Corporate Strategy Chapter 10
Learning Objectives Compare corporate strategy decisions to business level strategy decisions. Historical acquisition performance and reasons why. Why companies diversify. Related versus unrelated diversification. Why companies use either type. Tools for managing diversified companies.
Corporate versus Business Strategy Value chain, Resources, Differentiation versus Low Cost approach Corporate strategy Decide which industries to enter / exit Combine divisions in Strategic Business Units Establish investment priorities across SBUs Transfer resources and management between SBUs Structure the multi-divisional company
Historical Perspective on Diversification Diversification among Fortune 500 1949 …………. 30% 1974 …………. 64% 2014 …………. 89% Mergers & acquisition activity 2008: $1.5 Trillion (14% of U.S. GDP) 2015: $2.4 Trillion (12.4% of U.S. GDP) Sources: Rumelt 1982, Financial Times 2014; West 2016
Motivations for Diversification Growth Market power Market entry Risk spreading
Types of Diversification
Related Diversification Achieve synergies with existing businesses Synergies depend on fit in parts of value chain Source of Synergies Market Fit Operational Fit Management Fit Results of Synergies Scope Economizing Economizing; Resources Leverage
Unrelated Diversification No synergies anticipated Depends on financial market imperfections Management identifies under-valued firms with significant growth prospects Unfavorable view of entire industry includes target firm Target firm is unable to access market financing on favorable terms
Diversification Performance Wide distribution, slightly positive average
Favorable Diversification Performance Selecting attractive industries Good strategic rationale Strong due diligence Capturing estimated synergies Post-acquisition integration
Unfavorable Diversification Performance Acquisition premiums Poor due diligence, Bidding wars, CEO hubris, bandwagon effects Capturing estimated synergies* Loss of focus on core businesses Accelerating growth is difficult Post-acquisition integration* (* Note: also in list of favorable factors – must do these well ! )
Evaluating "Parenting Advantage" Fit
Portfolio Management
Portfolio Management
Portfolio Management Drawbacks Evaluates SBUs on market-related factors. Value chain, extraordinary resources, core competences are less important. Static views – do not account for how resources can be shared / leveraged. BCG matrix depends on assumption that high market share is related to superior profitability – not universally true.
Restructuring & Divestiture Downscoping Shedding divisions to strategically re-focus Divestiture Some of the parts are worth more than the sum of the parts Decision process for divestiture Consider same factors as for diversification, only in reverse Unattractive industry, no strategic rationale, inability to capture synergies any longer