Asst Prof. Dr. Songporn Hansanti

1. Topic 7 Strategy Formulation Asst Prof. Dr. Songporn Hansanti

2. Making Diversification Work • What businesses should a corporation compete in? • How should these businesses be managed to jointly create more value than if they were freestanging unit?

3. Business 1 Business 2 Making Diversification Work • Diversification initiatives must create value for shareholders • Mergers and acquisitions • Strategic alliances • Joint ventures • Internal development • Diversification should create synergy + > 2

4. Synergy • Related businesses (horizontal relationships) • Sharing tangible resources • Sharing intangible resources • Unrelated businesses (hierarchical relationships) • Value creation derives from corporate office • Leveraging support activities

5. Related Diversification: Economies of Scope and Revenue Enhancement • Economies of scope • Cost savings from leveraging core competencies or sharing related activities among businesses in the corporation • Leverage or reuse key resources • Favorable reputation • Expert staff • Management skills • Efficient purchasing operations • Existing manufacturing facilities

6. Leveraging Core Competencies • Core competencies • The glue that binds existing businesses together • Engine that fuels new business growth • Collective learning in a firm • How to coordinate diverse production skills • How to integrate multiple streams of technologies • How to market diverse products and services

7. Three Criteria of Core Competencies • Three criteria (of core competencies) that lead to the creation of value and synergy • Different businesses in the firm must be similar in at least one important way related to the core competence • Not essential that products or services themselves be similar • Is essential that one or more elements in the value chain require similar essential skills • Is essential that one or more elements in the value chain require similar essential skills • Brand image is an example

8. Sharing Activities • Corporations can also achieve synergy by sharing tangible and value-creating activities across their business units • Common manufacturing facilities • Distribution channels • Sales forces • Sharing activities provide two payoffs • Cost savings • Revenue enhancements

9. Related Diversification: Market Power • Two principal means to achieve synergy through market power • Pooled negotiating power • Vertical integration • Government regulations may restrict this power

10. Pooled Negotiating Power • Similar businesses working together can have stronger bargaining position relative to • Suppliers • Customers • Competitors • Abuse of bargaining power may affect relationships with customers, suppliers and competitors

11. Vertical Integration • In making decisions associated with vertical integration, six issues should be considered: • Are we satisfied with the quality of the value that our present suppliers and distributors are providing? • Are there activities in our industry value chain presently being outsourced or performed independently by others that are a viable source of future profits? • Is there a high level of stability in the demand for the organization’s products? • How high is the proportion of additional production capacity actually absorbed by existing products or by the prospects of new and similar products?

12. Vertical Integration (cont.) • In making decisions associated with vertical integration, six issues should be considered: • Do we have the necessary competencies to execute the vertical integration strategies? • Will the vertical integration initiative have potential negative impacts on our stakeholders?

13. Unrelated Diversification: Financial Synergies and Parenting • Most benefits from unrelated diversification are gained from vertical (hierarchical) relationships • Parenting and restructuring of businesses • Allocate resources to optimize • Profitability • Cash flow • Growth • Appropriate human resources practices • Financial controls

14. Example • General Electric’s products and services include: • Appliances • Aviation • Consumer Electronics • Electrical Distribution • Energy • Finance – Business; Consumer • Healthcare • Lighting • Media & Entertainment • Oil & Gas • Plastics • Rail • Security • Water Source: www.ge.com

15. Corporate Parenting & Restructuring • Corporate Parenting • Parenting—creating value within business units • Experience of the corporate office • Support of the corporate office • Corporate Restructuring • Find poorly performing firms • With unrealized potential • On threshold of significant positive change

16. Corporate Restructuring (Cont.) • Corporate management must • Have insight to detect undervalued companies or businesses with high potential for transformation • Have requisite skills and resources to turn the businesses around • Restructuring can involve changes in • Assets • Capital structure • Management

17. Portfolio Management Key Each circle represents one of the firm’s business units Size of circle represents the relative size of the business unit in terms of revenue

