1. * ^CEO Fired CEO fired November 2000, so 5 year back period is most relevant.

2. 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 Apple Dell Busch Newell Coke Starbucks Pennzoil Printer co’s Cat Food Monsanto Nucor Virgin

3. Why Diversify?? 2001 Q1 Q2 Q3 Q4 Division Sales ($) Industry Growth (%) 1996 1997 1998 1999 2000 2001

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

5. Types of Diversification Vertical Horizontal –Related –Unrelated Geographic

6. Views of diversification have evolved over time, from driving growth, to “deworsification” losing focus, to related growth. Lexmark

7. Why the evolution? > Change of goals from growth to profitability > Economic downturns of mid 70’s, early 80’s, and 89-90 > Pressure on management from LBO’s & institutional shareholders > Reduced transaction costs > Less confidence in “universality of mgt techniques” > GE: share resources & transfer capabilities

8. US Single businesses are plunging from 1949-74, while Related has strong upward trend. Unrelated is increasing as well. Diversification Strategies, Fortune 500, 1949-74. Source: Contemporary Strategy Analysis (4th edition), Robert M. Grant, Table 15.1, p. 447

9. US Single businesses are plunging from 1949-74, while Related has strong upward trend. Unrelated is increasing as well. Diversification Strategies, Fortune 500, 1949-74. Source: Contemporary Strategy Analysis (4th edition), Robert M. Grant, Table 15.1, p. 447

10. European trends were similar to the US, with Single businesses plunging, Related has strong, though plateauing, upward trend. Unrelated is increasing as well. Diversification Strategies, European Large Companies, 1950 - 1993. Red is UK, Blue is France, and Black is Germany. Source: Contemporary Strategy Analysis (4th edition), Robert M. Grant, Table 15.2, p. 448

11. European trends were similar to the US, with Single businesses plunging, Related has strong, though plateauing, upward trend. Unrelated is increasing as well. Diversification Strategies, European Large Companies, 1950 - 1993. Red is UK, Blue is France, and Black is Germany. Single companies are focused dots, Related are aligned diamonds, and Unrelated are boxes with everything thrown in. Source: Contemporary Strategy Analysis (4th edition), Robert M. Grant, Table 15.2, p. 448

12. Incremental product diversity can lower incremental ROA%, but if still above WACC, may be beneficial.

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

17. Entering New Businesses and Evaluating Current Portfolio WHY? –Does business fit? oFinancially oStrategically oCulturally –If not in this business today, would we want to get into it now? HOW? –Acquisition –Internal start-up –Joint ventures –Reinvest? –Spin-off/shut down?

18. Why M&A Activity? Intensifying competition Global markets Growth in new industries NOTE: –20% of all-time M&A activity has occurred within last 3-4 years

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

20. Why MBCs “Should” Outperform SBCs Economies of Scope –Intangible assets - brand –Consolidate operations Efficient Resource Allocation –MBC as “internal” capital market Increased Size –Lower cost of capital –Increased market power

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

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

23. Alternative Corporate Strategies Portfolio reconfiguration… Evolutionary Approach Corporate Transformation Sudden Redefinition

24. Portfolio Management Turnaround –restore competitiveness to poor performers –New advantages created within portfolio Retrenchment –narrow scope of portfolio –“stick to your knitting” Restructuring –add new businesses / divest poor performers

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

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

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

28. Transformation Total Return 1993 S&P Nokia Motorola Eriksson Nokia –1989: Diversified electrical conglomerate –1993: 87% telecom focus

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

30. Strategic Planning at Exxon

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