Rationalizing Diversification and Building Shareholder Value SESSION 12: CORPORATE LEVEL STRATEGY: Analysis and Choice in The Multi-Business Company Rationalizing Diversification and Building Shareholder Value

The Concept of Corporate-Level Strategy Primary Question - Where to Compete? Are there other business opportunities? Entering or exiting Industries

CL Strategy – Whether to Diversify? Synergies Growth Opportunities Agency Issues – “Empire Building”

Diversification Corporate strategy to enter into a new market or industry which the business is not currently in, whilst also creating a new product for that market

When? Expand into a business activity that doesn’t negatively react to the same economic downturns as your current business activity Growth potential in present business Attractiveness of opportunities to transfer Potential cost-savings opportunities Availability of adequate resources Managerial expertise to cope with complexity

Questions to Ask What can our company do better than any of its competitors in its current market? What strategic assets do we need in order to succeed in the new market? Can we catch up to or leapfrog competitors at their own game? Will diversification break up strategic assets that need to be kept together? Will we be simply a player in the new market or will we emerge a winner? What can our company learn by diversifying, and are we ssufficiently organized to learn it?

Motives for Diversification To grow To more fully utilize existing resources and capabilities To escape from undesirable or unattractive industry environments To make use of surplus cash flows

Risks & Rewards Increased Sales and Revenue Dependency Reduction Operational Stress Brand Damage

Failed BP and Exxon: tried to use their knowledge of exploration, extraction, and large-scale management capabilities in the mineral business. What they didn’t have? Access to deposits Coca-Cola: tried to use their intimate knowledge of consumers, marketing and branding expertise, and distribution capabilities in the wine business. So, what was the problem? They knew nothing about wine!

Concentric Diversification Primary Industry Expanding into market or products that are related to current business Related diversification Opportunities to expand product offerings or expand into new geographical areas Very complex and difficult to coordinate different but related businesses A B C

Examples Pepsi Co. Canon Johnson & Johnson Bought Taco Bell, KFC, Pizza Hut, and Frito Lay Canon Cameras to Photocopiers Johnson & Johnson Baby shampoo and Neutrogena skin care products

Conglomerate Diversification Primary Industry Expanding into industries unrelated to its current business Unrelated diversification Helps the company to continue to grow after a core business has matured or started to decline Company can’t lack expertise about their new business A B

Examples General Electric Samsung Virgin Group Limited Radios, fridges, and wind turbines TV networks Financial service firms Oil drilling Jet Aircraft Engines Samsung Phones, TVs, and tablets Military hardware Apartments Korean amusement parks Virgin Group Limited Travel and entertainment Financial services Wineries Mobile phones Space Tourism

Multibusiness Corporations Corporations comprised of multiple businesses are often referred to as having a portfolio of businesses

By Definition a change in Corporate Level Strategy should be reflected in a change in Mission Statement

                                 

                                               

                                                                   

                                                                                             

                                                                                                                                                                SONY PICTURES STUDIOS

CADBURY SCHWEPPES, PLC. DR. PEPPER/SEVEN UP, INC   DR. PEPPER/SEVEN UP, INC .   SNAPPLE LA CASERA ORANGINA CANADA DRY  MOTT’S HAWAIIAN PUNCH TRINA CLAMATO SOLO A & W GINI SUNKIST CANADA DRY SQUIRT ENERGADE CRUNCHIE FRUIT & NUT MINIHEROES

The Portfolio Approach to Corporate Level Strategy Research Allocation Decisions How does Corporate Affiliation Provide Value?

