Strategy A View from the Top: Corporate Strategy: Shaping the Portfolio

1. Strategy A View from the Top: Corporate Strategy: Shaping the Portfolio Everett Gibson Alex Beverly Andrew Keeling Emily Dale Kolt Pedersen CarliSlingerland Hayley Rush

2. Introduction • “What is your Strategy” • For single business companies it should be clear and concise • For multibusiness corporations it is more complex • Most effective way to answer is to identify three to five strategic themes that are simple to communicate and comprehend • Example: GE’s key values: Strength in developing leaders, ability to integrate business on a global scale, prowess in making skillful acquisitions

3. Introduction • Corporate Strategy is concerned with decisions about which businesses a company operates in—actions that shape the corporate portfolio of businesses—and with decisions about how to create value in the portfolio by exploiting synergies among multiple business units.

4. Economies of Scale • Occurs when the unit cost of performing an activity decreases as the scale of activity increases • Reasons: better technologies in production processes or greater buyer power in large-scale purchasing situations • Economies of learning: cumulative number of units processed or tasks performed drives the cost reduction- • occurs when cost is reduced as a result of finding better ways to perform a task

5. Economies of Scope • Occurs when the unit cost of an activity falls because the asset used is shared with some other activity • Frito Lay: uses its trucks to deliver its Frito corn chips and Lay’s potato chips, as well as salsa and other dips.

6. Economies of Scope • Decision opportunities for creating economies of scope fall into three broad classes: • Horizontal Scope-concern decisions of product scope • Geographical Scope-involves choices of geographical coverage • Vertical Scope- converned with how a company links its value chain activities vertically

7. Economies of Scope and Scale • To capitalize on the advantages of scale and scope: • Companies must make related investments to create global marketing and distribution organizations • Must create the right mangement infrastructure to effectively coordinate the operations of a multinational corporation (Essential piece of Good-to-Great Companies) • Timing is Critical • First Mover advantage: IBM, Intel, Microsoft, and Sony all dominant in their industries due to being first movers • Challengers: Face uphill battle. They work on building productive capacity while the first movers are perfecting their production processes

8. What is “Core”? • A firms most valuable customers, most valuable products, most important channels, and distinctive capabilities. -Strategy You're Hedgehog

9. What is “Core”? • Not making a choice IS, making a choice. • Non-linear relationship to leadership • Increasing returns of scale

10. Strategy Traps • Assuming the business units that are performing well have peaked, and deciding not to make further investment. • Assuming there is more potential in underperforming businesses and making a risky investment • Prematurely abandoning core businesses.

11. Vertical Integration Involves increasing a corporation’s vertical participation in an industry’s value chain Forward Integration- moving closer to the customer Backward Integration- acquiring resource suppliers or raw materials or manufacturing components that used to be sourced elsewhere Valuable when corporation already possesses a business unit with strong competitive position in highly attractive industry Potentially costly by creating exit barrier that prevents company from leaving industry if its fortunes decline ~VS~

12. Horizontal Integration • Involves increasing the range of products and services already offered to current markets or expanding geographically • Often designed to leverage brand potential • In recent years, strategic alliances have become increasingly popular in implementing horizontal growth strategies • Ex: GE- appliances, medical systems, aircraft engines, financing, etc…

13. Diversification • Defined as a strategy of entering product markets different from those in which a company is currently engaged • Ex- Berkshire Hathaway operates in insurance, food, furniture, footwear, and a host of other businesses • Motivated by desire to: • Create revenue growth • Increase profitability through shared resources • Reduce company’s overall risk exposure • Exploit underutilized resources

14. Major Considerations • Potential for relatedness- the ability to target new business opportunities that have meaningful commonalities with the rest of the company’s portfolio • Three degrees of relatedness: dominant business companies, related business companies, and unrelated business companies; companies with closely related portfolios outperform widely diversified corporations • Types of related diversification strategies: • Target tangible links, such as opportunities arising from common buyers, channels, technologies, or other commonalities • Target intangible resources, such as knowledge or capabilities • Target ability of business units to jointly gain or exercise market power • Combination in which companies have opportunity to exploit the different types of relatedness

15. Porter’s 3 Tests • The attractiveness test- Is new industry attractive from growth, competitive, and profitability perspectives? Can company create such favorable conditions? • The cost of entry test- Costs of entry reasonable? How long before venture becomes profitable? • The better-off test- Does portfolio’s overall competitive position and performance improve?

