Competing For Advantage

1. Competing For Advantage Part III – Creating Competitive Advantage Chapter 8 – Corporate Level Strategy

2. Corporate-Level Strategies • Key Terms • Corporate-Level Strategy– specifies actions a firm takes to gain a competitive advantage by selecting and managing a portfolio of businesses that compete in different product markets or industries. • WHERE ARE WE GOING TO COMPETE?

3. Corporate-level strategy • Specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets • Expected to help firm earn above-average returns • Value ultimately determined by degree to which “the businesses in the portfolio are worth more under the management of the company then they would be under any other ownership • Synergy > 1 + 1 = 3 • Product diversification (PD): primary form of corporate-level strategy

4. Levels and Types of Diversification

5. Curvilinear Relationship between Diversification and Performance

6. Unrelated Diversification • Key Terms • Financial Economies– cost savings realized through improved allocations of financial resources based on investments inside or outside the firm • Efficient internal capital market allocation • Buying/Selling other companies assets in the external market

7. Drawbacks for Unrelated • Demanding requirements • Limited to no opportunities to share advantages

8. Diversification and the Multidivisional Structure • Key Terms • Multidivisional Structure (M-form)– organizational structure which ties together several operating divisions, each representing a separate business or profit center to which responsibility for daily operations and business-unit strategy is delegated

9. Original Benefits of the M-form • It enables corporate officers to more accurately monitor the performance of each business, which simplifies the problem of control • It facilitates comparisons between divisions, which improves the resource allocation process • It stimulates managers of poorly performing divisions to look for ways of improving performance

10. Variations of the M-form • Cooperative • Strategic business-unit (SBU) • Competitive

11. Cooperative Form of the Multidivisional Structure

12. Cooperative Form of the Multidivisional Structure • All of the divisions share one or more corporate strengths • Interdivisional sharing depends on cooperation • Links resulting from effective integration mechanisms support sharing of both tangible and intangible resources • Centralization is one integrating mechanism that can be used to link activities among divisions, allowing firms to exploit common strengths and share competencies • Success is influenced by how well information is processed among divisions

13. SBU Form of the Multidivisional Structure

14. SBU Form of the Multidivisional Structure • Divisions within each SBU are related in terms of shared products and/or markets • Divisions of one SBU have little in common with division of other SBUs • Divisions within each SBU share product or market competencies to develop economies of scope • Integrations used in cooperative form are equally effective for the SBU form • Each SBU is a profit center • Financial controls are more vital for evaluating performance

15. Competitive Form of the Multidivisional Structure

16. Competitive Form of the Multidivisional Structure • Divisions do not share common corporate strengths • Integration devices are not developed to coordinate activities across divisions • Efficient capital markets in unrelated strategies require organizational arrangements that emphasize divisional competition rather than cooperation • Specific performance expectations and accountability for independent divisions stimulate internal competition for future resources

17. Competitive Form of the Multidivisional Structure • Headquarters maintains a distant relationship to avoid intervention in divisional affairs • Headquarters remains responsible for cash flow allocation, performance appraisal, resource allocation, and the legal aspects related to acquisitions

18. Benefits of Internal Competition • Internal competition creates flexibility • Internal competition challenges the status quo and inertia • Internal competition motivates effort

19. Competing For Advantage Part III – Creating Competitive Advantage Chapter 9 – Acquisition and Restructuring Strategy

20. Mergers, Acquisitions, and Takeovers: What Are the Differences? • Key Terms • Merger - strategy through which two firms agree to integrate their operations on a relatively co-equal basis. • Acquisition - strategy through which one firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio.

21. Mergers, Acquisitions, and Takeovers – What Are the Differences? • Key Terms • Takeover – special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bid • Hostile Takeover– unfriendly takeover strategy that is unexpected and undesired by the target firm

22. Mergers and Acquisitions Reasons of Acquisitions Market Power Horizontal Vertical Related Overcome Entry Barriers Reduce Costs/Risks of NPD Speed Diversify product offerings Develop/acquire new capabilities

23. Mergers and Acquisitions Problems with Acquisitions Integration of two firms Overpayment/Debt Overestimation of Synergy Overdiversification Managerial energy absorption Become too large Substitute for innovation Inadequate evaluation Transaction costs

24. Mergers and Acquisitions Results Poor Performance Who Wins? Acquired Firm Shareholders

25. Failures of Acquisitions 30 - 40% average acquisition premium Acquiring firm’s value drops 4% in the 3 months following acquisitions 30 - 50% of acquisitions are later divested Acquirers underperform S&P by 14%, peers by 4% 3 month performance before and after • 30% substantial losses, 20% some losses, 33% marginal returns, 17% substantial returns

26. Why, then, do executives acquire? Often, for personal reasons Firm size and executive compensation are related When do executives loss their jobs? • 1) Acquired - larger firms harder to acquire • 2) Performing poorly - employment risk is reduced as returns are less volatile

27. Effective Acquisitions • Complementary assets or resources • Friendly acquisitions facilitate integration of firms • Effective due-diligence process (assessment of target firm by acquirer, such as books, culture, etc.) • Financial slack • Low debt position • High debt can… • Increase the likelihood of bankruptcy • Lead to a downgrade in the firm’s credit rating • Preclude needed investment in activities that contribute to the firm’s long-term success • Innovation • Flexibility and adaptability

28. When/Why to Diversify? To create shareholder value Porter’s Three Point Test 1) Attractiveness Test 2) Cost of Entry Test 3) Better off Test Should pass all 3