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Transcript
Corporate Strategy
Chapter 10
Strategic Management:Value Creation, Sustainability, and Performance, 4e, 2016
Learning Objectives
1.
Compare corporate strategy decisions to
business level strategy decisions.
2.
Historical acquisition performance and
reasons why.
3.
Why companies diversify.
4.
Related versus unrelated diversification.
5.
Why companies use either type.
6.
Tools for managing diversified companies.
Corporate versus Business Strategy

Business strategy
 Value chain, Resources, Differentiation versus
Low Cost approach

Corporate strategy
 Decide which industries to enter / exit
 Combine divisions in Strategic Business Units
 Establish investment priorities across SBUs
 Transfer resources and management between
SBUs
 Structure the multi-divisional company
Historical Perspective on Diversification

Diversification among Fortune 500
 1949 …………. 30%
 1974 …………. 64%
 2014 …………. 89%

Mergers & acquisition activity
 2008: $1.5 Trillion (14% of U.S. GDP)
 2015: $2.4 Trillion (12.4% of U.S. GDP)
Sources: Rumelt 1982, Financial Times 2014; West 2016
Motivations for Diversification

Growth

Market power

Market entry

Risk spreading
Types of Diversification
Related Diversification
• Achieve synergies with existing businesses
• Synergies depend on fit in parts of value chain
Source of Synergies
Results of Synergies
Market Fit
Scope
Operational Fit
Economizing
Management Fit
Economizing;
Resources Leverage
Unrelated Diversification

No synergies anticipated

Depends on financial market imperfections
 Management identifies under-valued firms with
significant growth prospects
 Unfavorable view of entire industry includes
target firm
 Target firm is unable to access market financing
on favorable terms
Diversification Performance

Wide distribution, slightly positive average
Favorable Diversification Performance

Selecting attractive industries

Good strategic rationale

Strong due diligence

Capturing estimated synergies

Post-acquisition integration
Unfavorable Diversification Performance

Acquisition premiums
 Poor due diligence, Bidding wars, CEO hubris,
bandwagon effects

Capturing estimated synergies*

Loss of focus on core businesses

Accelerating growth is difficult

Post-acquisition integration*
(* Note: also in list of favorable factors – must do these well ! )
Evaluating "Parenting Advantage" Fit
Portfolio Management
Portfolio Management
Portfolio Management Drawbacks

Evaluates SBUs on market-related factors.

Value chain, extraordinary resources, core
competences are less important.

Static views – do not account for how
resources can be shared / leveraged.

BCG matrix depends on assumption that
high market share is related to superior
profitability – not universally true.
Restructuring & Divestiture

Downscoping
 Shedding divisions to strategically re-focus

Divestiture
 Some of the parts are worth more than
the sum of the parts

Decision process for divestiture
 Consider same factors as for diversification, only
in reverse
 Unattractive industry, no strategic rationale,
inability to capture synergies any longer