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July 2, 1999July 2, 1999
Corporate Level Strategy
Ian Lee, Ph.D
Carleton University
School of Business
July 2, 1999July 2, 1999
Corporate Strategy
Vertical integration (scale)
Horizontal diversification (scope)
International diversification
M&A versus Strategic Alliances
July 2, 1999July 2, 1999
Jack Welch, CEO-GE
When I was younger I thought therewas a room where all the strategic
concepts were worked out for theentire company.
Only later did I realize there was nosuch room and that the strategy does
not even exist in the mind of any oneperson. It is simply transmitted in aseries of decisions made.
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July 2, 1999July 2, 1999
Grand mothers Advice
Eat your brocolli!
Why? Because its good for you
Why is it good for me?
Because my grandmother told me
July 2, 1999July 2, 1999
American Medical Research
Brocolli is good for you
Why?
Because SGH is an anti-carcinogen
found in high quantities in brocolli
July 2, 1999July 2, 1999
Coca Cola Manager, Prague
Corporate Strategy is very useful
because now I know WHY
my Head Office chose the strategies it
chose
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July 2, 1999July 2, 1999
When an industry with a reputation for
difficult economics meets a manager with
a reputation for excellence, it is usually
the industry that keeps its reputation
intact.
Warren BuffetWarren Buffet
July 2, 1999July 2, 1999
Diversified Company hasDiversified Company has 22 levels of strategylevels of strategy
July 2, 1999July 2, 1999
CorporateCorporate--Level StrategyLevel Strategy (Company(Company--wide Strategy)wide Strategy)
Diversified Company hasDiversified Company has 22 levels of strategylevels of strategy
BusinessBusiness--Level StrategyLevel Strategy(Competitive Strategy)(Competitive Strategy)
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July 2, 1999July 2, 1999
How to create CA in each BU in which firm competesHow to create CA in each BU in which firm competes
Diversified Company hasDiversified Company has 22 levels of strategylevels of strategy
BusinessBusiness--Level StrategyLevel Strategy (Competitive Strategy)(Competitive Strategy)
July 2, 1999July 2, 1999
- low cost
- differentiation
- integrated low cost/differentiation
- low cost
- differentiation
- integrated low cost/differentiation
- focused low cost
- focused differentiation
- focused low cost
- focused differentiation
A Diversified Company hasA Diversified Company has 22 levels of strategylevels of strategy
How to create CA in each BU in which firm competesHow to create CA in each BU in which firm competes
BusinessBusiness--Level StrategyLevel Strategy (Competitive Strategy)(Competitive Strategy)
July 2, 1999July 2, 1999
- low cost
- differentiation
- integrated low cost/differentiation
-- low costlow cost
-- differentiationdifferentiation
-- integrated low cost/differentiationintegrated low cost/differentiation
- focused low cost
- focused differentiation
-- focused low costfocused low cost
-- focused differentiationfocused differentiation
How to create value for corporation as a wholeHow to create value for corporation as a whole
A Diversified Company hasA Diversified Company has 22 levels of strategylevels of strategy
How to create CA in each BU in which competesHow to create CA in each BU in which competesHow to create CA in each BU in which competes
CorporateCorporate--Level StrategyLevel Strategy (Company(Company--wide Strategy)wide Strategy)
BusinessBusiness--Level StrategyLevel Strategy(Competitive Strategy)(Competitive Strategy)
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July 2, 1999July 2, 1999
Purp ose of Corporate Strategy
Maximize shareholder value
why?
Who cares?
Why value value?
July 2, 1999July 2, 1999
Valuing Value Creation
Why are some countrys rich?
Why care if some business people are
rich?
Why should employees care?
July 2, 1999July 2, 1999
Valuing Value Creation
Shareholder wealth is a residual
maximize it - you maximize all
stakeholders
capital flows to returns i.e. moreprofitable firms & countries
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July 2, 1999July 2, 1999
Stakeholder Involvement
Each of the key stakeh olders involved
wants a piece of the same pie
1 How do you divide the pie
in order to keep all
stakeholders in volved?
