Strategic Management

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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

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

9. Levels and Types of Diversification

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

11. 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

12. 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

13. 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

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

15. 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

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

17. 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

18. The Curvilinear Relationship between Diversification and Performance

19. 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

20. 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

21. 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

22. 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)