GE and McKinsey The Concept of The SBU Corporate Review Capability Matrices to Facilitate/Illuminate the Resource Allocation Decision

To Be Designated an SBU, Businesses had to: Have a unique mission independent of other SBUs Have a clearly definable set of competitors Compete in external markets Be able to carry out integrative planning relatively independent of other SBUs Be able to manage resources in key areas Be large enough to justify senior management attention

Balancing Financial Resources: Portfolio Techniques BCG Growth-Share Matrix Industry Attractiveness-Business Strength Matrix Life Cycle-Competitive Strength Matrix

BCG Growth-Share Matrix Cash Generation (Market Share) High Low Market Share: Sales relative to those of other competitors in market (dividing point is usually selected to have only 2-3 largest competitors in any market fall into high market share region) Growth Rate: Industry growth rate in constant dollars (dividing point is typically GNP’s growth rate) Description of Dimensions Star Problem Child Cash Cow Dog High Low Cash Use (Growth Rate)

Industry Attractiveness Factors Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix Industry Attractiveness Factors Nature of Competitive Rivalry Number of competitors Size of competitors Strength of competitors’ corporate parents Price wars Competition on multiple dimensions Bargaining Power of Suppliers/Customers Relative size of typical players Numbers of each Importance of purchases from or dales to Ability to vertically integrate Threat of Substitutes/ New Entrants Technological maturity/stability Diversity of the market Barriers to entry Flexibility of distribution system

Industry Attractiveness Factors Fig. 9-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (continued) Industry Attractiveness Factors Economic Factors Sales volatility Cyclicality of demand Market growth Capital intensity Financial Norms Average profitability Typical leverage Credit practices Sociopolitical Considerations Government regulation Community support Ethical standards

Business Strength Factors Fig. 9-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (continued) Business Strength Factors Cost Position Economies of scale Manufacturing costs Overhead Scrap/waste/rework Experience effects Labor rates Proprietary processes Level of Differentiation Promotion effectiveness Product quality Company image Patented products Brand awareness Response Time Manufacturing flexibility Time needed to introduce new products Delivery times Organizational flexibility

Business Strength Factors Fig. 9-3: Factors Considered in Constructing an Industry Attractiveness-Business Strength Matrix (concluded) Business Strength Factors Financial Strength Solvency Liquidity Break-even point Cash flows Profitability Growth in revenues Human Assets Turnover Skill level Relative wage/salary Morale Managerial commitment Unionization Public Approval Goodwill Reputation Image

Fig. 9-4: Industry Attractiveness-Business Strength Matrix Medium High Low Industry Attractiveness Industry Attractiveness: Subjective assessment based on broadest possible range of external opportunities and threats beyond control of management Business Strength: Subject assessment of how strong a competitive advantage is created by a broad range of a firm’s internal strengths and weaknesses Description of Dimensions Invest Selective Growth Grow or Let Go Selective Growth Grow or Let Go Harvest Divest Low High Medium Business Strength

Terminology is less offensive and more understandable Advantages of the Industry Attractiveness-Business Strength Matrix over the BCG Matrix Terminology is less offensive and more understandable Multiple measures associated with each dimension tap many factors relevant to business strength and market attractiveness Allows for broader assessment during both strategy formulation and implementation for a multibusiness company

Fig. 9-5: Market Life Cycle-Competitive Strength Matrix Growth Introduction Maturity Stage of Market Life Cycle Decline Stage of Market Life Cycle: See page 182 Competitive Strength: Overall subjective rating, based on wide range of factors regarding likelihood of gaining and maintaining a competitive advantage Description of Dimensions Invest Aggressively Push: Caution: Invest Selectively Danger: Harvest Low High Moderate Competitive Strength

Contributions of Portfolio Approaches Convey large amounts of information about diverse businesses and corporate plans in a simplified format Illuminate similarities and differences among businesses, conveying the logic behind corporate strategies for each business Simplify priorities for sharing corporate resources across diverse businesses Provide a simple prescription of what should be accomplished - a balanced portfolio of businesses

Limitations of Portfolio Approaches Does not address how value is created across business units Accurate measurement for matrix classification not as easy as matrices implied Underlying assumption about relationship between market share and profits varies across different industries and market segments Limited strategic options viewed as basic strategic missions Portrays notion that firms need to be self-sufficient in capital Fails to compare competitive advantage a business receives from being owned by a particular company with costs of owning it