16. Mergers and Acquisitions • Companies implement diversification strategies through internal development • Alliances • Mergers and Acquisitions • Internal development is slow and expensive • Bonding with companies is the easiest way to diversify

17. Mergers and Acquisitions • Merger • Two companies have joined to form one company • Acquisition • When one firm buys another firm • The difference between the two is management control • Acquisitions quickly positions a firm

18. Mergers and Acquisitions • Acquisitions process is complex • Intense pressures • Frenzy environment • Six themes help the merger and acquisition process • Well developed corporate strategy • Ongoing, long term process • Disciplined strategic analysis • Add value • Objectivity is essential • Strategies must be formulated before acquisition

19. Cooperative Strategies • Cooperative strategies are becoming popular • Globalization is an important factor in cooperative ventures • Going alone is a big risk • Motivation for cooperative strategies is the corporations ability to spread its investments

20. Cooperative Strategies • Key drivers for cooperative strategies • Risk Sharing, Funding Limitations, Market Access, Technology Access • Risk Sharing • Most companies cannot afford to participate in all markets of interest • Companies must prioritize

21. Cooperative Strategies • Funding Limitations • Going it alone is not practical • Immense fixed costs with shorter payback • Market Access • Lack of prerequisite knowledge, infrastructure • Ex. Hitachi • Technology Access • Many different technologies • Technology spreading rapidly

22. Cooperative Strategies • Alternative reasons to pursue • Management skills • Inability to add value in house • Lack of opportunities • Airline Industry • Strategic alliance • Deregulation • Mergers blocked

23. The Strategic Logic of Alliances • Unique Alliance Drivers • Product Innovation • Credibility Early Growth Stage • Access to Capital • External Value • Customer Reach • Reduced Cost • Value-Chain Strengthening • Product Extension Rapid Growth Stage Stability Stage

24. Alliance Models • Franchise Model – between a firm and one discrete class of partners. • Portfolio Model – multiple class alliances managed by one firm. • Cooperative Model – between many comparable sized peers. • Constellation Model – multiple alliances led by two or more comparably sized peers.

25. Alliance Types • Expertise Alliances – A collection of non competing firms • Share Expertise and have specific capabilities • New Business Alliances – Partnerships focused on entering a new market • Popular when entering a new part of the world (China) • Cooperative Alliances – Joint efforts by competitors • Looking for cheaper health insurance • M&A - like Alliances – Focus on near complete integration. • Prevented from doing so, due to legal constraints

26. Growth & Strategic Risk • We can measure strategic risk in terms of how far a growth initiative takes a company away from the established strengths of its core business. • Bain International • This is calculated by assessing the degree of sharing between the core business and the growth opportunity

27. Growth & Strategic Risk • Distance from the core is measured on five dimensions based off of certain adjacencies (1 step, 2 steps, multi-step, diversification) • Shared customers • Shared costs • Shared channels • Shared competitors • Shared capabilities/technology • The chances of success vary by the type of adjacency that defines a particular growth initiative.

28. Growth & Strategic Risk • Straying from the core almost always guarantees failure Diversification (<1%) Step 3 (7%) Step 2 (26%) Step 1 (38%) Core

29. Growth & Strategic Risk • Two dimensions of strategic risk define a strategic map used to manage the risk profile of an overall corporate growth strategy • The distance from the core • The type of strategic adjacencies

30. Growth & Strategic Risk Probability of Successful Adjacency Move New Business Forward/Backward Integration <10% New Channel Segment 10% - 30% New Customer Segment New Geography 30% - 50% New Products & Services Step 1 Step 2 Step 3 Diversification Steps from Core

31. Disinvestments: Sell-offs, Spin-offs, and Liquidations “A sell-off or a spin-off into a separate company makes sense when analysis confirms the corporation is the wrong corporate parent for the business.” Example: Chrysler Holding

32. Pitfalls • Splitting a company into a separate entity creates value for shareholders • For every one success there are two failures • Spin-off success factors: • Ensure that both the parent corporation and the unit spun off have viable business and financial structures. • Meet or exceed earning expectations. • Continue growth

33. Conclusion • The Economics of Scale and Scope • What is “core”? • Growth Strategies • Disinvestments: Sell-offs, Spin-offs, and Liquidations