Managing Corporate Strategy: Themes & Retrospective

1. Managing Corporate Strategy: Themes & Retrospective • Performance & diversification • Finance critique: • What is value-added of HQ? • Shareholders can diversify away non-systemic risk themselves if markets efficient • Strategy critique: • One half to 70% of acquisitions in new industries are later divested (Porter 1987) • Might something useful be learned even if later divestment? • What is strategic logic for diversification? What holds it together? What is value-added? • What is acquisition premium? What are coordination costs? Review 1

2. Performance & diversification (continued) • Some studies (Rumelt 1974, 1982; Lubatkin 1989) indicate related diversification yields better performance • Complications: • What is related? • Technology, capabilities? • Customers? • Geography? • Centre of gravity? • What is source of gain in related diversification: • “Synergy”?, Market power? or efficiency? (Ravenscraft & Scherer 1974) • One time or continuing gain? (Salter & Weinhold 1978) • Despite complications in defining relatedness, • 1980s unrelated diversification still popular • 1990s emphasis on core business & horizontal or related mergers, divestiture of unrelated businesses Technology Review 2

3. Models for corporate strategy • Strategy models • Capabilities (Haspeslagh & Jemison 1991) • Acquisition benefits: operational resource sharing, functional skill transfer, general management skill transfer, combination benefit • Corporate goals: Domain strengthening, domain extension, domain exploration • Business goals: acquiring a specific capability, acquiring platform, acquiring business position • Core competence (Prahalad & Hamel 1990 • Core competence, core product, end product • Restructuring, turnaround skills (Salter & Weinhold 1988) • Value creation, value transfer / capture, value destruction Review 3

4. Models for corporate strategy (continued) • Strategy models (continued) • Restructuring, turnaround skills (Salter & Weinhold 1988) • Value creation, value transfer / capture, value destruction • Sharing activities (Porter 1985) • Value chain • Centre of gravity (Galbraith) • Product/market portfolio models • BCG (corporate level) internal capital market • Challenge: defining industry boundary & efficient markets • GE-McKinsey Model (corporate & business level) • PIMS Model (business level) • Portfolio of core competencies (capabilities level) Review 4

5. Portfolio of Core Competencies (adapted from Hamel & Prahalad, Competing for the Future, 1994: 227) Review 5

6. Models for corporate strategy (continued) • Finance models • Risk-return model (Salter & Weinhold 1979) • Can management reduce risk (manage Beta?) • Can we measure synergy for adding shareholder value? (Rappaport & Friskey 1986) • Does Beta accurately link risk & return? (Fama French 1992) • Valuation models • Book value, liquidation value, price/earnings multiples, etc. • Discounted cash flow, WACC, MVA, EVA • Option value, perpetuity value • Corporate governance model (Berle & Means 1932, Jensen 1984, Rao & Lee-Sing 1995) • Separation of ownership / management ==>Agency theory • Takeovers are about market for corporate governance rather than diversification Review 6

7. Models for corporate strategy (restated) • Strategy models • Fundamental corporate strategy issues • How is economic value created through multi-market activity? • How can corporation be structured & coordinated to realize benefits & create value? • Make/buy decision: what should be inside/outside the firm? • Core activities vs. risk of hollowing out • Use of following for non-core activities • contracts • joint ventures, alliances Review 7

8. Tests for expanding scope: • 2 External tests • “Economic scope” test: • Economic value created? Unique advantage? Are profits appropriable? • “Organizational scope” test (governance): • Make/buy: Why should activity be in-house rather than external via following? • Contracts: license, sub-contract, franchise, alliance, joint venture, etc. • 3 Internal tests • Resource test: (unique versus generic resources) (fit with existing resources) • Scope economies test (“synergy”): Value chain & multi-market competition advantages vs. costs (required complementary activities, opportunity costs; cannibalization of existing products) • Systems & logic test: fit with existing management systems, organization structure, & strategic logic Review 8

9. Means for expanding scope Review 9

10. Coordinating the diversified firm • Control mechanisms • Organization structure coordination mechanisms, conflict resolution • Outcome control versus behaviour control • Technology dominant logic, common language, assumptions, time frame, development cycles • Culture & style culture, style, symbolic actions, stories • Rewards & incentives • HRM: management development, career paths, training, socialization • Planning & control: strategic planning, resource allocation (capital budgeting & people), reporting systems, MIS, expenditure controls Review 10

11. Managing change in the diversified firm • Levers of control (Simons 1994) • Belief systems core values, purpose, direction • Boundary systems risks to avoid, policies, resource allocation, strategic planning • Diagnostic control systems critical performance variables, plans & budgets, profit centres, project monitoring, brand reviews • Interactive control systems agendas, face-to-face meetings, debates on data, assumptions and action plans Review 11

12. Managing Core Skills Review 12

13. Four Challenges in Managing Acquisitions • Consistency with strategy • Quality of acquisition decision making • Obtaining input from operations into decision • Capability to integrate • Capacity for learning Review 13

14. Acquisition Process & Value CreationHaspeslagh & Jemison 1991 Decision-Making Process Problems Integration Process Problems Results (value creation / destruction) Acquisition justification Acquisition integration Idea • Key Players (typical) • Top management • CFO • Legal • Corporate Strategy • Key Players (typical) • Division head • Operational units Lack of communication Review 14

15. Dimensions of acquisitions • Four types of capability transfer to gain acquisitions benefits: • Operational resource sharing(scale & scope economies) • Functional skill transfer(to / from acquisition, embeddedness challenge) • General management skill transfer(to / from acquisition, systems, etc.) • Combination benefits(market power, lower borrowing costs, reputation) • Three types of corporate strategy goals: • Domain strengthening:(augmenting capabilities in existing domains) • Domain extension:(applying firm’s capabilities to/from adjacent business) • Domain exploration:(moving into new business & capabilities) • Three types of business strategy goals: • Acquiring a specific capability • Acquiring a platform • Acquiring an existing business position Review 15

16. Three modes of integration • Absorption: • full consolidation of operations, organization & culture • Creation of ABB from ASEA and Brown Boveri) • Preservation: • how to manage at arm's length to learn from acquired firm • Ciba-Geigy managed Airwick (as stand-alone consumer product firm) • Symbiotic: • coexist then interdependent (“reaching out”); mutual redefinition of purpose • Compaq / Digital Review 16

17. TYPES OF ACQUISITION INTEGRATION APPROACHES (Haspeslagh & Jemison 1991) Review 17