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  1. Today’s News • Pepsi’s challenges • Spun-off restaurants • Acquired Tropicana • Pepsi Bottling IPO • Disney -- Retail stores • Baby merchandize • White goods • Paint • AT&T • Spin-off or sell Consumer Long Distance unit • Maxtor acquires Quantum HDD unit

  2. Corporate Strategy Single Business Product Line Expansion Q: What businesses are we in? How did we get there? Geographic Expansion/ Vertical Integration Diversification Related / Unrelated

  3. Diversification and Poker J 8 3 8 K 2 10 7 Q 4 7 4 J 3 3

  4. Why Diversify?? Division Sales ($) Q1 Q2 Q3 Q4 1994 Industry Growth (%) 1993 1994 1995 1996 1997 1998

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

  6. Types of Diversification • Vertical • Horizontal • Related • Unrelated • Global

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

  8. Evaluation of Diversified Firms • Reveal contextual position of corporate portfolio BCG Growth-share Matrix Hi Industry Growth Rate Lo < 1.0 1.0 > 1.0 Relative Market Share

  9. Evaluation of Diversified Firms • Reveal competitive position of corporate portfolio - G.E. Industry attractiveness/business strength matrix H Industry Long Term Attractiveness M L Str. Avg. Weak Firm’s Competitive Position

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

  11. Entering New Businesses • WHY? • Does business fit? • Financially • Strategically • Culturally • If not in this business today, would we want to get into it now? • HOW? • Acquisition • Internal start-up • Joint ventures

  12. Why M&A Activity? • Intensifying competition • Global markets • Growth in new industries • NOTE: • 20% of all-time corporate mergers have occurred within last 18 months

  13. 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?

  14. Why MBC’s “Should” Outperform SBC’s • 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

  15. 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

  16. 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

  17. Alternative Corporate Strategies • Portfolio “juggling” ... • Evolutionary Approach • Corporate Transformation • Sudden Redefinition

  18. Portfolio Managers • 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

  19. 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)

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

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

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

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