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Corporate Strategy
Mission
Objectives
Strategy Implementation
Competitive Advantage
Internal Analysis
Competitive Strategy
Division A
Division B
R&D
Functional Strategies
HR
Finance
Production Marketing/Sales
Portfolio Change
How should we expand (shrink) our portfolio of value chain activities?
Internal development organic growth (Apple case) Alliances (Coors case - Coors / Molson initially) Acquisitions / Divestitures (General Electric case )
PURCHASE
R&D
MANUFAC.
PURCHASE
R&D
MANUFAC.
Value of Diversification
Business X
+ Business Y
+ Business Z
Value
Independent: equity holder could buy shares of each firm only risk reduction is captured by equity holders.
Focal Firm
Business X Economies Of Scope Business Y Business Z
Combined: equity holder buys shares in one firm. Most economies of scope cannot be captured 8 of by equity holders. If a corporate diversification move is unlikely to generate valuable economies scope, managers should avoid it.
Value
Operational
Sharing Activities: reducing costs by exploiting efficiencies of sharing business activities in the value chain of two firms. Example: CCU Transportes Spreading Core Competencies: reducing costs or enhancing revenue by exploiting resources and capabilities which are strategically relevant in other businesses (Banks)
Financial
Tax Advantages: Reducing costs by taking advantage of differentials in tax rates between countries or regions; transfer pricing policy allows profits in one division to be offset by losses in another division. This is especially true internationally and can be used to smooth income Example: Puerto Rico, Ireland and other tax havens. Internal Capital Market : Capital cost reductions; premise: insiders can allocate capital across divisions more efficiently than the external capital market (banks and institutional investors). Works only if managers have better information than the market. Risk reduction: counter cyclical businesses may provide decreased overall risk thus, lower costs. However, individual investors can usually do this more efficiently than a firm (CCU- VSP)
Anticompetitive
Multipoint Competition: mutual forbearance enhances revenue; a firm chooses not to compete
aggressively in one market to avoid competition in another market (Unilever vs. P&G Market Power: using profits from one business to compete in another business or by using buying power in one business to obtain advantage in another business cost reductions 9
HQ Costs
No revenues & overhead (bureaucratic costs: i.e. corporate reporting requirements) Lack of close knowledge of businesses Encourages gaming behaviour by division managers
HQ Benefits
Investment banker/consultant role Resources & Capabilities: Infrastructure, R&D, etc. Superior management skills/ business model Enable collaboration between units
http://www.quinenco.cl/pdf/presentation/Presentation_Quin enco_Santander_January_2011.pdf
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Corporate Advantage
Happens if a Corporate Strategy meets the VRIO criteria Is it Valuable? Is it Rare? Is it costly to Imitate? Is the firm Organized to exploit it?
Mission
Objectives
Strategy Implementation
Competitive Advantage
Internal Analysis
Vertical Integration
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Upstream
If the focal firm is able to create synergy with the other firm(s) in the value chain through:
Downstream
cost reductions
55%
* 2 or less suppliers for a product category
Toyota
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Integration makes sense when the focal firm can capture more value than a market exchange provides
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Sciences in 1991 for the theory of firm boundaries Coases question: Why do firms exist at all ? (instead of a series of contracts between individuals who do what they have competitive advantage at). Why are some economic activities performed within firms and others within markets? Answer: Integration makes sense when the focal firm can capture more value than a market exchange provides Integration depends on comparison of total costs production costs plus transaction costs the costs of buying the product or service in the market (rather than produce in-house).
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Transaction costs
Production costs
In-house production
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Costs of managing interactions with a (remote) vendor that would have occurred naturally in-house
Travel (Tele) communications Coordination mistakes Knowledge acquisition and transfer
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Leverage Capabilities firm capabilities may be sources of competitive advantage in other businesses if not, then dont integrate vertically
internalizing must flexibility is be less costly than valuable when uncertainty is opportunism 20 high
International Expansion
The Cost Control Tradeoff
Cost (Capital at Risk) High Greenfield Investment Acquisition
Vertically Integrated
Strategic Alliance
Franchising Licensing Exporting Low
Mission
Objectives
Strategy Implementation
Competitive Advantage
Internal Analysis
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Product-Market Diversification
operating in multiple industries in multiple geographic markets
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Related Diversification
related - all businesses related on most activities in the value chains linked - some businesses related on some activities
Unrelated Diversification
businesses are not related Group or Conglomerate
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Would the gains from being in both businesses outweigh the cost of entry?
Acquisition premium (premium over market price of shares) vs. the cost of internal development Are there any synergies with current business
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Its 1970...
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1949
1954
1959
1964
1969
1974
The spread of the M-form (multi-divisional structure) Portfolio management techniques The belief in generic management techniques and skills
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???
Earnings : high stable Cash flow: high stable Strategy : milk Earnings : low, unstable Cash flow: neutral or negative Strategy : divest
Strategy: analyze to determine whether business can be grown into a star, or will degenerate into a dog
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Strategy: divest
2
Strategy: milk
Fruit juices division Bakery division
0 -2
1.5
0.5
0.1
Current position
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DISADVANTAGES
Sensitive to market definition Ignores Resources & Capabilities Ignores synergies Reduces investments in Cash Cows; invests in business in which Cos may not have Competitive Advantages Ignores financing from capital markets
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Restructuring
Transferring Intangible assets
Portfolio
Market Activated Corporate Strategy (MACS): Who is the Best Owner McKinsey in the 21st Century
Natural Owner Parents Company ability to extract value from the business unit, relative to other potential owners
Thus, after decades of research the overwhelming conclusion must be that M&A activity, on average, does not positively contribute to an acquiring firms performance.
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Inorganic Growth
Organic Growth
New product development, Internal corporate ventures
Non-equity alliances
Acquisitions
Equity alliances
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Organic Growth
Advantages
incremental compatible with organizational culture Promotes intrapreneurship Internal investment
Disadvantages
slow Forces to develop new resources and capabilities Increases installed capacity; entry may not be at scale size Failures are not recoverable
44 Matko Koljatic
Disadvantages
Cost of acquisition (premium) Bureaucratic costs Acquisition of resources which are not needed Organizational conflicts may occur Commitment of large resources - risk
45 Matko Koljatic
Alliances
Advantages
Access to complimentary resources revenue enhancement (OneWorld) Fast
Disadvantages
Lack of control Helps a competitor too Long term viability, questionable Difficulty in integration and learning
46 Matko Koljatic
Summary
Corporate Strategy: In what businesses should the firm operate?
an understanding of diversification helps managers answer that question
Two Criteria:
1) economies of scope must exist 2) must create value that outside equity holders cannot create on their own
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Summary
Economies of Scope
a case of synergycombined activities generate greater value than independent activities
may generate competitive advantage if they meet the VRIO criteria
Firms should pursue diversification only if careful analysis shows that corporate advantage is likely!
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