How do you divide the pie
in order to keep all
stakeholders in volved?
2
How do you increase the
size of pie so that there is
more to go around?
How do you increase th e
size of pie so that there is
more to go around?
July 2, 1999July 2, 1999
Corporate Strategy concernsCorporate Strategy concerns 22 key questions:key questions:
July 2, 1999July 2, 1999
WhatWhat businessesbusinesses should corporation be in?should corporation be in?
Corporate Strategy concernsCorporate Strategy concerns 22 key questions:key questions:
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July 2, 1999July 2, 1999
WhatWhat businessesbusinesses should corporation be in?should corporation be in?
How should Head OfficeHow should Head Office managemanage array ofarray ofBUsBUs??
Corporate Strategy concernsCorporate Strategy concerns 22 key questions:key questions:
July 2, 1999July 2, 1999
WhatWhat businessesbusinesses should the corporation be in?should the corporation be in?
How should Head OfficeHow should Head Office managemanage itsits BUsBUs??
Corporate Strategy = corporate whole add up to >Corporate Strategy = corporate whole add up to >
sum of its BU partssum of its BU parts
Corporate Strategy concernsCorporate Strategy concerns 22 key questions:key questions:
July 2, 1999July 2, 1999
Corporate Strategy
diversified firm is COLLECTIONof
individual businesses (BUs)
Corp.Strat. should create Corporate
Advantage (Cynthia Montgomery)
or Parenting Advantage (Goold/Campbell)
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July 2, 1999July 2, 1999
Corporate Strategy & Diversification
In diversified firm, corporate mgrs must
craft a MULTI-BUSINESS, MULTI-
INDUSTRYstrategy for
different businesses
competing in
diverse industry environments
July 2, 1999July 2, 1999
Focus of Corp orate Strategy
1. Diversification strategies
internal growth, acquisitions, alliances
2. economies of scope
i.e. strategic fit, synergy
3. corporate governance
i.e. corporate-business relationship
July 2, 1999July 2, 1999
Main Tasks for Corporate Strategy
choose scope of diversification
horizontal
vertical
international
choose strategy of diversification acquisition
growth from within
strategic alliance
oversee LR performance of firmsbusinesses
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July 2, 1999July 2, 1999
Corporate Strategies - Scale
Growth (internal, acquisition, alliance)
stability
retrenchment (turnaround, divest,liquidate)
July 2, 1999July 2, 1999
Corporate Strategies - Scope
vertical integration (backward/forward orupstream/downstream)
horizontal diversif (related or unrelated)
international diversification
July 2, 1999July 2, 1999
Corporate Strategies - International
Exporting
Licensing
Joint ventures (alliances)
Acquisitions
Green-field development
Production sharing
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July 2, 1999July 2, 1999
Synergy
Synergy from Greek word synergos
i.e. working together
2 or more BUs or divisions to create moreS/H value
than as separate firms
July 2, 1999July 2, 1999
Synergy
Synergy = economies of scope
economies of scope = strategic fit
strategic fit = closely related businesses
closely related businesses = scopeeconomies = synergy
July 2, 1999July 2, 1999
Economies of Scope
eliminate costsby operating 2 or more
businesses under same corporate umbrella
Exist when less costlyfor 2 or more
businesses to operate under centralized
mgmt
Cost savingsfrom interrelationships
anywhere along businesses VCs
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July 2, 1999July 2, 1999
Goold & Campbell: 6 Types of
Synergy
1. Shared know-how
2. Shared tangibleresources
3. Pooled negotiatingpower
4. Coordinated
strategies
5. Vertical integration
6. Combined businesscreation
July 2, 1999July 2, 1999
Value Chains are part of a Total Value SystemValue Chains are part of a Total Value System
Supplier VC Firm VCFirm VC Channel VC Buyer VC
July 2, 1999July 2, 1999
Value Chains are part of a Total Value SystemValue Chains are part of a Total Value System
