Today’s News n Pepsi’s challenges u Spun-off restaurants u Acquired Tropicana u Pepsi Bottling IPO n Disney -- Retail stores u Baby merchandize u White goods u Paint n AT&T u Spin-off or sell Consumer Long Distance unit n Maxtor acquires Quantum HDD unit

Corporate Strategy Q: What businesses are we in? How did we get there? Single Business Product Line Expansion Geographic Expansion/ Vertical Integration Diversification Related / Unrelated

Diversification and Poker   J 3 K 7 Q J

Why Diversify?? 1994 Q1 Q2 Q3 Q4 Division Sales ($) Industry Growth (%)

Benefits of Diversification n Reduce earnings volatility n Minimize risk n Move firm into attractive industries n Prolong “life” of firm n Improve long-term performance n Capture synergies and strategic “fit” between businesses n Steer corporate resources

Types of Diversification n Vertical n Horizontal u Related u Unrelated n Global

Evaluation of Diversified Firms n Identify present corporate strategy u extent and type of diversification u geographic scope u new acquisitions u recent divestitures u mode of new business entry

Evaluation of Diversified Firms n Reveal contextual position of corporate portfolio BCG Growth-share Matrix Industry Growth Rate Hi Lo Relative Market Share 1.0< 1.0> 1.0

Evaluation of Diversified Firms Reveal competitive position of corporate portfolio - G.E. Industry attractiveness/business strength matrix Industry Long Term Attractiveness H M L Firm’s Competitive Position Str. Avg.Weak

Diversified Inc. HQ Bus. 1Bus. 2Bus. 3 $$$ Growth Size Remote Env. Growth Size Remote Env. Growth Size Remote Env.

Entering New Businesses n WHY? u Does business fit? F F Financially F F Strategically F F Culturally u u If not in this business today, would we want to get into it now? n HOW? u Acquisition u Internal start-up u Joint ventures

Why M&A Activity? n Intensifying competition n Global markets n Growth in new industries n NOTE: u 20% of all-time corporate mergers have occurred within last 18 months

Justifications n Attractiveness test u Industry factors u Core competencies u Strategic position n Cost of entry test u Buy outstanding shares u Cash u Contributions to merger or JV n Better off test u Synergies, econ. of scale/scope u Consolidation of resources, activities u Competitive advantage?

Why MBC’s “Should” Outperform SBC’s n Economies of Scope u Intangible assets - brand u Consolidate operations n Efficient Resource Allocation u MBC as “internal” capital market n Increased Size u Lower cost of capital u Increased market power

Why MBC’s Actually Underperform SBCs n Why does stock price of acquirer always go down? n Diseconomies of Scope u Leadership - bureaucracy n Capital Allocation u Democratic process u Cross-subsidization (e.g., AT&T) n Misaligned Incentives u Too short-term n Underdeveloped Corporate Strategy

International Diversification n WHY? u slow domestic growth (earnings risk?) u intense domestic rivalry u no overseas competition u intense overseas competition n HOW? u Exporting u Franchising u Joint ventures u Wholly-owned subsidiaries F Greenfield (internal development) F Mergers & Acquisitions

Alternative Corporate Strategies n Portfolio “juggling”... n Evolutionary Approach n Corporate Transformation n Sudden Redefinition

Portfolio Managers n Turnaround u u restore competitiveness to poor performers u u New advantages created within portfolio n Retrenchment u u narrow scope of portfolio u u “stick to your knitting” n Restructuring u u add new businesses / divest poor performers

Evolutionary Approach: Leveraging Competence n Performance culture (3M, ABB) n Business system replicator (Gillette) n Capability leverager (Nike) n Valuator (Berkshire Hathaway) n Inventor (H-P, J&J) n Synergy capturer (Kraft-Genl. Foods) n Cost squeezer (Sunbeam)

Disney: Capability Bundling n Films n Videos n Network TV n Cable TV n Hotels n Cruise lines n Merchandise n Brand licensing n NEW … Retail Stores Retail Stores Toy Story TV Show Merchandise Food Items Theme Park

Corp. Transformation n Choosing new businesses n Planned Surprises u Change business portfolio (Monsanto) u Change global portfolio (CitiBank) u Capability bundling (Disney) u Industry consolidation (Chrysler) Total Return 1994 S&P MTC Chemicals (18%) Biotech (38%)

Transformation Total Return 1993 S&P Nokia Motorola Eriksson n Nokia u 1989: Diversified electrical conglomerate u 1993: 87% telecom focus

Sudden Redefinition n Competitive/performance crisis n Massive immediate corporate portfolio change u Deregulation u Patents u Foreign competition u M&A in same/related industries