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^CEO Fired

^CEO Fired. CEO fired November 2000, so 5 year back period is most relevant. *. Corporate Strategy . Single Business. Apple Dell Busch Newell Coke Starbucks Pennzoil Printer co’s. Product Line Expansion. Q: What businesses are we in? How did we get there?. Geographic Expansion/

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^CEO Fired

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  1. ^CEO Fired CEO fired November 2000, so 5 year back period is most relevant. *

  2. Corporate Strategy Single Business Apple Dell Busch Newell Coke Starbucks Pennzoil Printer co’s Product Line Expansion Q: What businesses are we in? How did we get there? Geographic Expansion/ Vertical Integration Cat Food Monsanto Nucor Virgin Diversification Related / Unrelated

  3. Why Diversify?? Division Sales ($) Q1 Q2 Q3 Q4 2001 Industry Growth (%) 1996 1997 1998 1999 2000 2001

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

  5. Types of Diversification • Vertical • Horizontal • Related • Unrelated • Geographic

  6. Views of diversification have evolved over time, from driving growth, to “deworsification” losing focus, to related growth. Lexmark

  7. Why the evolution? • Change of goals from growth to profitability • Economic downturns of mid 70’s, early 80’s, and 89-90 • Pressure on management from LBO’s & institutional shareholders • Reduced transaction costs • Less confidence in “universality of mgt techniques” • GE: share resources & transfer capabilities

  8. US Single businesses are plunging from 1949-74, while Related has strong upward trend. Unrelated is increasing as well.Diversification Strategies, Fortune 500, 1949-74. Source: Contemporary Strategy Analysis (4th edition), Robert M. Grant, Table 15.1, p. 447

  9. US Single businesses are plunging from 1949-74, while Related has strong upward trend. Unrelated is increasing as well.Diversification Strategies, Fortune 500, 1949-74. Source: Contemporary Strategy Analysis (4th edition), Robert M. Grant, Table 15.1, p. 447

  10. European trends were similar to the US, with Single businesses plunging, Related has strong, though plateauing, upward trend. Unrelated is increasing as well.Diversification Strategies, European Large Companies, 1950 - 1993. Red is UK, Blue is France, and Black is Germany. Source: Contemporary Strategy Analysis (4th edition), Robert M. Grant, Table 15.2, p. 448

  11. European trends were similar to the US, with Single businesses plunging, Related has strong, though plateauing, upward trend. Unrelated is increasing as well.Diversification Strategies, European Large Companies, 1950 - 1993. Red is UK, Blue is France, and Black is Germany. Single companies are focused dots, Related are aligned diamonds, and Unrelated are boxes with everything thrown in. Source: Contemporary Strategy Analysis (4th edition), Robert M. Grant, Table 15.2, p. 448

  12. Incremental product diversity can lower incremental ROA%, but if still above WACC, may be beneficial.

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

  14. Entering New Businessesand Evaluating Current Portfolio • 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 • Reinvest? • Spin-off/shut down?

  15. Why M&A Activity? • Intensifying competition • Global markets • Growth in new industries • NOTE: • 20% of all-time M&A activity has occurred within last 3-4 years

  16. 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?

  17. Why MBCs “Should” Outperform SBCs • 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

  18. 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

  19. 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

  20. Alternative Corporate Strategies • Portfolio reconfiguration… • Evolutionary Approach • Corporate Transformation • Sudden Redefinition

  21. Portfolio Management • 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

  22. 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)

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

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

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

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

  27. Strategic Planning at Exxon

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

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