Firm VC Channel VC Buyer VC
Supplier VCSupplier VC
Upstream ValueUpstream Value
Perform valuable activities that
complement the firms activities
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July 2, 1999July 2, 1999
Firms Vary by Degree of DiversificationFirms Vary by Degree of Diversification
July 2, 1999July 2, 1999
Firms Vary by Degree of DiversificationFirms Vary by Degree of Diversification
Single-businessSingle-business > 95% revenues from single BU> 95% revenues from single BU
Low Levels of DiversificationLow Levels of Diversification
Dominant-businessDominant-business Between 70% & 95% of revenuesBetween 70% & 95% of revenuesfrom single BUfrom single BU
July 2, 1999July 2, 1999
Firms Vary by Degree of DiversificationFirms Vary by Degree of Diversification
SingleSingle--businessbusiness > 95% revenues from single BU> 95% revenues from single BU
Low Levels of DiversificationLow Levels of Diversification
DominantDominant--businessbusiness Between 70% & 95% of revenuesBetween 70% & 95% of revenuesfrom single BUfrom single BU
Related-DiversifiedRelated-Diversified
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July 2, 1999July 2, 1999
Firms Vary by Degree of DiversificationFirms Vary by Degree of Diversification
SingleSingle--businessbusiness > 95% revenues from single BU> 95% revenues from single BU
Low Levels of DiversificationLow Levels of Diversification
DominantDominant--businessbusiness Between 70% & 95% of revenuesBetween 70% & 95% of revenues
from single BUfrom single BU
RelatedRelated--DiversifiedDiversified
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July 2, 1999July 2, 1999
Premises of Corporate StrategyPremises of Corporate Strategy
Competition occurs atCompetition occurs at BU levelBU level
Diversified firms do not compete with each otherDiversified firms do not compete with each other----
only theironly their BUsBUs compete.compete.
Premises of Corporate StrategyPremises of Corporate Strategy
July 2, 1999July 2, 1999
Premises of Corporate StrategyPremises of Corporate Strategy
Competition occurs at BU levelCompetition occurs at BU level
Diversified firms do not compete with each otherDiversified firms do not compete with each other----
only theironly their BUsBUs compete.compete.
Diversification adds costs & constraints toDiversification adds costs & constraints to BUsBUs
July 2, 1999July 2, 1999
Premises of Corporate StrategyPremises of Corporate Strategy
Competition occurs at BU levelCompetition occurs at BU level
Diversified firms do not compete with each otherDiversified firms do not compete with each other----
only theironly their BUsBUs compete.compete.
DiversificationDiversification adds costs & constraints toadds costs & constraints to BUsBUs
Corporate overheadCorporate overhead
Communication betweenCommunication between BUsBUs & top mgmt& top mgmt
No direct equity ownership by employeesNo direct equity ownership by employees
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July 2, 1999July 2, 1999
Premises of Corporate StrategyPremises of Corporate Strategy
Competition occurs at BU levelCompetition occurs at BU level
Diversified firms do not compete with each otherDiversified firms do not compete with each other----
only theironly their BUsBUs compete.compete.
Diversification adds costs and constraints to BUDiversification adds costs and constraints to BU
Corporate overheadCorporate overhead
Communication between BU & top mgmtCommunication between BU & top mgmt
No direct equity ownership by employeesNo direct equity ownership by employees
ShareholdersShareholders cancan diversifydiversify more cheaply for themselvesmore cheaply for themselves
July 2, 1999July 2, 1999
Premises of Corporate StrategyPremises of Corporate Strategy
Competition occurs at the BU levelCompetition occurs at the BU level
Diversified firms do not compete with each otherDiversified firms do not compete with each other----
only theironly their BUsBUs compete.compete.
