Developing corporate strategy MGMT 619 Prof. Sanjay Jain.
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Transcript of Developing corporate strategy MGMT 619 Prof. 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