Chapter 6: Corporate-Level Strategy  Pooled Negotiating Power: improvement

in bargaining position relative to suppliers

Diversification and customers
- Process of firms expanding their operations by  Vertical Integration: expansion or
entering new businesses extension of the firm by integrating
- Companies bother with diversification initiatives preceding or successive production
because of synergy (Gk. Synergos; working processes
together)  Benefits and Risks
 Diversify into related businesses or BENEFITS RISKS
horizontal relationships: business sharing Secure source of raw Costs and expenses are
intangible and tangible resources materials increased
 Diversify into unrelated businesses or Protection of and control Loss of flexibility
hierarchical relationships: value creation over valuable assets
from corporate office Proprietary access to new Unbalanced capacities
technologies
RELATED Diversification Simplifies procurement and Additional administrative
- Firm entering a different business in which it can administrative procedures costs
benefit from leveraging core competencies,
sharing activities or building market power  Transaction Cost Perspective:
- Benefit from economies of scope perspective that the choice of a
 Cost savings from transaction’s governance
leveraging core structure is influenced by
competencies or sharing transaction costs (search,
related activities among negotiating, contracting,
businesses in a monitoring and enforcement
corporation costs) associated with each
- Leveraging Core Competencies choice
 Firm’s strategic resources that
reflect the collective learning in UNRELATED Diversification
the organization - Firm entering a different business that has little
 Viewed as “glue” that binds existing horizontal interaction with other businesses of a
businesses together firm

Three criteria TWO SOURCES OF SYNERGIES

1. Core competence must enhance competitive 1. Corporate Parenting and Restructuring
advantage by creating superior customer  Parenting Advantage: positive
value contributions of the corporate office to a
2. Different businesses in the corporation must new business as a result of expertise and
be similar in at least one important way support provided and not as a result of
related to the core competence substantial changes in assets, capital
3. The core competencies must be difficult for structure, or management
competitors to imitate or find substitutes for it  Restructuring: intervention of the
corporate office in a new business that
- Sharing activities substantially changes the assets, capital
 Having activities of two or more structure and management
businesses’ value chains done by one  Asset Restructuring: sale of
value of the businesses unproductive assets
 Capital Restructuring: changing
Two primary pay-offs the debt-equity mix
1. Devising Cost Savings  Management Restructuring:
- Most common type of synergy and easiest to changes in composition of the top
estimate management team,
- Hard synergies organizational structure and
reporting relationships
2. Revenue Enhancements 2. Portfolio Management
 Method of:
- Market Power  Assessing the competitive
 Firm’s ability to profit through restricting or position of a portfolio of
controlling supply to a market or businesses within a corporation
coordinating with other firms to reduce  Suggesting strategic alternatives
investment for each business
  Identifying priorities for the
allocation of resources across the
businesses
 KEY PURPOSE: assist a firm in achieving
a balanced portfolio of businesses
Means to achieve diversification
1. Mergers and Acquisitions
 Mergers: combination or consolidation of
two firms to form a new legal entity
 Acquisitions: incorporation of one firm into
another through purchase
 Benefits
 Obtain valuable resources that
help an organization expand its
product offerings
 Provide the opportunity for firms
to attain three bases of synergy (
leveraging core competencies,
sharing activities and building
market power)
 Lead to consolidation within an
industry and force other players to
merge
 Enter new market segments
 Limitations
 Takeover premiums paid for
acquisitions are high
 Competing firms often can imitate
any advantages or copy
synergies that result from M&A
 Managers’ ego sometimes get in
the way of sound business
decisions
 Cultural issues may doom
intended benefits from M&A
endeavors
 Divestment: exit of a business from a
firm’s portfolio; help a firm reverse an
earlier acquisition that didn’t work out as
planned
 Seven principles for successful
divestiture
a. Remove emotion from decision
b. Know the value of the business you
are selling
c. Time the deal right
d. Maintain a sizable pool of potential
buyers
e. Tell a story about the deal
f. Run divestitures systematically
through a project office
g. Communicate clearly and frequently
2. Joint Venture or Strategic Alliance
 Strategic Alliance: cooperative
relationship between two or more firms
 Joint Venture: new entities formed within
a strategic alliance in which two or more
firms contribute equity to form a new legal
entity
Internal Development: entering a new
business through investment in new
facilities, often called corporate
entrepreneurship and new venture
development
3. Diversify
How managerial motives can erode value creation
Managerial Motives: managers acting in their own self-
interest rather than to maximize log-term shareholder
value
Growth for growth’s Sake
 Managers’ actions to grow the size of
their firms not to increase long-term
profitability but to serve managerial self-
interest
Egotism
 Manager’s actions to shape their firm’s
strategies to serve their selfish interests
rather than maximize lone-term
shareholder value
Antitakeover Tactics
 Managers’ actions to avoid losing wealth
or power as a result of hostile takeover
 Greenmail: payment by a firm to a
hostile party for the firm’s stock at
a premium, made when the firm’s
management feels that the hostile
party is about to make a tender
offer
 Golden parachute: prearranged
contract with managers specifying
that, in an event of a hostile
takeover, the target firm’s
managers will be paid a
significant severance package
 Poison pill: used by a company to
give shareholders certain rights in
the event of takeover by another
firm; shareholder rights plans