Diversification adds costs & constraints toDiversification adds costs & constraints to BUsBUs
Corporate overheadCorporate overhead
Communication betweenCommunication between BUsBUs and top mgmtand top mgmt
No direct equity ownership by employeesNo direct equity ownership by employees
ShareholdersShareholders cancan diversifydiversify more cheaply for themselvesmore cheaply for themselves
Shareholders can buy shares atShareholders can buy shares at mktmkt price & avoidprice & avoid
paying large acquisitionpaying large acquisition premiapremia
July 2, 1999July 2, 1999
Implications for these PremisesImplications for these Premises
Corporate Strategy cannot succeed unlessCorporate Strategy cannot succeed unless addsaddsvalue tovalue to BUsBUs::
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July 2, 1999July 2, 1999
Implications for these PremisesImplications for these Premises
by providingby providing tangible benefits that offsettangible benefits that offset
inherent costsinherent costs of lost independenceof lost independence
Corporate Strategy cannot succeed unless addsCorporate Strategy cannot succeed unless adds
value tovalue to BUsBUs::
--
July 2, 1999July 2, 1999
Implications for these PremisesImplications for these Premises
by providing tangible benefits that offsetby providing tangible benefits that offset
inherent costs of lost independenceinherent costs of lost independence
add value to shareholders in a way thatadd value to shareholders in a way that
shareholders could not replicate by themselvesshareholders could not replicate by themselves
Corporate Strategy cannot succeed truly addsCorporate Strategy cannot succeed truly adds
value tovalue to BUsBUs::
--
--
July 2, 1999July 2, 1999
Adding Value by DiversificationAdding Value by Diversification
Diversification most effectively adds value byDiversification most effectively adds value byeither of 2 mechanismseither of 2 mechanisms
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July 2, 1999July 2, 1999
Adding Value by DiversificationAdding Value by Diversification
By developing economies of scope betweenBy developing economies of scope between
BUsBUs
which leads to synergistic benefitswhich leads to synergistic benefits
Diversification most effectively adds value byDiversification most effectively adds value by
either of 2 mechanismseither of 2 mechanisms
July 2, 1999July 2, 1999
Adding Value by DiversificationAdding Value by Diversification
By developing economies of scope betweenBy developing economies of scope between BUsBUs
which leads to synergistic benefitswhich leads to synergistic benefits
By developing market power which lead toBy developing market power which lead togreater returnsgreater returns
Diversification most effectively adds value byDiversification most effectively adds value by
either of two mechanismseither of two mechanisms
July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Sharing ActivitiesSharing Activities
Corporate Strategy: Reasons to DiversifyCorporate Strategy: Reasons to Diversify
Efficient Internal KEfficient Internal K MktMkt AllocationAllocation
RestructuringRestructuring
Related Diversification Strategies
Unrelated Diversification Strategies
11
22
33
44
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July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Corporate Strategy: Reasons to DiversifyCorporate Strategy: Reasons to Diversify
Related Diversification Strategies
11
July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Key Characteristics
Sharing Activities oftenSharing Activities often lowers costslowers costs oror raisesraises differentiationdifferentiation
July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Key Characteristics
Sharing Activities often lowers costs or raises differentiationSharing Activities often lowers costs or raises differentiation
ExampleExample: Using common physical distribution system &: Using common physical distribution system &
sales force such as Procter & Gambles disposablesales force such as Procter & Gambles disposable
diaper & paper towel divisionsdiaper & paper towel divisions
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July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Key Characteristics
Sharing Activities often lowers costs or raises differentiationSharing Activities often lowers costs or raises differentiation
Sharing Activities can lower costs if it:Sharing Activities can lower costs if it:
ExampleExample: Using common physical distribution system &: Using common physical distribution system &