18. Portfolio Management (Cont.) • Creation of synergies and shareholder value by portfolio management and the corporate office • Allocate resources (cash cows to stars and some question marks) • Expertise of corporate office in locating attractive firms to acquire • Creation of synergies and shareholder value by portfolio management and the corporate office • Provide financial resources to business units on favorable terms reflecting the corporation’s overall ability to raise funds • Provide high quality review and coaching for units • Provide a basis for developing strategic goals and reward/evaluation systems

19. Means to Achieve Diversification • Acquisitions or mergers • Pooling resources of other companies with a firm’s own resource base • Joint venture • Strategic alliance • Internal development • New products • New markets • New technology

20. Business Strategy Business Strategy Focuses on improving competitive position of company’s products or services within the specific industry or market segment

21. Porter’s Competitive Strategies • Competitive Strategy -- • Low cost • Differentiation • Direct competition • Focus on niche

22. Porter’s Competitive Strategies • Generic Competitive Strategies -- • Lower Cost strategy • Greater efficiencies than competitors • Differentiation strategy • Unique/superior value, quality, features, service

23. Porter’s Competitive Strategies • Competitive Advantage -- • Determined by Competitive Scope • Breadth of the target market

24. Porter’s Competitive Strategies • Cost Leadership -- • Low-cost competitive strategy • Broad mass market • Efficient-scale facilities • Cost reductions • Cost minimization

25. Porter’s Competitive Strategies • Differentiation – • Broad mass market • Unique product/service • Premiums charged • Less price sensitivity

26. Porter’s Competitive Strategies • Cost-Focus – • Low-cost competitive strategy • Focus on market segment • Niche focused • Cost advantage in market segment

27. Cooperative Strategies

28. Benefits of Strategic Alliances Potential Benefits of Strategic Alliances Ease of Market Entry Shared Risk Shared Knowledge and Expertise Synergy and Competitive Advantage

29. Scope of Strategic Alliances • Significant variation • Comprehensive alliance • Narrowly defined alliance • Degree of collaboration depends upon basic goals of each partner

30. Types of Alliances • Comprehensive • Functional • Production • Marketing • Financial • Research and Development

31. Implementation of Strategic Alliances • Selection of partners • Compatibility • Nature of potential partner’s products or services • Relative safeness of the alliance • Learning potential of the alliance

32. Joint Management Considerations • Shared management agreements • Assigned arrangements • Delegated arrangements

33. Shared Management Agreement Partner 1 Partner 2 Both partners participate actively Alliance

34. Assigned Arrangement Partner 1 Partner 2 One partner takes primary responsibility Alliance

35. Delegated Arrangement Partner 1 Partner 2 Both partners delegate management to the joint venture’s executives Joint Venture

36. Pitfalls of Strategic Alliances Pitfalls of Strategic Alliances Incompatibility of partners Access to Information Distribution of Earnings Loss of Autonomy Changing Circum- stances

37. Beijing Jeep – A joint venture between American Motors Company (part of Daimler Chrysler) and Beijing Auto Works

38. Merger & Acquisition (M&A) • Technological change • Efficiency of operations • Globalization and freer trade • Changes in industry organization • New industries • Deregulation and regulation

39. Merger • เป็นการรวมที่ไม่จำเป็นต้องตั้งบริษัทใหม่ ซึ่งการรวมกันจะเป็นตกลงกันว่าจะเลิกบริษัทใด แล้วแต่จะตกลงกัน • เช่น บริษัท สปามหาวินาศ และ บริษัท สปาเทวาบรรลัย ต่างประกอบกิจการ ได้รวมกิจการเข้าด้วยกัน เหลือเพียง บริษัท สปามหาวินาศ เพียงบริษัทเดียว • ซึ่งการรวมแบบนี้อาจจะเรียกได้ว่า Acquisition ซึ่งเป็นการซื้อกิจการของบริษัทอื่น • อาจซื้อเพียงทรัพย์สิน หรือทั้งทรัพย์สินและหนี้สิน (โอนกิจการ) • หรืออาจเป็นเข้าไปซื้อหุ้นเพื่อให้เพียงพอกับการเข้าไปได้บริหารกิจการ (Take Over)

