Discussion 5 Global strategy
TonKung
StratMan-CreatingValueThrDiversification.ppt6-*
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Corporate-Level Strategy:
Creating Value through Diversification
McGraw-Hill/Irwin
Strategic Management, 3/e
Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter six
Part 2:
strategic formulation
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Learning Objectives
- After reading this chapter, you should have a good understanding of:
- How managers can create value through diversification initiatives.
- The reasons for the failure of many diversification efforts.
- How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
McGraw-Hill/Irwin
Strategic Management, 3/e
Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objectives
- After reading this chapter, you should have a good understanding of:
- How corporations can use unrelated diversification to attain synergistic benefits trough corporate restructuring, parenting, and portfolio analysis.
- The various means of engaging in diversification-mergers and acquisitions, joint ventures/strategic alliances, and internal development.
McGraw-Hill/Irwin
Strategic Management, 3/e
Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objectives
- After reading this chapter, you should have a good understanding of:
- The benefits and potential drawbacks of real options analysis (ROA) in making resource allocation decisions under conditions of high uncertainty.
- Managerial behaviors that can erode the creation of value.
McGraw-Hill/Irwin
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Making Diversification Work
McGraw-Hill/Irwin
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- What businesses should a corporation compete in?
- How should these businesses be managed to jointly create more value than if they were freestanding units?
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Making Diversification Work
McGraw-Hill/Irwin
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- Diversification initiatives must create value for shareholders
- Mergers and acquisitions
- Strategic alliances
- Joint ventures
- Internal development
- Diversification should create synergy
Business 2
Business 1
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Synergy
McGraw-Hill/Irwin
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- Related businesses (horizontal relationships)
- Sharing tangible resources
- Sharing intangible resources
Business 2
Business 1
Production facilities
Distribution channels
Favorable reputation
Patents, copyrights, etc.
Specialized skills
Manufacturing facilities
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Synergy
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- Unrelated businesses (hierarchical relationships)
- Value creation derives from corporate office
- Leveraging support activities
Technology development
Business 2
Business 1
Procurement
Information systems
Human resource mgmt
Firm infrastructure
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Creating Value
McGraw-Hill/Irwin
Strategic Management, 3/e
Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Leveraging core competencies
- 3M leverages it competencies in adhesives technologies to many industries, including automotive, construction, and telecommunications
Sharing activities
- McKesson, a large distribution company, sells many product lines, such as pharmaceuticals and liquor, through its superwarehouses
Related Diversification: Economies of Scope
Related Diversification: Market Power
Pooled negotiating power
- The Times Mirror Company increases its power over customers by providing “one-stop shopping” for advertisers to reach customers through multiple media—television and newspapers—in several huge markets such as New York and Chicago
Vertical integration
- Shaw industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input to its manufacturing process
Exhibit 6.2 Creating Value through Related and Unrelated Diversification
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Creating Value
McGraw-Hill/Irwin
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Corporate restructuring and parenting
- The corporate office of Cooper Industries adds value to its acquired businesses by performing such activities as auditing their manufacturing operations, improving their accounting activities, and centralizing union negotiations
Portfolio management
- Novartis, formerly Ciba-Geigy, uses portfolio management to improve many key activities, including resource allocation and reward and evaluation systems
Unrelated Diversification: Parenting, Restructuring, and Financial Synergies
Exhibit 6.2 Creating Value through Related and Unrelated Diversification
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Related Diversification: Economies of
Scope and Revenue Enhancement
McGraw-Hill/Irwin
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- 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
- Existing manufacturing facilities
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Leveraging Core Competencies
McGraw-Hill/Irwin
Strategic Management, 3/e
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- Core competencies
- The glue that binds existing businesses together
- Engine that fuels new business growth
- Collective learning in a firm
- How to coordinate diverse production skills
- How to integrate multiple streams of technologies
- How to market diverse products and services
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Three Criteria of Core Competencies
McGraw-Hill/Irwin
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- Three criteria (of core competencies) that lead to the creation of value and synergy
- Core competencies must enhance competitive advantage(s) by creating superior customer value
- Develop strengths relative to competitors
- Build on skills and innovations
- Appeal to customers
Superior
Customer
value
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Three Criteria of Core Competencies
McGraw-Hill/Irwin
Strategic Management, 3/e
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- Three criteria (of core competencies) that lead to the creation of value and synergy
- Different businesses in the firm must be similar in at least one important way related to the core competence
- Not essential that products or services themselves be similar
- Is essential that one or more elements in the value chain require similar essential skills
- Is essential that one or more elements in the value chain require similar essential skills
- Brand image is an example
Superior
Customer
value
Businesses similar in way related to core competency
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Three Criteria of Core Competencies
McGraw-Hill/Irwin
Strategic Management, 3/e
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- Three criteria (of core competencies) that lead to the creation of value and synergy
- Core competencies must be difficult for competitors to imitate or find substitutes for
- Easily imitated or replicated core competencies are not a sound basis for sustainable advantages
- Specialized technical skills acquired only in company work experience are an example
Superior
Customer
value
Businesses similar in way related to core competency
Difficult to imitate or find substitutes for
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Sharing Activities
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- 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
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Related Diversification: Market Power
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- Two principal means to achieve synergy through market power
- Pooled negotiating power
- Vertical integration
- Government regulations may restrict this power
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- 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
Pooled Negotiating Power
Bargaining power
Bargaining power
Bargaining power
Business 1
Business 2
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Vertical Integration
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- 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
Dependency
- Suppliers
- Customers
Dependency
- Suppliers
- Customers
Dependency
Business 1
Business 2
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Vertical Integration
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- 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
Dependency
Business 1
Business 2
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Vertical Integration: Benefits and Risks
McGraw-Hill/Irwin
Strategic Management, 3/e
Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
A secure source of raw materials or distribution channels.