sales force such as P&s disposable diaper & papersales force such as P&s disposable diaper & paper
towel divisionstowel divisions
** Achieves economies of scaleAchieves economies of scale
** Boosts efficiency of utilizationBoosts efficiency of utilization
** Helps move more rapidly down Learning CurveHelps move more rapidly down Learning Curve
July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Key Characteristics
Sharing Activities often lowers costs or raises differentiationSharing Activities often lowers costs or raises differentiation
Sharing Activities can lower costs if it:Sharing Activities can lower costs if it:
ExampleExample: Using common physical distribution system &: Using common physical distribution system &
sales force such as P&Gs disposable diaper & papersales force such as P&Gs disposable diaper & paper
towel divisionstowel divisions
** Achieves economies of scaleAchieves economies of scale
** Boosts efficiency of utilizationBoosts efficiency of utilization
** Helps move more rapidly down Learning CurveHelps move more rapidly down Learning Curve
ExampleExample: GEs costs to advertise, sell & service major: GEs costs to advertise, sell & service major
appliances spread over many different productsappliances spread over many different products
July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Sharing Activities can enhance potential for or reduce costSharing Activities can enhance potential for or reduce cost
of differentiationof differentiation
Key Characteristics
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July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Sharing Activities can enhance potential for or reduce costSharing Activities can enhance potential for or reduce cost
of differentiationof differentiation
ExampleExample: Shared order processing system may allow new: Shared order processing system may allow new
features which customers value or make more advancedfeatures which customers value or make more advancedremote sensing technology availableremote sensing technology available
Key Characteristics
July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Sharing Activities can enhance potential for or reduce costSharing Activities can enhance potential for or reduce cost
of differentiationof differentiation
Must involve activitiesMust involve activities crucial to CAcrucial to CA
ExampleExample: Shared order processing system may allow new: Shared order processing system may allow new
features customers value or make more advanced remotefeatures customers value or make more advanced remote
sensing technology availablesensing technology available
Key Characteristics
July 2, 1999July 2, 1999
Sharing ActivitiesSharing Activities
Sharing Activities can enhance potential for or reduce costSharing Activities can enhance potential for or reduce cost
of differentiationof differentiation
Must involve activities crucial to CAMust involve activities crucial to CA
ExampleExample: Shared order processing system may allow new: Shared order processing system may allow new
features customers value or make more advanced remotefeatures customers value or make more advanced remote
sensing technology availablesensing technology available
ExampleExample: P&Gs sharing of sales & physical distribution: P&Gs sharing of sales & physical distribution
for disposable diapers and paper towels effective becausefor disposable diapers and paper towels effective because
these items are bulky & costly to shipthese items are bulky & costly to ship
Key Characteristics
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July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Corporate Strategy: Reasons to DiversifyCorporate Strategy: Reasons to Diversify
Related Diversification Strategies
22
Sharing ActivitiesSharing Activities11
July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Key Characteristics
** ExploitsExploits InterrelationshipsInterrelationships among divisionsamong divisions
July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Key Characteristics
** ExploitsExploits InterrelationshipsInterrelationships among divisionsamong divisions
** Start withStart with Value ChainValue Chain analysisanalysis
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July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Key Characteristics
** ExploitsExploits InterrelationshipsInterrelationships among divisionsamong divisions
** Start withStart with VCVCanalysisanalysis
ID ability to transfer skills or expertiseID ability to transfer skills or expertise
