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Corporate-Level Strategy: Creating Value through Diversification. chapter 6. Learning Objectives. After reading this chapter, you should have a good understanding of: LO6.1 The reasons for the failure of many diversification efforts. - PowerPoint PPT Presentation
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Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Corporate-Level
Strategy: Creating
Value through
Diversificationchapter 6
Learning Objectives6-2
After reading this chapter, you should have a good understanding of:
LO6.1 The reasons for the failure of many diversification efforts.
LO6.2 How managers can create value through diversification initiatives.
LO6.3 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.
Learning Objectives
LO6.4 How corporations can use unrelated diversification to attain synergistic benefits through corporate restructuring, parenting, and portfolio analysis.
LO6.5 The various means of engaging in diversification – mergers and acquisitions, joint ventures/strategic alliances, and internal development.
LO6.6 Managerial behaviors that can erode the creation of value.
6-3
Corporate-Level Strategy
Consider…
What businesses should a corporation compete in?
How can these businesses be managed so they create “synergy” – that is, create more value by working together than if they were freestanding units?
6-4
Making Diversification Work
Diversification initiatives must create value for shareholders through Mergers and acquisitions Strategic alliances Joint ventures Internal development
Diversification should create synergy
6-5
Making Diversification Work
A firm may diversify into related businesses Benefits derive from horizontal relationships
Sharing intangible resources such as core competencies in marketing
Sharing tangible resources such as production facilities
A firm may diversify into unrelated businesses Benefits derive from hierarchical relationships
Value creation derived from the corporate office Leveraging support activities in the value chain
6-6
Related Diversification
Related diversification enables a firm to benefit from horizontal relationships across different businesses
Economies of scope allow businesses to: Leverage core competencies Share related activities Enjoy greater revenues
Related businesses gain market power by: Pooled negotiating power Vertical integration
6-7
Question?
Sharing core competencies is one of the primary potential advantages of diversification. In order for diversification to be most successful, it is important thatA. the similarity required for sharing core
competencies must be in the value chain, not in the product.
B. the products use similar distribution channels.C. the target market is the same, even if the
products are very different.D. the methods of production are the same.
6-8
Related Diversification: Leveraging Core Competencies
Core competencies reflect the collective learning in organizations. Can lead to the creation of value and synergy if…
They create superior customer value The value chain elements in separate
businesses require similar skills They are difficult for competitors to
imitate or find substitutes for
6-9
Related Diversification: Sharing Activities
Corporations can also achieve synergy by sharing activities across their business units.
Sharing tangible & value-creating activities can provide payoffs: Cost savings through elimination of jobs,
facilities & related expenses, or economies of scale
Revenue enhancements through increased differentiation & sales growth
6-10
Related Diversification: Market Power
Market power can lead to the creation of value and synergy through…
Pooled negotiating power Gaining greater bargaining power with
suppliers & customers
Vertical integration - becoming its own supplier or distributor through Backward integration Forward integration
6-11
Example: Question?
Shaw Industries, a giant carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, a key input into its manufacturing process. This is an example ofA. leveraging core competencies.B. pooled negotiating power.C. vertical integration.D. sharing activities.
6-12
Related Diversification: Vertical Integration
Exhibit 6.3 Simplified Stages of Vertical Integration: Shaw Industries
6-13
Related Diversification: Vertical Integration
1. It is the company satisfied with the quality of the value that its present suppliers & distributors are providing?
2. Are there activities in the industry value chain presently being outsourced or performed independently by others that are a viable source of future profits?
3. Is there a high level of stability in the demand for the organization’s products?
4. Does the company have the necessary competencies to execute the vertical integration strategies?
5. Will the vertical integration initiatives have potential negative impacts on the firm’s stakeholders?
6-14
Related Diversification: Vertical Integration
The transaction cost perspective Every market transaction involves some
transaction costs: Search costs Negotiating costs Contract costs Monitoring costs Enforcement costs Need for transaction specific investments Administrative costs
6-15
Unrelated Diversification
Unrelated diversification enables a firm to benefit from vertical or hierarchical relationships between the corporate office & individual business units through…
The corporate parenting advantage Providing competent central functions
Restructuring to redistribute assets Asset, capital, & management restructuring
Portfolio management BCG growth/share matrix
6-16
Unrelated Diversification: Parenting & Restructuring
Parenting allows the corporate office to create value through management expertise & competent central functions
In restructuring the parent intervenes: Asset restructuring involves the sale of
unproductive assets Capital restructuring involves changing the
debt–equity mix, adding debt or equity Management restructuring involves changes
in the top management team, organizational structure, & reporting relationships
6-17
Unrelated Diversification: Portfolio Management
Portfolio management involves a better understanding of the competitive position of an overall portfolio or family of businesses by… Suggesting strategic alternatives for each
business Identifying priorities for the allocation of
resources Using Boston Consulting Group’s (BCG)
growth/share matrix
6-18
Unrelated Diversification: Portfolio Management
Each circle represents one of the firm’s business units. The size of the circle represents the relative size of the business unit in terms of revenue.
