1. Developing corporate strategy
MGMT 619
Prof. Sanjay Jain

2. 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

3. 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

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

5. Diversification and value creation19
Diversification and value creation
Geographic diversification
Does this create value?
Economies of scale/scope?
Revenue- enhancement opportunities?
Horizontal diversification
Vertical diversification

6. 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

7. 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)

8. 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

9. 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)

10. 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

11. 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

12. 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

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

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

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

16. 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

17. 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

18. 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

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

20. 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

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

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

23. 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