40. Merger • เป็นการรวมที่ไม่จำเป็นต้องตั้งบริษัทใหม่ ซึ่งการรวมกันจะเป็นตกลงกันว่าจะเลิกบริษัทใด แล้วแต่จะตกลงกัน • เช่น บริษัท สปามหาวินาศ และ บริษัท สปาเทวาบรรลัย ต่างประกอบกิจการ ได้รวมกิจการเข้าด้วยกัน เหลือเพียง บริษัท สปามหาวินาศ เพียงบริษัทเดียว • ซึ่งการรวมแบบนี้อาจจะเรียกได้ว่า Acquisition ซึ่งเป็นการซื้อกิจการของบริษัทอื่น • อาจซื้อเพียงทรัพย์สิน หรือทั้งทรัพย์สินและหนี้สิน (โอนกิจการ) • หรืออาจเป็นเข้าไปซื้อหุ้นเพื่อให้เพียงพอกับการเข้าไปได้บริหารกิจการ (Take Over)

41. Consolidation or Amalgamation • คือการรวมกิจการที่ตั้งบริษัทใหม่ และยกเลิกบริษัทเดิม • บริษัทใหม่นี้ต้องเป็นชื่อใหม่ มีการออกหุ้นใหม่ ผู้ถือหุ้นของบริษัทเดิมจะได้รับหุ้นสามัญของบริษัทใหม่แทนของบริษัทเดิม • เช่น บริษัท สูดดมอ๊อกซิไดซ์ และ บริษัท เป่าและดม ต่างประกอบกิจการผลิตยาดม ได้รวมกิจการเข้าด้วยกัน และจดทะเบียนใหม่ชื่อ บริษัท สูดเป่าและดม

42. M&A Terminology • Merger • Negotiated deals • Mutuality of negotiations • Mostly friendly • Restructuring — changes to improve operations, policies, and strategies

43. Types of Mergers • Horizontal mergers • Between firms in same business activity • Rationale • Economies of scale and scope • Synergies (ex. combining of best practices) • Government regulation due to potential anticompetitive effects • Vertical mergers • Combinations between firms at different stages • Goal is information and transaction efficiency

44. M&A

45. M&A Strategy • Defines the long-term plans, policies and culture of an organization • Strategic planning is a dynamic process that requires inputs from all segments of the organization • Acquisition and restructuring policies and decisions should be part of the company's overall strategic plans and processes • Ultimate responsibility for strategic planning resides in the top executive group

46. Alternative Strategy Methodologies • SWOT or WOTS UP – inventory and analysis of organizational strengths, weaknesses, environmental opportunities and threats • Top-down or Bottom-up – relate to company forecasts vs. aggregation segment forecasts • Computer models – allow detail and complexity • Logical incrementalism – well-supported moves from current bases • Comparative histories – learn from the experiences of others

47. Alternative Analytical Frameworks • Product life cycle – introduction, growth, maturity, decline stages with changing opportunities, threats • Learning curve – costs decline with cumulative volume experience (first mover advantage) • Competitive analysis – industry, suppliers, customers, complemetors, etc. • Value chain analysis – seek to add product characteristics valued by customers • Cost leadership – low-cost advantages

48. Strategy Formulation Approaches • Boston Consulting Group Approach • Historical emphasis: experience curve, product life cycle, product portfolio balance • Recent approaches • Impact of the Internet and other innovations • Performance measurements - cash flow return on investment (CFROI) • Michael Porter Approach (1980, 1985, 1987) • Select attractive industry using “Five Forces” • Develop competitive advantage through cost leadership, product differentiation, or focus • Develop attractive value chains

49. Formulating a Merger Strategy • Requires continuing reassessment • Industry analysis • Competitor analysis • Supplier analysis • Customer analysis • Substitute products • Complementors • Technology changes • Societal factors • Firm's strengths/weaknesses relative to present/future industry conditions

50. Formulating a Merger Strategy • Grove (1996) • Firm must adjust to six forces • Existing competitors • Potential competitors • Complementors • Customers • Suppliers • Industry transformation • Eclectic adaptive processes approach to strategy