among similar VCsamong similar VCs
July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Key Characteristics
** ExploitsExploits InterrelationshipsInterrelationships among divisionsamong divisions
** Start withStart with VCVCanalysisanalysis
ID ability to transfer skills or expertiseID ability to transfer skills or expertise
among similar VCsamong similar VCs
Exploit ability toExploit ability to share activitiesshare activities
2 firms can share same sales force, logistics2 firms can share same sales force, logistics
network or distribution channelsnetwork or distribution channels
July 2, 1999July 2, 1999
Assumptions
Transferring CC leads to CA only if similarities amongTransferring CC leads to CA only if similarities among BUsBUs meetmeetfollowing conditions:following conditions:
Activities involved inActivities involved in BUsBUs are similarare similar enufenufthatthat
sharing expertise is meaningfulsharing expertise is meaningful11
Transferring Core CompetenciesTransferring Core Competencies
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July 2, 1999July 2, 1999
Assumptions
Transferring CC leads to CA only if similarities amongTransferring CC leads to CA only if similarities among BUsBUs meetmeet
following conditions:following conditions:
Activities involved inActivities involved in BUsBUs are similarare similar enufenufthatthatsharing expertise is meaningfulsharing expertise is meaningful11
22 Transfer of skills involves activitiesTransfer of skills involves activities importantimportant
to CAto CA
Transferring Core CompetenciesTransferring Core Competencies
July 2, 1999July 2, 1999
Assumptions
Transferring CC leads to CA only if similarities amongTransferring CC leads to CA only if similarities among BUsBUs meetmeet
following conditions:following conditions:
Activities involved inActivities involved in BUsBUs are similarare similar enufenufthatthat
sharing expertise is meaningfulsharing expertise is meaningful11
22
33
Transfer of skills involves activities which areTransfer of skills involves activities which are
important to competitive advantageimportant to competitive advantage
Skills transferred represent significant sources ofSkills transferred represent significant sources of
CA for receiving unitCA for receiving unit
Transferring Core CompetenciesTransferring Core Competencies
July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Sharing ActivitiesSharing Activities
Corporate StrategyCorporate Strategy -- Reasons to DiversifyReasons to Diversify
Efficient Internal KEfficient Internal K MktMkt AllocationAllocation
Related Diversification Strategies
Unrelated Diversification Strategies
11
22
33
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July 2, 1999July 2, 1999
Key Characteristics
Firms pursuing this strategy frequently diversify by acquisitionFirms pursuing this strategy frequently diversify by acquisition::
Acquire sound, attractive companiesAcquire sound, attractive companies
Efficient Internal KEfficient Internal K MktMkt AllocationAllocation
July 2, 1999July 2, 1999
Key Characteristics
Firms pursuing this strategy frequently diversify by acquisitionFirms pursuing this strategy frequently diversify by acquisition::
Acquire sound, attractive companiesAcquire sound, attractive companies
AcquiredAcquired BUsBUs are autonomousare autonomous
Efficient Internal KEfficient Internal K MktMkt AllocationAllocation
July 2, 1999July 2, 1999
Key Characteristics
Firms pursuing this strategy frequently diversify by acquisitionFirms pursuing this strategy frequently diversify by acquisition::
Acquire sound, attractive companiesAcquire sound, attractive companies
AcquiredAcquired BUsBUs are autonomousare autonomous
Acquiring corporation supplies needed KAcquiring corporation supplies needed K
Efficient Internal KEfficient Internal K MktMkt AllocationAllocation
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July 2, 1999July 2, 1999
Key Characteristics
Firms pursuing this strategy frequently diversify by acquisitionFirms pursuing this strategy frequently diversify by acquisition::
Acquire sound, attractive companiesAcquire sound, attractive companies
AcquiredAcquired BUsBUs are autonomousare autonomousAcquiring corporation supplies needed KAcquiring corporation supplies needed K
Portfolio managers transfer resources fromPortfolio managers transfer resources from BUsBUs thatthat
generate cash to those with high growth potential &generate cash to those with high growth potential &
substantial cash needssubstantial cash needs
Efficient Internal KEfficient Internal K MktMkt AllocationAllocation
