Copyright © Houghton Mifflin Company. All rights reserved. STRATEGIC MANAGEMENT Lecture 10 Dr. John Kraft Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Overview Diversification The process of adding new businesses to the company that are distinct from its established operations Vehicles for diversification Internal new venturing Starting a new business from scratch Acquisitions Joint ventures Restructuring Reducing the scope of diversified operations by exiting from business areas Source: Publisher’s PowerPoint, Ch10-Slide 2 Copyright © Houghton Mifflin Company. All rights reserved.

Expanding Beyond a Single Industry Advantages of staying in a single industry Focus resources and capabilities on competing successfully in one area Focus on what the company knows and does best Disadvantages of being in a single industry Danger of the industry declining Missing the opportunity to leverage resources and capabilities to other activities Resting on laurels and not continually learning Source: Publisher’s PowerPoint, Ch10-Slide 3 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Opening Case Samsung’s Success Copyright © Houghton Mifflin Company. All rights reserved.

Types of Diversification Related diversification Entry into a new business activity in a different industry that is related to a company’s existing business activity, or activities, by commonalities between one or more components of each activity’s value chain Unrelated diversification Entry into industries that have no obvious connection to any of a company’s value chain activities in its present industry or industries Source: Publisher’s PowerPoint, Ch10-Slide 13 Copyright © Houghton Mifflin Company. All rights reserved.

Bureaucratic Costs and Diversification Strategy The costs increases that arise in large, complex organizations due to managerial inefficiencies Number of businesses in a company’s portfolio Information overload Coordination among businesses Inability to identify the unique profit contribution of a business unit that shares resources with another unit Source: Publisher’s PowerPoint, Ch10-Slide 15 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Strategy in Action Cisco Systems is Entering New Industries Copyright © Houghton Mifflin Company. All rights reserved.

Bureaucratic Costs and Diversification Strategy (cont’d) Limits of diversification Bureaucratic costs place a limit on the amount of diversification that can profitably be pursued Related or unrelated diversification? Related diversified companies can create value in more ways than unrelated companies, but they have to bear higher bureaucratic costs Source: Publisher’s PowerPoint, Ch10-Slide 17 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Strategy in Action Postacquisition Problems at Mellon Bank Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Real World “The Restructuring of Sears” Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Real World “McDonald’s to Shed Only 2 Brands” Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Real World “Downscoping at Corning” Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Film Nike Click for Video Nike Copyright © Houghton Mifflin Company. All rights reserved.

Entry Strategies to Implement Multibusiness Model Various entry strategies may be employed based on the company’s competencies and capabilities: Internal New Ventures Company has a set of valuable competencies in its existing businesses. Competences leveraged or recombined to enter new business areas. Acquisitions Company lacks important competencies to compete in an area. Company can purchase an incumbent company that has those competencies at a reasonable price. Joint Ventures Company can increase the probability of success by teaming up with another company with complementary skills. Joint ventures are preferred when risks and costs of setting up a new business unit are more than company can assume. Copyright © Houghton Mifflin Company. All rights reserved.

 Pitfalls of New Ventures Scale of entry Large-scale entry is initially more expensive than small- scale entry, but it brings higher returns in the long run. Commercialization Technological possibilities should not overshadow market needs and opportunities. Poor implementation Demands on cash flow Need clear strategic objectives Anticipate time and costs Copyright © Houghton Mifflin Company. All rights reserved.

 Guidelines for Successful Internal New Venturing Structured approach to managing internal new venturing: Research aimed at advancing basic science and technology Development research aimed at finding and refining commercial applications for the technology Foster close links between R&D and marketing; between R&D and manufacturing Selection process for choosing ventures Monitor progress Copyright © Houghton Mifflin Company. All rights reserved.

 The Attractions of Acquisition Acquisitions are the principle strategy used to implement horizontal integration: Used to achieve diversification when the company lacks important competencies Enable a company to move quickly Perceived as less risky than internal new ventures An attractive way to enter a new industry that is protected by high barriers to entry Copyright © Houghton Mifflin Company. All rights reserved.

 Acquisition Pitfalls There is ample evidence that many acquisitions fail to create value or to realize their anticipated benefits: Integrating the acquired company Difficulty in integrating value-chain and management activities High management and employee turnover in acquired company Overestimating the economic benefits Overestimate the competitive advantages and value-added that can be derived from the acquisition Pay too much for the target company The expense of acquisitions Premium paid for publicly traded companies Premium cancels out the prospective value-creating gains Inadequate preacquisition screening Weaknesses of acquisitions’ business model are not clear Copyright © Houghton Mifflin Company. All rights reserved.

 Guidelines for Successful Acquisition Target identification and preacquisition screening for: Financial position Distinctive competencies and competitive advantage Changing industry boundaries Management capabilities Corporate culture Bidding strategy Avoid hostile takeovers and speculative bidding. Encourage friendly takeover with amicable merger. Integration Eliminate duplication of facilities and functions. Divest unwanted business units included in acquisition. Learning from experience Conduct post-acquisition audits. Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Real World “Maytag’s Profit Plunges 80% on Higher Costs, Lower Sales” Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Real World “Haier Offer Casts a Chill over Maytag Home Town” Copyright © Houghton Mifflin Company. All rights reserved.

Entry Strategy: Joint Ventures—Attractions Helps avoid the risks and costs of building a new operation up from the ground floor Teaming with another company that has complementary skills and assets may increase the probability of success Source: Publisher’s PowerPoint, Ch10-Slide 27 Copyright © Houghton Mifflin Company. All rights reserved.

Entry Strategy: Joint Ventures—Pitfalls Requires the sharing of profits if the new business succeeds Venture partners must share control; conflicts on how to run the joint venture can cause failure Runs the risk of giving critical know-how away to joint venture partner Source: Publisher’s PowerPoint, Ch10-Slide 28 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Restructuring Reducing the scope of the company by exiting business areas Why restructure? Diversification discount: investors see highly diversified companies as less attractive Complexity and lack of transparency in financial statements Too much diversification or for the wrong reasons Response to failed acquisitions Innovations have diminished the advantages of vertical integration or diversification Source: Publisher’s PowerPoint, Ch10-Slide 29 Copyright © Houghton Mifflin Company. All rights reserved.

Restructuring Strategies Exit strategies Divestment Spinoff Selling to another company Management buyout (MBO) Harvest Liquidation Source: Publisher’s PowerPoint, Ch10-Slide 30 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Closing Case Tyco Changing Corporate Level Strategies Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Closing Case e-Bay Aquire Skype Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. End of Lecture 10 Copyright © Houghton Mifflin Company. All rights reserved.