous and should be compensated based on its results Requires good but undervalued companies But, the success of this is a ‘Past’ Thing. More complex nature of portfolio, difficult to manage… Gulf & Western Sara Lee 17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy

Acquire sound, attractive companies with competent mangers who stay

Companies acquired needs to be autonomous and should be compensated based on its results

Requires good but undervalued companies

But, the success of this is a ‘Past’ Thing.

More complex nature of portfolio, difficult to manage…

Gulf & Western

Sara Lee

Restructuring Underdeveloped, sick, or threatened organizations or industries on the threshold of significant change Parent intervenes frequently changing the management team, shifting strategy, or infusing the company with new technology Business is sold when parent is no longer adding value Some Restructuring companies Hanson Trust Loews BTR When well implemented, it passes all 3 tests Major Pitfall – Companies find it difficult to divest once restructured 17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy

Underdeveloped, sick, or threatened organizations or industries on the threshold of significant change

Parent intervenes frequently changing the management team, shifting strategy, or infusing the company with new technology

Business is sold when parent is no longer adding value

Some Restructuring companies

Hanson Trust

Loews

BTR

When well implemented, it passes all 3 tests

Major Pitfall – Companies find it difficult to divest once restructured

Transferring Skills Knowledge about how to perform activities is transferred among the units Characterized by units with similar buyers, channels, value activities and/or the same strategic concept Example A toiletries business unit, can give the marketing skills, positioning concepts, promotion techniques to a cough syrup business unit Expertise must be a meaningful source of competitive advantage Companies which diversified using this concept 17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy

Knowledge about how to perform activities is transferred among the units

Characterized by units with similar buyers, channels, value activities and/or the same strategic concept

Example

A toiletries business unit, can give the marketing skills, positioning concepts, promotion techniques to a cough syrup business unit

Expertise must be a meaningful source of competitive advantage

Companies which diversified using this concept

Sharing Activities Leads to lowering costs or raising differentiation Must involve activities that are significant to competitive advantage and costs outweighed by benefits Business unit collaboration is encouraged and reinforced Example 17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy Uses common physical distribution system and sales force in both paper towels and disposable diapers Shared Procurement and distribution system for food serves in all Marriott units Fully Integrated Real Estate unit

Leads to lowering costs or raising differentiation

Must involve activities that are significant to competitive advantage and costs outweighed by benefits

Business unit collaboration is encouraged and reinforced

Example

Shared Procurement and distribution system for food serves in all Marriott units

Fully Integrated Real Estate unit

Action Program Identify Interrelationships Among Units Select Core Business Facilitate Interrelationships Diversify Via Shared Activities Diversify Via Transfer of Skills Diversify Via Restructuring Pay Dividends Instead Create a Corporate theme A way to ensure that corporation will create shareholder value 17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy

Identify Interrelationships Among Units

Select Core Business

Facilitate Interrelationships

Diversify Via Shared Activities

Diversify Via Transfer of Skills

Diversify Via Restructuring

Pay Dividends Instead

Create a Corporate theme

A way to ensure that corporation will create shareholder value

Corporate Theme - Examples NEC Corporation Corporate Theme --- ‘C&C’ in 1978 Started to integrate ‘Computers and Communications’ 17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy Columbia Broadcasting System Corporate Theme --- ‘Entertaining Company’ Started to diversify in toys, crafts, musical instruments, sport teams But, failed miserably None has any significant opportunity for sharing activity or transferring skills

NEC Corporation

Corporate Theme --- ‘C&C’ in 1978

Started to integrate ‘Computers and Communications’

Columbia Broadcasting System

Corporate Theme --- ‘Entertaining Company’

Started to diversify in toys, crafts, musical instruments, sport teams

But, failed miserably

None has any significant opportunity for sharing activity or transferring skills

Thank you