Strategic Management

3. Strategic Management Part II: Strategic Actions: Strategy Formulation Chapter 6: Corporate-Level Strategy

4. Beverages Foods Snack Foods Frito-Lay North America Frito-Lay International Quaker North America Pepsi-Cola North America Gatorade/Tropicana North America PepsiCo Beverages International

5. Snack Foods Frito-Lay North America Funyuns Sunchips Cracker Jack Chester’s popcorn Grandma’s cookies Munchos Smartfood Baken-ets fried pork skins Oberto meat snacks Lay’s Ruffles Doritos Santitas Fritos Cheetos Rold Gold

6. Snack Foods Frito-Lay International Bocabits wheat snacks Crujitos corn snacks Fandangos corn snacks Hamkas snacks Niknaks cheese sticks Quavers potato snacks Sabritas potato chips Twisties cheese snacks Walkers potato crisps Walkers Square potato snacks Walkers Monster Munch Corn snacks Miss Vickie’s potato chips Gamesa cookies Dippas Sonric’s sweet snacks

7. Snack Foods Frito-Lay International Bocabits wheat snacks Crujitos corn snacks Fandangos corn snacks Hamkas snacks Niknaks cheese sticks Quavers potato snacks Sabritas potato chips Twisties cheese snacks Walkers potato crisps Walkers Square potato snacks Walkers Monster Munch Corn snacks Miss Vickie’s potato chips Gamesa cookies Dippas Sonric’s sweet snacks

8. Beverages Pepsi-Cola North America Pepsi-Cola Mountain Dew Slice Mug Sierra Mist FruitWorks Lipton Dole Aquafina Frappuccino SoBe AMP

9. Beverages Gatorade/Tropicana North America Gatorade Propel Tropicana Dole juices

10. Beverages PepsiCo Beverages International Loóza juices and nectars Copella juices Frui’Vita juices Tropicana 100 juices

11. Foods Quaker North America Quaker rice cakes and granola bars Rice-A-Roni side dishes Near East couscous/pilafs Aunt Jemima mixes & syrups Quaker grits Quaker Oats Cap’n Crunch cereal Life cereal Quisp cereal King Vitaman cereal Mother’s cereal

12. How are we going to compete and gain a competitive advantage in each of our businesses? Foods Business Level Strategies Quaker North America Quaker rice cakes and granola bars Rice-A-Roni side dishes Near East couscous/pilafs Aunt Jemima mixes & syrups Quaker grits Quaker Oats Cap’n Crunch cereal Life cereal Quisp cereal King Vitaman cereal Mother’s cereal

13. Snack Foods Beverages Foods Corporate Level Strategy 1) What businesses do we want to compete in? 2) How do manage effectively across businesses

14. Where did they go?

15. 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 • Product diversification (PD): primary form of corporate-level strategy

16. Goals of Corporate Strategy Moves to enter new businesses Boosting combined performance of the businesses Capturing synergies and turning them into competitive advantages Establishing investment priorities and steering resources into business units

17. 4 Conditions of Successful Diversification • 1) Growing industries with complementary products and technologies • Apple IPhone • 2) Leverage existing capabilities which match the KSFs in other arenas • Disney Cruise Lines • 3) Closely related moves which reduce costs • Kroger & Fred Meyer • 4) Powerful brand and reputation • Marguerittaville, NASCAR Café, or Emril’s

18. Levels of Diversification (N=3) • 1. Low Levels • Single Business Strategy • Corporate-level strategy in which the firm generates 95% or more of its sales revenue from its core business area • Dominant Business Diversification Strategy • Corporate-level strategy whereby firm generates 70-95% of total sales revenue within a single business area

21. Procter & Gamble’s Diversification Strategy • Purpose of diversification: Use expertise and knowledge gained in one business by diversifying into a business where it can be used in a related way • Builds synergy: value added by corporate office adds up to more than the value if different businesses in the portfolio were separate and independent • Procter & Gamble (P&G) • Product mix: beauty products targeting women and baby care products • 2005: Acquired Gillette (consumer health care products) focused on masculine market

22. Related Diversification at Disney Entertainment/Production Theme Parks Resorts Entertainment/Broadcasting Retailing Cruise Lines

23. Levels of Diversification (N=3) (Cont’d) • 2. Moderate to High Levels • Related Constrained Diversification Strategy • Less than 70% of revenue comes from the dominant business • Direct links (I.e., share products, technology and distribution linkages) between the firm's businesses • Related Linked Diversification Strategy (Mixed related and unrelated) • Less than 70% of revenue comes from the dominant business • Mixed: Linked firms sharing fewer resources and assets among their businesses (compared with related constrained, above), concentrating on the transfer of knowledge and competencies among the businesses

25. Tyco Electronics Tyco Telecommunications Tyco Fire and Security Tyco Safety Products Tyco Healthcare Tyco Plastics Tyco Adhesives Tyco Flow Control Tyco Electrical and Metal Products Tyco Fire and Building Products Tyco Infrastructure Services

26. GE Advanced materials Commercial loans Appliances Insurance Jet engines Electric power generation Medical imaging NBU Universal Chemical Treatment Equipment services and rentals

27. Levels of Diversification (N=3 ) (Cont’d) • 3. Very High Levels: Unrelated • Less than 70% of revenue comes from dominant business • No relationships between businesses

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

29. Levels and Types of Diversification

30. Strategic Management: Concepts and Cases Part II: Strategic Actions: Strategy Formulation Chapter 7: Acquisition and Restructuring Strategies

31. Cross-Border Acquisitions: Increased Trend • Number of cross-border deals continues to increase in all corners of the world • Acquisitions by emerging-country firms occurring in developed countries, especially in the U.S., UK and Europe • Developed economies have more open policies allowing emerging-country economies to make inroads, especially in more mature businesses including steel, aluminum and cement; or basic services such as management of airports and railroads, or infrastructure management, such as toll roads

32. Introduction: Popularity of M&A Strategies • Popular strategy among U.S. firms for many years • Can be used because of uncertainty in the competitive landscape • Increase market power because of competitive threat • Spread risk due to uncertain environment • Shift core business into different markets • Due to industry or regularity changes • Intent: increase firm’s strategic competitiveness and value – the reality, however, is returns are close to zero

33. Introduction: Merger vs. Acquisition vs. Takeover(Cont’d) • Merger • Two firms agree to integrate their operations on a relatively co-equal basis • Acquisition • 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. • Takeover • Special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bid • Hostile Takeover: Unfriendly takeover that is unexpected and undesired by the target firm

34. Mergers and Acquisitions Reasons of Acquisitions Market Power Overcome Entry Barriers Increased Speed Lower Risk New Technologies/Capabilities Diversify Gain Competitive Advantages

35. 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

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

37. Monday October 27th WSJ • Bank of American – Boston Fleet Financial • BoA down $8.29, or 10%, BFF rose 23% • Anthem – WellPoint Health Networks • Anthem down 8.2%, WellPoint up 8.8% • United Health – MidAtlantic Med Services • UH down 4.9%, MAMS up 9.7%

38. 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

39. 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

40. The Curvilinear Relationship between Diversification and Performance

41. 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

42. 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

43. Restructuring • Restructuring defined: Firm changes set of businesses or financial structure • Three restructuring strategies • 1. Downsizing • Reduction in number of firms’ employees (and possibly number of operating units) that may or may not change the composition of businesses in the company's portfolio • 2. Downscoping • Eliminating businesses unrelated to firms’ core businesses through divesture, spin-off, or some other means • 3. Leveraged buyouts (LBOs) • One party buys all of a firm's assets in order to take the firm private (or no longer trade the firm's shares publicly)