Exhibit 6.5 The Boston Consulting Group (BCG) Portfolio Matrix
6-19
Unrelated Diversification: Portfolio Management
Limitations of portfolio models: SBUs are compared on only two dimensions
& each SBU is considered a standalone entity Are these the only factors that really matter? Can every unit be accurately compared on that
basis? What about possible synergies? An oversimplified graphical model
substitutes for managers’ experience Following strict & simplistic rules for
resource allocation can be detrimental to a firm’s long-term viability
6-20
Example: Goal of Diversification = Risk Reduction?
Diversification can reduce variability in revenues & profits over time. However… Stockholders can diversify portfolios at a
much lower cost & economic cycles are difficult to predict, so why diversify?
Example = General Electric’s businesses: Aircraft engines, power generation
equipment, locomotive trains, large appliances, healthcare products, financial products, lighting, mining, oil & gas
Why is GE in so many businesses?
6-21
Means of Diversification
Diversification can be accomplished via Mergers & acquisitions
And divestment Pooling resources of other companies with
a firm’s own resource base through Strategic alliances & joint ventures
Internal Development through Corporate entrepreneurship
6-22
Mergers and Acquisitions
Mergers involve a combination or consolidation of two firms to form a new legal entity: Are relatively rare The two firms are on a relatively equal
basis Acquisitions involve one firm buying
another either through stock purchase, cash, or the issuance of debt
6-23
Mergers and Acquisitions
Exhibit 6.6 Global Value of Mergers and Acquisitions ($ trillion)Source: Thomson Financial, Institute of Mergers, Acquisitions, and Alliances (IMAA) analysis
6-24
Mergers and Acquisitions: Motives
In high-technology & knowledge-intensive industries, speed is critical: acquiring is faster than building.
M&A allows a firm to obtain valuable resources that help it expand its product offerings & services.
M&A helps a firm develop synergy: Leveraging core competencies Sharing activities Building market power
6-25
Mergers and Acquisitions: Motives
M&A can lead to consolidation within an industry, forcing other players to merge.
Corporations can also enter new market segments by way of acquisitions.
6-26
Mergers and Acquisitions: Limitations
Takeover premiums for acquisitions are typically very high
Competing firms can imitate advantages Competing firms can copy synergies Managers’ egos get in the way of sound
business decisions Cultural issues may doom the intended
benefits
6-27
Question?
Divestment can be the common result of an acquisition. Divesting businesses can accomplish many different objectives. These includeA. enabling managers to focus their efforts more
directly on the firm’s core businesses.B. providing the firm with more resources to spend
on more attractive alternatives.C. raising cash to help fund existing businesses.D. all of the above.
6-28
Mergers and Acquisitions: Divestment
Divestment objectives include: Cutting the financial losses of a failed
acquisition Redirecting focus on the firm’s core
businesses Freeing up resources to spend on more
attractive alternatives Raising cash to help fund existing
businesses
6-29
Mergers and Acquisitions: Divestment
Successful divestiture involves: Removing emotion from the decision Knowing the value of the business you’re
selling Timing the deal right Maintaining a sizable pool of potential buyers Telling a story about the deal Running divestitures systematically through a
project office Communicating clearly and frequently
6-30
Strategic Alliances & Joint Ventures: Motives
Strategic alliances & joint ventures are cooperative relationships with potential advantages: Ability to enter new markets through
Greater financial resources Greater marketing expertise
Ability to reduce manufacturing or other costs in the value chain
Ability to develop & diffuse new technologies
6-31
Strategic Alliances & Joint Ventures: Limitations
Need for the proper partner: Partners should have complementary
strengths Partner’s strengths should be unique
Uniqueness should create synergies Synergies should be easily sustained & defended
Partners must be compatible & willing to trust each other
6-32
Internal Development
Corporate entrepreneurship & new venture development motives: No need to share the wealth with alliance
partners No need to face difficulties associated with
combining activities across the value chains No need to merge diverse corporate cultures
Limitations: Time-consuming Need to continually develop new capabilities
6-33
Managerial Motives
Managerial motives: Managers may act in their own self interest – eroding rather than enhancing value creation through Growth for growth’s sake
Top managers gain more prestige, higher rankings, greater incomes, more job security
It’s exciting and dramatic! Excessive egotism Use of antitakeover tactics
6-34
Managerial Motives: Antitakeover Tactics
Antitakeover tactics include: Green mail Golden parachutes Poison pills
Can benefit multiple stakeholders – not just management
Can raise ethical considerations because the managers of the firm are not acting in the best interests of the shareholders
6-35