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Corporate-Level Strategy:

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Search costs. Negotiation costs. Contracting costs. Monitoring costs. Enforcement costs ... Management ego. Cultural issues. Strategic Alliances & Joint Ventures ... – PowerPoint PPT presentation

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Title: 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.
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