CHAPTER 6
Corporate Strategy
CORPORATE STRATEGY
• Portfolio or “mix” of businesses of a company• Parallels investment portfolio concept from finance• Corporate strategy IS NOT business or business
level strategy• Corporate strategy is about combination of
businesses within a company• Focuses on owner/stockholder as main
stakeholder—creation of value for owners through “mix” of businesses
• Diversification
MAKING DIVERSIFICATION WORK• What businesses should a corporation compete
in?• How should these businesses be managed to
jointly create more value than if they were freestanding units?
MAKING DIVERSIFICATION WORK• Diversification initiatives must create value for
shareholders– Mergers and acquisitions– Strategic alliances– Joint ventures– Internal development
• Diversification should create synergy
Business 1
Business 2
MOVING ALONG THE VALUE CHAIN
• Vertical– Backward integration– Forward integration
• Horizontal– Diversification– Alliances
SYNERGY
• Related businesses (horizontal relationships)– Sharing tangible resources– Sharing intangible resources
• Unrelated businesses (hierarchical relationships)– Value creation derives from corporate office– Leveraging support activities
DIVERSIFICATION REASONS CONTINUUM
Least Power to
Create Value
Most Power to
Create Value
Reducing
Risk
Maintaining
Growth
Balancing
Cash
Flows
Sharing
Infrastructure
Increasing
Market
Power
Capitalizing
on Core
Competencies
Not
Recommended
as a Reason
to Diversify
Recommended
as a Reason
to Diversify
ADDING VALUE
• The critical question
• Deploying and exploiting current resources
• Developing and expanding new resources
Exploit v. Expand
ADDING VALUE THROUGH DIVERSIFICATION BY EXPLOITING
CURRENT RESOURCES
Value From
“Front-end,” customer-facing part of the business
• Expand customer base• Better serve existing
customers, through more, better products
“Back-end” operational parts of the business
• Create economies of scope or increase scale
• Broaden existing production capacity
• Adopt new technology platforms
ADDING VALUE THROUGH DIVERSIFICATION BY ENHANCING
CURRENT RESOURCES
Value From
“Front-end,” customer-facing part of the business
• Gain new market knowledge• Add new brands• Identify new trends earlier
“Back-end” operational parts of the business
• Improve quality, productiviy, or other best practices
• Access innovative process or product technologies
• Enhance R&D capabilities or outputs
MECHANISMS TO CREATE VALUE
Slack
Synergy
Shared Knowledge
Similar Business Models
Spreading Capital
Stepping stone
DESTROYING VALUE THROUGH DIVERSIFICATION
• Hubris• Sunk Cost Fallacy• Imitation• Poor Governance and Incentives• Poor Management• Lack of Resources
2 WAYS TO DIVERSIFY
Go it alone—Greenfield
Buy your way in—acquisition
ENTRY MODE
Greenfield • Existing resources
move from existing to new business– Brand– Customer knowledge– Technology overlap
• Speed not essential
Acquisition• Resources don’t
move from existing to new business– No brand equity– New customers– New technology
• Speed essential
ACQUISITION AND INTEGRATION
• Have real, value-creating reasons for the acquisition
• Perform Due Diligence• Determine appropriate acquisition premium• Integrate the acquisition
ACQUISITION INTEGRATION STRATEGIES
Bury—completely absorb target, also termed takeover
Build—a new organization, best of breed, often from merger
Blend—loose coupling, leverage target
Bolt-on—two companies, one owner
INTEGRATING BUSINESS UNITS
INTEGRATING BUSINESS UNITS
Source of value
creation
Employing Slack
Creating Synergy
Stepping Stones
Shared Knowledge
Similar Models
Spread capital
Degree of Integration
Tightly integrated
Well integrated
Integrated Moderately integrated
Loosely integrated
Not integrated
Reason Best exploit economies of scope, knowledge, and skills.
Cost sharing requires integrated operations
Innovation builds on common resources
Building new knowledge and skill requires close proximity and exchange but also freedom of action by the acquired firm
Sharing overlapping knowledge, but allowing each business to exploit unique knowledge
Only those areas with common model will gain through shared practices.
Keep units separate to monitor performance and create accountability
THE PORTFOLIO APPROACH
• Historical starting point for strategic analysis and choice in multibusiness firms
• Portfolio techniques focusing on – “balancing” the flow of cash resources among
various businesses– while identifying their basic strategic purpose
within the overall portfolio
PORTFOLIO MANAGEMENT
Key
Each circle represents one of the firm’s business units
Size of circle represents the relative size of the business unit in terms of revenue
The Industry Attractiveness – Business strength Matrix
Strong Average Weak
High Premium – invest for growth
Selective – invest for growth
Protect/refocus – selectively invest for earnings
Medium Challenge—invest for growth
Prime—selectively invest for earnings
Restructure – harvest or divest
Low Opportunistic – selectively invest for earn
Opportunistic – preserve for harvest
Harvest or divest
Business Strength
Indu
stry
Attr
activ
enes
s
EXAMPLE• Church & Dwight has a well balanced portfolio of
products, which includes– Arm & Hammer– Trojan condoms– Oxi Clean– AIM toothpastes– First Response– Nair– Xtra laundry detergent– Brillo
Source: www.churchdwight.com
PORTFOLIO MANAGEMENT (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• Creation of synergies and shareholder value by
portfolio management and the corporate office– Provide financial resources to business units on
favorable terms reflecting the corporation’s overall ability to raise funds
– Provide high quality review and coaching for units– Provide a basis for developing strategic goals and
reward/evaluation systems
LIMITATIONS OF PORTFOLIO APPROACH
• Does not address how value is created across business units
• Accurate measurement for matrix classification not easy • Relationship between market share and profitability
varies across industries and market segments• Limited strategic options came to be seen more as basic
strategic missions• Ignores capital raised in capital markets, focusing
excessively on internal cash flows• Failed to compare the competitive advantage a business
received from being owned by a particular company with the costs of owning it
WHAT DID YOU LEARN TODAY?
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