July 2, 1999July 2, 1999
Key Characteristics
Firms pursuing this strategy frequently diversify by acquisitionFirms pursuing this strategy frequently diversify by acquisition::
Acquire sound, attractive companiesAcquire sound, attractive companies
AcquiredAcquired BUsBUs are autonomousare autonomous
Acquiring corporation supplies needed KAcquiring corporation supplies needed K
Portfolio managers transfer resources fromPortfolio managers transfer resources from BUsBUs thatthat
generate cash to those with high growth potential andgenerate cash to those with high growth potential and
substantial cash needssubstantial cash needsAdd professional management & control toAdd professional management & control to BUsBUs
Efficient Internal KEfficient Internal K MktMkt AllocationAllocation
July 2, 1999July 2, 1999
Key Characteristics
Firms pursuing this strategy frequently diversify by acquisitionFirms pursuing this strategy frequently diversify by acquisition::
Acquire sound, attractive companiesAcquire sound, attractive companies
AcquiredAcquired BUsBUs are autonomousare autonomous
Acquiring corporation supplies needed KAcquiring corporation supplies needed K
Portfolio managers transfer resources from units thatPortfolio managers transfer resources from units that
generate cash to those with high growth potential andgenerate cash to those with high growth potential and
substantial cash needssubstantial cash needs
Add professional management & control toAdd professional management & control to BUsBUs
BU mgrs compensation based on BU resultsBU mgrs compensation based on BU results
Efficient Internal KEfficient Internal K MktMkt AllocationAllocation
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July 2, 1999July 2, 1999
Efficient Internal KEfficient Internal K MktMkt AllocationAllocation
Assumptions
Mgrs have more detailed knowledge of firm visMgrs have more detailed knowledge of firm vis--aa--visvis
outside investorsoutside investors
July 2, 1999July 2, 1999
Efficient Internal KEfficient Internal K MktMkt AllocationAllocation
Assumptions
Mgrs have more detailed knowledge of firm visMgrs have more detailed knowledge of firm vis--aa--visvis
outside investorsoutside investors
Firm need not risk competitive edge by disclosingFirm need not risk competitive edge by disclosing
sensitive competitive info to investorssensitive competitive info to investors
July 2, 1999July 2, 1999
Efficient Internal KEfficient Internal K MktMkt AllocationAllocation
Assumptions
Mgrs have more detailed knowledge of firm visMgrs have more detailed knowledge of firm vis--aa--visvis
outside investorsoutside investors
Firm can reduce risk by allocating resources amongFirm can reduce risk by allocating resources among
diversified businesses,diversified businesses, althoaltho shareholders can generallyshareholders can generally
diversify more economically on their owndiversify more economically on their own
Firm need not risk competitive edge by disclosingFirm need not risk competitive edge by disclosing
sensitive competitive info to investorssensitive competitive info to investors
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July 2, 1999July 2, 1999
Transferring Core CompetenciesTransferring Core Competencies
Sharing ActivitiesSharing Activities
Corporate StrategyCorporate Strategy -- Reasons to DiversifyReasons to Diversify
Efficient Internal KEfficient Internal K MktMkt AllocationAllocation
RestructuringRestructuring
Related Diversification Strategies
Unrelated Diversification Strategies
11
22
33
44
July 2, 1999July 2, 1999
RestructuringRestructuring
Key Characteristics
Seek out undeveloped, sick or threatened firms orSeek out undeveloped, sick or threatened firms or
industriesindustries
July 2, 1999July 2, 1999
RestructuringRestructuring
Key Characteristics
Seek out undeveloped, sick or threatened organizationsSeek out undeveloped, sick or threatened organizations
or industriesor industries
Parent company (acquirer) intervenes& frequently:Parent company (acquirer) intervenes& frequently:
-- Changes BU mgmt teamChanges BU mgmt team
-- Shifts strategyShifts strategy
-- Infuses firm with new technologyInfuses firm with new technology
-- Divests part of firmDivests part of firm
-- Makes additional acquisitions to achieve critical massMakes additional acquisitions to achieve critical mass
-- Enhances discipline by changing control systemsEnhances discipline by changing control systems
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July 2, 1999July 2, 1999
Key Characteristics
