*

^CEO Fired

CEO fired November 2000, so 5 year back period is most relevant.

Corporate Strategy

Q: What businesses are we in?

How did we get there?Single BusinessSingle Business

Product Line ExpansionProduct Line Expansion

Geographic Expansion/Geographic Expansion/Vertical IntegrationVertical Integration

DiversificationDiversificationRelated / UnrelatedRelated / Unrelated

AppleDellBuschNewellCokeStarbucksPennzoilPrinter co’s Cat Food

MonsantoNucorVirgin

Why Diversify??

2001Q1 Q2 Q3 Q4

DivisionSales($)

IndustryGrowth

(%)

1996 1997 1998 1999 2000 2001

Benefits of Diversification

• Growth

• Reduce earnings volatility

• Reduce risk

• Move firm into attractive industries

• Prolong “life” of firm

• Improve long-term performance

• Capture synergies and strategic “fit” between businesses

• Steer corporate resources

Types of Diversification• Vertical

• Horizontal– Related– Unrelated

• Geographic

Views of diversification have evolved over time, from driving growth, to “deworsification” losing focus, to related growth.

Lexmark

Why the evolution?

>Change of goals from growth to profitability>Economic downturns of mid 70’s, early 80’s, and 89-90>Pressure on management from LBO’s & institutional shareholders

>Reduced transaction costs>Less confidence in “universality of mgt techniques”

>GE: share resources & transfer capabilities

US Single businesses are plunging from 1949-74, while Related has strong upward trend. Unrelated is increasing as well.

Diversification Strategies, Fortune 500, 1949-74.

Source: Contemporary Strategy Analysis (4th edition), Robert M. Grant, Table 15.1, p. 447

1949 1954 1959 1964 1969 1974Single Business >95% 42% 34% 23% 22% 15% 14%Vertically integrated >70% 13% 12% 13% 14% 12% 12%Dominant >70% <95% 15% 17% 18% 18% 13% 10%Related >70% 26% 32% 39% 37% 41% 42%Unrelated <70% 4% 5% 7% 9% 19% 21%

US Single businesses are plunging from 1949-74, while Related has strong upward trend. Unrelated is increasing as well.

Diversification Strategies, Fortune 500, 1949-74.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1949 1954 1959 1964 1969 1974

Single Business >95%

Vertically integrated >70%

Dominant >70% <95%

Related >70%

Unrelated <70%

Source: Contemporary Strategy Analysis (4th edition), Robert M. Grant, Table 15.1, p. 447

European trends were similar to the US, with Single businesses plunging, Related has strong, though plateauing, upward trend. Unrelated is increasing as well.

Diversification Strategies, European Large Companies, 1950 - 1993. Red is UK, Blue is France, and Black is Germany.

Source: Contemporary Strategy Analysis (4th edition), Robert M. Grant, Table 15.2, p. 448

1950 1960 1970 1983 1993Single France 45% 35% 20% 24% 20%Dominant France 18% 22% 27% 11% 15%Related France 31% 36% 41% 53% 52%Unrelated France 5% 5% 9% 12% 14%Single Germany 39% 27% 27% 18% 13%Dominant Germany 22% 24% 15% 17% 8%Related Germany 31% 38% 38% 40% 48%Unrelated Germany 9% 11% 19% 25% 32%Single UK 24% 18% 6% 7% 5%Dominant UK 50% 36% 32% 16% 10%Related UK 27% 48% 57% 67% 62%Unrelated UK 0% 0% 6% 11% 24%

European trends were similar to the US, with Single businesses plunging, Related has strong, though plateauing, upward trend. Unrelated is increasing as well.

Diversification Strategies, European Large Companies, 1950 - 1993. Red is UK, Blue is France, and Black is Germany. Single companies are focused dots, Related are aligned diamonds, and Unrelated are boxes with everything thrown in.

