Developing corporate strategy

MGMT 619Prof. Sanjay Jain

Corporate Strategy

Diversified company has 2 levels of strategy Business-level strategy

How to create competitive advantage in each of company’s businesses

Corporate-level strategy How to create value for the corporation as a

whole

Corporate Strategy

2 key questions of corporate strategy What businesses should we be in? How should these be managed?

Walt Disney Co.

Theme Parks TelevisionCruise LineMovie

Production

CORPORATELEVEL

BUSINESSLEVEL

Degrees of Diversification

Low

High BUS A

BUS B

BUS C

Unrelated

Single Business

>95%

BUS A

BUS B

Dominant Business

70%-95%

Related

BUS A

BUS B

BUS C

sharing value chain

5

Diversification and value creation

Geographic diversification

Horizontaldiversification

Verticaldiversification

Does this createvalue?

• Economies of scale/scope?

• Revenue- enhancement opportunities?

6

Sources of value from diversification

Economies of scope

Lower price of a common

resource by combining purchases

Share manufacturing capacity to reduce average costs

Share distribution to reduce average distribution costs

Revenue-enhancement synergies

Bundle products to appeal to new customers

Cross sell to existing customers

Achieve higher valuation from larger, more predictable cash flows

Sharing Activities Often lowers costs due to economies of

scope Anheuser Busch’s Eagle Snacks were sold

through its beer distributors …or scale economies

P&G’s diapers and paper towels are both made from paper pulp

Can enhance potential for or reduce the cost of differentiation Shared order processing systems may allow

new features customers value (Amazon.com)

Transferring Core Competencies

Exploit interrelationships among divisions Identify ability to transfer skills and expertise

among similar value chains (across divisions) Activities must be sufficiently similar that sharing

is possible

Examples: FedEx’s logistics expertise Toyota’s core competence in engines Sony’s core competence in miniaturization

Synergy: A mirage?

Synergies are possible, but difficult to obtain, due to

- potential loss of focus - likelihood of competitors’ responses - incompatibility of resources - tangible (computer systems) - intangible (culture clashes)

Corporate strategy and M&A’s M&A’s are:

dominant means of diversification major strategic action (vs. tactical) significant and unique capital budgeting

decision no dry run -- all money paid up front substantial exit costs (in dollars and

reputation) managing integration extremely complex --

much like a new business

Overly diversified / Loss of focusOverly diversified / Loss of focusAcquirer doesn’t have expertise required to manage unrelated Acquirer doesn’t have expertise required to manage unrelated businesses or is preoccupied with acquisitionsbusinesses or is preoccupied with acquisitions

Too LargeToo LargeBureaucracy reduces innovation and flexibilityBureaucracy reduces innovation and flexibility

Problems with Acquisitions

Costly debt can create onerous burden on cash outflowsCostly debt can create onerous burden on cash outflows

Extraordinary Debt

Integration difficultiesIntegration difficultiesDiffering cultures can make integration of firms difficultDiffering cultures can make integration of firms difficult

Inadequate evaluation of target / Excessive Inadequate evaluation of target / Excessive premiumpremium

Required performance improvements are unrealisticRequired performance improvements are unrealistic

Problems with Acquisitions

Non-complementary capabilities

What’s the true value of an acquisition?

• Intrinsic value

• Market value

• Purchase price

• Synergy value

• Value gap

Calculating Synergy Value

• Cost savings

• Revenue enhancements

• Process improvements

• Financial engineering

• Tax benefits

Calculating synergy value

Takes place under horrendous conditions:

- Time pressure intense

- Information limited

- Confidentiality must be maintained

Imposing discipline on the deal process• Reigning in emotion

• Worrying about competition

• Use of more sophisticated valuation techniques

• Setting policies regarding deal-making

• Reviewing prior acquisitions to understand success/failure

Complementary CapabilitiesComplementary CapabilitiesBuying firms with assets that meet current needs to build Buying firms with assets that meet current needs to build competitivenesscompetitiveness

Friendly deals make integration go more smoothlyFriendly deals make integration go more smoothly

Deliberate evaluation and negotiations is more likely to lead to Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergieseasy integration and building synergies

Friendly acquisitionFriendly acquisition

Careful selection processCareful selection process

Characteristics of Effective Acquisitions

• Flexibility, adaptability, experience at managing changeFlexibility, adaptability, experience at managing change• Willingness/ability to continue to invest in R&D & Willingness/ability to continue to invest in R&D & support innovationsupport innovation

• Low to moderate debt levels that maintain flexibilityLow to moderate debt levels that maintain flexibility• Sufficient financial slack to cushion failures & fund otherSufficient financial slack to cushion failures & fund other profitable projects profitable projects

Characteristics of Effective Acquisitions

Financial Conditions

Organizational Conditions

Collaborative Advantage

Ability to create and sustain fruitful collaborations gives companies a significant competitive advantage

Managing the partnership in human terms

Collaborative Advantage

More than just the deal: evolve progressively in their possibilities

Collaboration rather than mere exchange

Dense web of interpersonal connections and internal infrastructures

North American – tend to take a narrow, opportunistic view of relationships

Collaborative Advantage

Selection and courtship- self analysis, chemistry, compatibility

Engagement- specificity, commitments, independence

Setting up housekeeping- gaining broader involvement, discovering difference, respect vs. resentment

Collaborative Advantage

Learning to collaborate- integration: strategic, tactical, operational, interpersonal, cultural

Changing within- infrastructure for learning

Takeaways

• Corporate strategy and its associated activity – acquisitions and alliances – play a key role in defining a firm’s competitiveness

• Understanding motives for acquisitions/alliances

• Realizing synergies

• Acquisitions and alliances as alternative strategies