Seek out undeveloped, sick or threatened organizationsSeek out undeveloped, sick or threatened organizations
or industriesor industries
Frequently sell BU after making 1Frequently sell BU after making 1--time changes sincetime changes since
parent no longer adds value to ongoing operationsparent no longer adds value to ongoing operations
RestructuringRestructuring
Parent company (acquirer) intervenes and frequently:Parent company (acquirer) intervenes and frequently:
-- Changes BU mgmt teamChanges BU mgmt team
-- Shifts strategyShifts strategy
-- Infuses firm with new technologyInfuses firm with new technology
-- Divests part of firmDivests part of firm
-- Makes additional acquisitions to achieve critical massMakes additional acquisitions to achieve critical mass
-- Enhances discipline by changing control systemsEnhances discipline by changing control systems
July 2, 1999July 2, 1999
Assumptions
Requires keen mgmt insight to select firms withRequires keen mgmt insight to select firms with
depressed values or unforeseen potentialdepressed values or unforeseen potential
RestructuringRestructuring
July 2, 1999July 2, 1999
Assumptions
Requires keen mgmt insight to select firms withRequires keen mgmt insight to select firms with
depressed values or unforeseen potentialdepressed values or unforeseen potential
Must do more than restructure companiesMust do more than restructure companies
Need to initiate restructuring of industries toNeed to initiate restructuring of industries to
create more attractive environmentcreate more attractive environment
RestructuringRestructuring
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July 2, 1999July 2, 1999
During 1970s, consulting firms popularized portfolioDuring 1970s, consulting firms popularized portfolio
matrix techniques to evaluate firms mix of businessesmatrix techniques to evaluate firms mix of businesses
BCG matrixBCG matrix focused on relativefocused on relative mktmkt share & segmentshare & segmentgrowthgrowth
Portfolio Matrix Analysis TechniquesPortfolio Matrix Analysis Techniques
July 2, 1999July 2, 1999
During 1970s, consulting firms popularized portfolioDuring 1970s, consulting firms popularized portfolio
matrix techniques to evaluate firms mix of businessesmatrix techniques to evaluate firms mix of businesses
BCG matrix focused on relativeBCG matrix focused on relative mktmkt share & segmentshare & segment
growthgrowth
These techniques now largely discredited because theyThese techniques now largely discredited because they
led to excessive focus on shifting financial resources &led to excessive focus on shifting financial resources &
lacked strategic insight for diversification decisionslacked strategic insight for diversification decisions
Portfolio Matrix Analysis TechniquesPortfolio Matrix Analysis Techniques
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Note on Diversification
Michael Porter
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Porter
Porter studied diversification efforts
1950-86
divestment rate for unrelatedacquisitions was 74%
mkt shows unrelated diversification afailure
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Porters Diversification Tests
1. attractiveness test
2. cost of entry test
3. better off test
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1. Attractiveness Test
shd only diversify into attractive
industries
attractive means high entry barriers,modest buyer and supplier power, weaksubstitutes and stable rivalry
often use rapid growth as proxy for
attractiveness - not so
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2. Cost of Entry Test
entry costs must not capitalize future
profits
more attractive a firm, higher purchasecost
higher entry barriers for attractiveindustries
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3. Better Off Test
either new unit must obtain CA from its
link with corporate or vice versa
not = diversifying corp risk to create S/V
diversification of risk should be by-product of corporate strategy - not driver
CEOs confuse firm size with S/V
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Porters Corporate Strategy Ad vice
1. identify interrelationships among SBUs
2.select core business that are foundation
of core strategy among SBUs
3.create horizontal mechanisms to
facilitate interrelationships among corebusinesses
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Porters Corporate Strategy
4.locate diversification activities that allow
shared activities
5.pursue diversif thro transfer of skills ifopportunities for sharing activities usedup