Developing corporate strategy MGMT 619 Prof. Sanjay Jain

Corporate Strategy Diversified company has 2 levels of strategy Business-level strategy How to create competitive advantage in each of company’s businesses Corporate-level strategy How to create value for the corporation as a whole

Corporate Strategy 2 key questions of corporate strategy What businesses should we be in? How should these be managed? Walt Disney Co. Theme Parks Television Cruise Line Movie Production CORPORATE LEVEL BUSINESS

Degrees of Diversification Single Business >95% Dominant Business 70%-95% Low Related sharing value chain Unrelated High

Diversification and value creation 19 Diversification and value creation Geographic diversification Does this create value? Economies of scale/scope? Revenue- enhancement opportunities? Horizontal diversification Vertical diversification

Sources of value from diversification Economies of scope Lower price of a common resource by combining purchases Share manufacturing capacity to reduce average costs Share distribution to reduce average distribution costs Revenue-enhancement synergies Bundle products to appeal to new customers Cross sell to existing customers Achieve higher valuation from larger, more predictable cash flows

Sharing Activities Often lowers costs due to economies of scope Anheuser Busch’s Eagle Snacks were sold through its beer distributors …or scale economies P&G’s diapers and paper towels are both made from paper pulp Can enhance potential for or reduce the cost of differentiation Shared order processing systems may allow new features customers value (Amazon.com)

Transferring Core Competencies Exploit interrelationships among divisions Identify ability to transfer skills and expertise among similar value chains (across divisions) Activities must be sufficiently similar that sharing is possible Examples: FedEx’s logistics expertise Toyota’s core competence in engines Sony’s core competence in miniaturization

Synergy: A mirage? Synergies are possible, but difficult to obtain, due to - potential loss of focus - likelihood of competitors’ responses - incompatibility of resources - tangible (computer systems) - intangible (culture clashes)

Corporate strategy and M&A’s M&A’s are: dominant means of diversification major strategic action (vs. tactical) significant and unique capital budgeting decision no dry run -- all money paid up front substantial exit costs (in dollars and reputation) managing integration extremely complex -- much like a new business

Problems with Acquisitions Overly diversified / Loss of focus Acquirer doesn’t have expertise required to manage unrelated businesses or is preoccupied with acquisitions Extraordinary Debt Costly debt can create onerous burden on cash outflows Too Large Bureaucracy reduces innovation and flexibility

Problems with Acquisitions Integration difficulties Differing cultures can make integration of firms difficult Non-complementary capabilities Inadequate evaluation of target / Excessive premium Required performance improvements are unrealistic

What’s the true value of an acquisition? Intrinsic value Market value Purchase price Synergy value Value gap

Calculating Synergy Value Cost savings Revenue enhancements Process improvements Financial engineering Tax benefits

Calculating synergy value Takes place under horrendous conditions: Time pressure intense Information limited Confidentiality must be maintained

Imposing discipline on the deal process Reigning in emotion Worrying about competition Use of more sophisticated valuation techniques Setting policies regarding deal-making Reviewing prior acquisitions to understand success/failure

Characteristics of Effective Acquisitions Complementary Capabilities Buying firms with assets that meet current needs to build competitiveness Friendly acquisition Friendly deals make integration go more smoothly Careful selection process Deliberate evaluation and negotiations is more likely to lead to easy integration and building synergies

Characteristics of Effective Acquisitions Financial Conditions Low to moderate debt levels that maintain flexibility Sufficient financial slack to cushion failures & fund other profitable projects Organizational Conditions Flexibility, adaptability, experience at managing change Willingness/ability to continue to invest in R&D & support innovation

Collaborative Advantage Ability to create and sustain fruitful collaborations gives companies a significant competitive advantage Managing the partnership in human terms

Collaborative Advantage More than just the deal: evolve progressively in their possibilities Collaboration rather than mere exchange Dense web of interpersonal connections and internal infrastructures North American – tend to take a narrow, opportunistic view of relationships

Collaborative Advantage Selection and courtship self analysis, chemistry, compatibility Engagement specificity, commitments, independence Setting up housekeeping - gaining broader involvement, discovering difference, respect vs. resentment

Collaborative Advantage Learning to collaborate integration: strategic, tactical, operational, interpersonal, cultural Changing within - infrastructure for learning

Takeaways Understanding motives for acquisitions/alliances Corporate strategy and its associated activity – acquisitions and alliances – play a key role in defining a firm’s competitiveness Understanding motives for acquisitions/alliances Realizing synergies Acquisitions and alliances as alternative strategies