Source: Contemporary Strategy Analysis (4th edition), Robert M. Grant, Table 15.2, p. 448

0%

10%

20%

30%

40%

50%

60%

70%

1950 1960 1970 1983 1993

Single France

Dominant France

Related France

Unrelated France

Single Germany

Dominant Germany

Related Germany

Unrelated Germany

Single UK

Dominant UK

Related UK

Unrelated UK

Incremental product diversity can lower incremental ROA%, but if still above WACC, may be beneficial.

Diversified Inc.

HQ

Bus. 1 Bus. 2 Bus. 3

$ $$

GrowthSize

Remote Env.

GrowthSize

Remote Env.

GrowthSize

Remote Env.

Entering New Businessesand Evaluating Current Portfolio

• WHY?– Does business fit?

o Financially

o Strategically

o Culturally– If not in this business today, would we want to get into it now?

• HOW?

– Acquisition

– Internal start-up

– Joint ventures

– Reinvest?

– Spin-off/shut down?

Why M&A Activity?• Intensifying competition

• Global markets

• Growth in new industries

• NOTE:

– 20% of all-time M&A activity has occurred within last 3-4 years

Justifications• Attractiveness test

– Industry factors– Core competencies– Strategic position

• Cost of entry test– Buy outstanding shares– Cash– Contributions to merger or JV

• Better off test– Synergies, econ. of scale/scope– Consolidation of resources, activities – Competitive advantage?

Why MBCs “Should” Outperform SBCs

• Economies of Scope– Intangible assets - brand– Consolidate operations

• Efficient Resource Allocation– MBC as “internal” capital market

• Increased Size– Lower cost of capital– Increased market power

Why MBC’s Actually Underperform SBCs

• Why does stock price of acquirer always go down?• Diseconomies of Scope

– Leadership - bureaucracy• Capital Allocation

– Democratic process– Cross-subsidization (e.g., AT&T)

• Misaligned Incentives– Too short-term

• Underdeveloped Corporate Strategy

International Diversification• WHY?

– slow domestic growth (earnings risk?)– intense domestic rivalry– no overseas competition– intense overseas competition

• HOW?– Exporting– Franchising– Joint ventures– Wholly-owned subsidiaries

• Greenfield (internal development)• Mergers & Acquisitions

Alternative Corporate Strategies

• Portfolio reconfiguration…

• Evolutionary Approach

• Corporate Transformation

• Sudden Redefinition

Portfolio Management• Turnaround

– restore competitiveness to poor performers– New advantages created within portfolio

• Retrenchment– narrow scope of portfolio– “stick to your knitting”

• Restructuring– add new businesses / divest poor performers

Evolutionary Approach:Leveraging Competence

• Performance culture (3M, ABB)

• Business system replicator (Gillette)

• Capability leverager (Nike)

• Valuator (Berkshire Hathaway)

• Inventor (H-P, J&J)

• Synergy capturer (Kraft-Genl. Foods)

• Cost squeezer (Sunbeam)

Disney: Capability Leverager• Films• Videos• Network TV• Cable TV• Hotels• Cruise lines• Merchandise• Brand licensing• NEW …

Retail Stores

Toy Story

TV Show

Merchan

diseFood Item

sThem

e Park

Corp. Transformation• Choosing new businesses• Planned Surprises

– Change business portfolio (Monsanto)– Change global portfolio (CitiBank)– Industry consolidation (Chrysler)

TotalReturn

1994

S&P

MTC

Chemicals (18%)

Biotech (38%)

Transformation

TotalReturn

1993

S&P

Nokia

Motorola

Eriksson

• Nokia– 1989: Diversified electrical conglomerate– 1993: 87% telecom focus

Sudden Redefinition• Competitive/performance crisis

• Massive immediate corporate portfolio change– Deregulation– Patents– Foreign competition– M&A in same/related industries

Strategic Planning at Exxon

Evaluation of Diversified Firms

• Identify present corporate strategy– extent and type of diversification

– geographic scope

– new acquisitions

– recent divestitures

– mode of new business entry