Corporate-Level Strategy: Creating Value through Diversification

1. 战略规划北京银行 Corporate-Level Strategy: Creating Value through Diversification

2. Definitions • SBU is the abbreviation for Strategic Business Unit • What we have studied so far are SBUs, because each has a unique SBU Strategy based on its own resources, value chain activities, and markets. • Corporations are made up of multiple SBUs, so Corporate Strategy is concerned with acquiring and managing its SBUs. • Corporate Strategy often is called Diversification Strategy.

3. Original Business A B C D E F Corporation Boundary Corporate Management (Strategic Business Units (SBUs), each with own strategy)

4. Making Diversification Work • What businesses should a corporation compete in? • How should these Strategic Business Units (SBUs) be managed to jointly create more value than if they were freestanding units?

5. New Business Original Business Combined Businesses Diversification should add value + = 1

6. Creating Value through Diversification • Diversify into Related SBUs to lower average costs & increase aggregated revenues by: • Leveraging (Sharing) Core Competences • Sharing Activities • Diversify into Related SBUs to get market power by: • Pooling Negotiating Power • Vertically Integrating • Diversify into Unrelated SBUs to use skills in parenting, restructuring, & managing portfolios • Parenting Subsidiary Business Units • Restructuring Subsidiary Business Units • Managing A Portfolio of Business Units

7. 1.1 Leveraging (Sharing) Core Competencies • SBU core competencies are an individual strategic business unit’s strengths • Corporate core competencies are the top administration’s strengths in acquiring, managing and divesting its SBUs. • New SBUs may bring their own strengths which benefit the current organization, or may be able to benefit from the current organization’s strengths.

8. Superior Customer value 1.1 Three Criteria for Valuable Core Competencies • Three criteria for core competenciesthat lead to the creation of value • Core competencies must enhance competitive advantage(s) by creating superior customer value • Develop strengths relative to competitors • Build on skills and innovations • Appeal to customers

9. Superior Customer value Businesses similar in way related to core competency 1.1 Three Criteria for Valuable 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 • Brand image is an example

10. Superior Customer value Businesses similar in way related to core competency Difficult to imitate or find substitutes for 1.1 Three Criteria for Valuable Core Competencies • Three criteria (of core competencies) that lead to the creation of value and synergy • Core competencies must be difficult for competitors to imitate or find substitutes for • Easily imitated or replicated core competencies are not a sound basis for sustainable advantages • Specialized technical skills acquired only in company work experience are an example

11. 1.2 Sharing Value Chain Activities • Corporations can also achieve added value by sharing value chain activities across their business units • Common manufacturing facilities • Distribution channels • Sales forces • Sharing value chain activities provide two payoffs • Cost savings • Revenue enhancements

12. 1.2 Cost Savings through Sharing Value Chain Activities • Most common type of sharing • Savings obtained through • Eliminating duplicate jobs • Eliminating duplicate facilities • Eliminating related expenses • Savings may be offset by • Greater costs of coordinating shared activities • Costs of compromising design or performance of a shared activity

13. 1.2 Enhancing Revenue through Sharing Activities • Acquiring firm and its target may achieve a higher level of sales growth together than either could have achieved on its own • Combined distribution channels can escalate sales of the acquiring company’s products • Enhanced effectiveness of differentiation strategies • Can have a negative effect on a given business’s differentiation

14. 2. Related Diversification: Market Power Two principal means to add value through market power 2.1 Pooled negotiating power 2.2 Vertical integration (we will not discuss)

15. Business 1 Business 2 Bargaining power 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 Bargaining power Bargaining power

16. Diversifying into Unrelated Businesses(Unrelated Diversification) 3.1 “Parenting” Subsidiary Business Units 3.2 Restructuring Subsidiary Business Units 3.3 Managing A Portfolio of Business Units

17. Corporate office Business unit Business unit Business unit 3.1 Corporate Parenting • Parenting—creating value within business units • Experience of the corporate office • Support of the corporate office • Plans • Budgets • Procurement • Legal functions • Financial functions • Human resource management

18. Corporate office Business unit Business unit Business unit Business unit Business unit Business unit 3.2 Corporate Restructuring • Find poorly performing firms • With unrealized potential • On threshold of significant positive change • Sell off parts • Reduce payroll • Change strategies • Change management • Infuse new technologies • Reduce unnecessary expenses

19. 3.2 Corporate Restructuring • 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

20. 3.3 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

21. 3.3 Portfolio Management • 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 • 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

22. Unrelated Diversification Activities Also Can Be Applied to RelatedStrategic Business Units 1.3 “Parenting” Related SBUs 1.4 Restructuring Related SBUs 1.5 Managing A Portfolio of Related SBUs

23. Means to Achieve Diversification • Acquisitions (or mergers) • Internal development: New business units • New products • New markets • New technology • Joint ventures or strategic alliances • I will only address the last one

24. Entering new markets Strategic Alliances and Joint Ventures • Introduce successful product or service into a new market • Lacks requisite marketing expertise • Doesn’t understand customer needs • Doesn’t know how to promote the product • Doesn’t have access to proper distribution channels

25. Entering new markets Reducing costs in value chain Strategic Alliances and Joint Ventures • Join other firms to reduce manufacturing (or other) costs in the value chain • Pool capital • Pool value-creating activities • Pool facilities • Economies of scale

26. Entering new markets Reducing costs in value chain Developing diffusing new technology Strategic Alliances and Joint Ventures • Develop or diffuse new technologies • Use expertise of two or more companies • Develop products technologically beyond the capability of the companies acting independently

27. Discuss What Citibank did, or could have done, in each of these areas. Tell whether it used internal development, acquisitions, mergers, joint ventures, or strategic alliances. • Diversify into Related SBUs to lower average costs & increase aggregated revenues by: • Leveraging (Sharing) Core Competences • Sharing Activities • Diversify into Related SBUs to get market power by: • Pooling Negotiating Power • Vertically Integrating • Diversify into Unrelated SBUs to exploit skills in parenting, restructuring, & managing portfolios • Parenting Subsidiary Business Units • Restructuring Subsidiary Business Units • Managing A Portfolio of Business Units • Diversify into Related SBUs to exploit skills in parenting, restructuring, & managing portfolios • Parenting Subsidiary Business Units • Restructuring Subsidiary Business Units • Managing A Portfolio of Business Units That’s All, Folks!