Protection of and control over valuable assets.
Access to new business opportunities
Simplified procurement and administrative procedures.
Benefits
Risks
Costs and expenses associated with increased overhead and capital expenditures
Loss of flexibility resulting from large investments.
Problems associated with unbalanced capacities along the value chain.
Additional administrative costs associated with managing a more complex set of activities.
Exhibit 6.4 Benefits and Risks of Vertical Integration
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Vertical Integration
McGraw-Hill/Irwin
Strategic Management, 3/e
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In making decisions associated with vertical integration, four issues should be considered:
- Are we satisfied with the quality of the value that our present suppliers and distributors are providing?
- Are there activities in our industry value chain presently being outsourced or performed independently by others that are a viable source of future profits?
- Is there a high level of stability in the demand for the organization’s products?
- How high is the proportion of additional production capacity actually absorbed by existing products or by the prospects of new and similar products?
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Analyzing Vertical Integration:
The Transaction Cost Perspective
McGraw-Hill/Irwin
Strategic Management, 3/e
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Market transaction
Monitoring costs
Monitoring costs
Enforcement costs
Enforcement costs
Costs of written contract
Costs of written contract
Search costs
Search costs
Negotiating costs
Negotiating costs
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Unrelated Diversification: Financial Synergies and Parenting
McGraw-Hill/Irwin
Strategic Management, 3/e
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- 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 resources practices
- Financial controls
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Corporate Parenting
McGraw-Hill/Irwin
Strategic Management, 3/e
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- Parenting—creating value within business units
- Experience of the corporate office
- Support of the corporate office
- Plans
- Budgets
- Procurement
- Legal functions
- Financial functions
- Human resource management
Corporate office
Business unit
Business unit
Business unit
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Corporate Restructuring
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Strategic Management, 3/e
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- Find poorly performing firms
- With unrealized potential
- On threshold of significant positive change
- Sell off parts
- Reduce payroll
- Change strategies
- Change management
- Infuse new technologies
- Reduce unnecessary expenses
Corporate office
Business unit
Business unit
Business unit
Business unit
Business unit
Business unit
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Corporate Restructuring
McGraw-Hill/Irwin
Strategic Management, 3/e
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- 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
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Portfolio Management
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Strategic Management, 3/e
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Adapted from Exhibit 6.5 The Boston Consulting Group (BCG) Portfolio Matrix
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
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Portfolio Management
McGraw-Hill/Irwin
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- 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
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Portfolio Management
McGraw-Hill/Irwin
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- 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
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Means to Achieve Diversification
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- Acquisitions or mergers
- Pooling resources of other companies with a firm’s own resource base
- Joint venture
- Strategic alliance
- Internal development
- New products
- New markets
- New technology
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Strategic Alliances and Joint Ventures
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Strategic Management, 3/e
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- Introduce successful product or service into a new market
- Lacks requisite marketing expertise
- Doesn’t understand customer needs
- Doesn’t know how to promote the product
- Doesn’t have access to proper distribution channels
Entering new markets
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Strategic Alliances and Joint Ventures
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Strategic Management, 3/e
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- Join other firms to reduce manufacturing (or other) costs in the value chain
- Pool capital
- Pool value-creating activities
- Pool facilities
- Economies of scale
Entering new markets
Reducing costs in value chain
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Strategic Alliances and Joint Ventures
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- Develop or diffuse new technologies
- Use expertise of two or more companies
- Develop products technologically beyond the capability of the companies acting independently
Entering new markets
Reducing costs in value chain
Developing diffusing new technology
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Unmet Expectations: Strategic Alliances
and Joint Ventures
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- Improper partner
- Each partner must bring desired complementary strengths to partnership
- Strengths contributed by each should be unique
- Partners must be compatible
- Partners must trust one another
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Real Options Analysis
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- Stock options (financial assets)
- Real options ( real assets or physical things)
- Investments can be staged
- Strategic decision-makers have “tollgates”
- Increased knowledge about outcomes at the time of the next investment decision
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Managerial Motives Can Erode Value Creation
McGraw-Hill/Irwin
Strategic Management, 3/e
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- Growth for growth’s sake
- Egotism
- Antitakeover tactics
- Greenmail
- Golden parachute
- Poison pills
