C HAPTER 6 Corporate Strategy

C ORPORATE S TRATEGY Portfolio or “mix” of businesses of a company Parallels investment portfolio concept from finance Corporate strategy IS NOT business or business level strategy Corporate strategy is about combination of businesses within a company Focuses on owner/stockholder as main stakeholder—creation of value for owners through “mix” of businesses Diversification

M AKING D IVERSIFICATION W ORK What businesses should a corporation compete in? How should these businesses be managed to jointly create more value than if they were freestanding units?

M AKING D IVERSIFICATION W ORK Diversification initiatives must create value for shareholders –Mergers and acquisitions –Strategic alliances –Joint ventures –Internal development Diversification should create synergy Business 1 Business 2

M OVING ALONG THE VALUE CHAIN Vertical –Backward integration –Forward integration Horizontal –Diversification –Alliances

S YNERGY Related businesses (horizontal relationships) –Sharing tangible resources –Sharing intangible resources Unrelated businesses (hierarchical relationships) –Value creation derives from corporate office –Leveraging support activities

D IVERSIFICATION R EASONS C ONTINUUM Least Power to Create Value Most Power to Create Value Reducing Risk Maintaining Growth Balancing Cash Flows Sharing Infrastructure Increasing Market Power Capitalizing on Core Competencies Not Recommended as a Reason to Diversify Recommended as a Reason to Diversify

A DDING VALUE The critical question Deploying and exploiting current resources Developing and expanding new resources Exploit v. Expand

A DDING V ALUE THROUGH D IVERSIFICATION B Y E XPLOITING C URRENT R ESOURCES Value From “Front-end,” customer- facing part of the business Expand customer base Better serve existing customers, through more, better products “Back-end” operational parts of the business Create economies of scope or increase scale Broaden existing production capacity Adopt new technology platforms

A DDING V ALUE THROUGH D IVERSIFICATION B Y E NHANCING C URRENT R ESOURCES Value From “Front-end,” customer- facing part of the business Gain new market knowledge Add new brands Identify new trends earlier “Back-end” operational parts of the business Improve quality, productiviy, or other best practices Access innovative process or product technologies Enhance R&D capabilities or outputs

M ECHANISMS TO CREATE VALUE S lack S ynergy S hared Knowledge S imilar Business Models S preading Capital S tepping stone

D ESTROYING V ALUE T HROUGH D IVERSIFICATION Hubris Sunk Cost Fallacy Imitation Poor Governance and Incentives Poor Management Lack of Resources

2 W AYS T O D IVERSIFY Go it alone— Greenfield Buy your way in—acquisition

E NTRY MODE Greenfield Existing resources move from existing to new business –Brand –Customer knowledge –Technology overlap Speed not essential Acquisition Resources don’t move from existing to new business –No brand equity –New customers –New technology Speed essential

A CQUISITION AND I NTEGRATION Have real, value-creating reasons for the acquisition Perform Due Diligence Determine appropriate acquisition premium Integrate the acquisition

A CQUISITION INTEGRATION STRATEGIES Bury—completely absorb target, also termed takeover Build—a new organization, best of breed, often from merger Blend—loose coupling, leverage target Bolt-on—two companies, one owner

I NTEGRATING BUSINESS UNITS

T HE P ORTFOLIO A PPROACH Historical starting point for strategic analysis and choice in multibusiness firms Portfolio techniques focusing on –“balancing” the flow of cash resources among various businesses –while identifying their basic strategic purpose within the overall portfolio

P ORTFOLIO M ANAGEMENT Key Each circle represents one of the firm’s business units Size of circle represents the relative size of the business unit in terms of revenue

The Industry Attractiveness – Business strength Matrix StrongAverageWeak High Premium – invest for growth Selective – invest for growth Protect/refocus – selectively invest for earnings Medium Challenge—invest for growth Prime— selectively invest for earnings Restructure – harvest or divest Low Opportunistic – selectively invest for earn Opportunistic – preserve for harvest Harvest or divest Business Strength Industry Attractiveness

E XAMPLE Church & Dwight has a well balanced portfolio of products, which includes –Arm & Hammer –Trojan condoms –Oxi Clean –AIM toothpastes –First Response –Nair –Xtra laundry detergent –Brillo Source:

P ORTFOLIO M ANAGEMENT (C ONT.) Creation of synergies and shareholder value by portfolio management and the corporate office –Allocate resources (cash cows to stars and some question marks) –Expertise of corporate office in locating attractive firms to acquire Creation of synergies and shareholder value by portfolio management and the corporate office –Provide financial resources to business units on favorable terms reflecting the corporation’s overall ability to raise funds –Provide high quality review and coaching for units –Provide a basis for developing strategic goals and reward/evaluation systems

L IMITATIONS OF P ORTFOLIO A PPROACH Does not address how value is created across business units Accurate measurement for matrix classification not easy Relationship between market share and profitability varies across industries and market segments Limited strategic options came to be seen more as basic strategic missions Ignores capital raised in capital markets, focusing excessively on internal cash flows Failed to compare the competitive advantage a business received from being owned by a particular company with the costs of owning it

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