Corporate-Level Strategy:

1
Chapter 6

• Corporate-Level Strategy
• Creating Value through Diversification

2
Discussion Objectives

• 1. How corporations can use related
  diversification to achieve synergistic benefits
  through economies of scope and market power.
• 2. How corporations can use unrelated
  diversification to attain synergistic benefits
• 3. The various means of engaging in
  diversification
• 4. Managerial behaviors that can erode the
  creation of value.

3
Does Diversification Make Sense

• Research indicates that diversification is
  generally a bad idea
• Between 33 and 50 of corporate diversification
  efforts end up as divestitures.
• Companies typically pay 30 to 40 premiums to
  acquire target companies.
• All of us can diversify our own portfolios very
  easily and efficiently

4
Key Questions

• Corporate level strategy is concerned with two
  key questions
• What businesses should a corporation compete in?
• How should these businesses be managed to jointly
  create more value than if they were freestanding
  units (synergy)?

5
Diversification Efforts

• Diversification initiatives must create value for
  shareholders
• Mergers and acquisitions
• Strategic alliances
• Joint ventures
• Internal development
• Diversification should create synergy
• Shared value

6
Synergy

• Related businesses - Horizontal relationships
• Sharing intangible resources
• Sharing tangible resources
• Pooled negotiating power
• Vertical integration
• Unrelated businesses.
• Hierarchical relationships - value creation
  derived from the corporate office.
• Leveraging support activities in the value chain

7
Related Diversification Economies of Scope

• 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

8
RD Leveraging Core Competencies.

• Leveraging Core competencies
• Core competencies reflect the collective learning
  in organizations
• How to coordinate diverse production skills,
  integrate multiple streams of technologies, and
  market and merchandise diverse products and
  services.
• Examples?

9
RD Leveraging Cont.

• Core competencies must meet three criteria
• 1. The core competence must enhance competitive
  advantage(s) by creating superior customer value.
  
• 2. Different businesses in the corporation must
  be similar in at least one important way related
  to the core competence.
• 3. The core competencies must be difficult for
  competitors to imitate or find substitutes for.

10
RD - Sharing Activities

• 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 enhancements
• Why do shared activities not lead to these
  benefits?

11
RD Pooled Negotiating Power

• Pooled negotiating power - Similar businesses
  working together can have stronger bargaining
  position relative to
• Suppliers
• Customers
• Competitors
• Abuse of bargaining power may affect
  relationships with customers, suppliers and
  competitors
• What are some other downsides to pooled
  negotiating power??

12
RD - Vertical Integration.

• Benefits
• Secure source of supply of raw materials
• Secure distribution channels
• Protection and control over assets and services
• Access to new business opportunities and
  technologies
• Simplified procurement and administrative
  procedures

13
RD Vertical Integration Cont.

• Risks
• Costs and expenses associated with increased
  overhead and capital expenditures
• Loss of flexibility resulting from inability to
  respond quickly to changes in the external
  environment
• Problems associated with unbalanced capacities or
  unfilled demand along the value chain
• Additional administrative costs

14
RD Vertical Integration Cont.

• Six issues to consider
• 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 organizations products?

15
RD Vertical Integration Cont.

• Six Issues to consider
• 4. How high is the proportion of additional
  production capacity actually absorbed by existing
  products or by the prospects of new and similar
  products?
• 5. Does the company have the necessary
  competencies to execute the vertical integration
  strategies?
• 6. Will the vertical integration initiative have
  potential negative impacts on the firms
  stakeholders?

16
RD Vertical Integration Cont.

• Transaction Cost Perspective VI makes sense if
  the sum of transaction costs to acquire a product
  are more than the costs of manufacturing it
  internally.
• Search costs
• Negotiation costs
• Contracting costs
• Monitoring costs
• Enforcement costs
• Transaction Specific Investments
• Transaction costs versus administrative costs

17
Unrelated Diversification

• 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 resource practices
• Financial controls

18
UD Parenting 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
• Management

19
UD Portfolio Management
20
UD Portfolio MNGT cont.

• 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 acquire
• Provide financial resources to business units on
  favorable terms reflecting the corporations
  overall ability to raise funds
• Provide high quality review and coaching for
  units
• Provide a basis for developing strategic goals
  and reward/evaluation systems

21
UD Portfolio MNGT Cont.

• Risks of the BCG Matrix
• Compares SBUs on only two dimensions
• Mechanical Process
• Views each SBU as a stand alone entity
• Reliance on strict rules regarding resource
  allocation across SBUs can be detrimental to a
  firms long-term viability
• Imagery of the BCG matrix can lead to some
  troublesome and overly simplistic prescriptions.

22
Mergers and Acquisitions

• M A activity in the U.S. increased in recent
  years for 3 primary reasons
• 1. Weak economy
• 2. Weak dollar
• 3. More governance regulations

23
M A Cont.

• Motives for M A Activity
• Speed
• Access to resources
• Expand product and service offerings
• Synergy
• Force other firms to merge
• Enter new markets or market segments

24
M A Cont.

• Potential drawbacks of M A activities
• Take over premium is very high
• Realized advantages are easily duplicated by
  competitors
• Management ego
• Cultural issues

25
Managerial Motives

• Growth for growths sake
• Egotism
• Antitakeover tactics
• Greenmail
• Golden parachute
• Poison pills

26
Discussion Objectives

• 1. How corporations can use related
  diversification to achieve synergistic benefits
  through economies of scope and market power.
• 2. How corporations can use unrelated
  diversification to attain synergistic benefits
• 3. The various means of engaging in
  diversification
• 4. Managerial behaviors that can erode the
  creation of value.