Strategy Formulation: Corporate Strategy - wiggo.com Formulation: Corporate Strategy ... Corporate Strategy Levels of Strategy ... • Turnaround • Captive Company • Divestment

Professor Robert R. Wiggins

Strategy Formulation:

Corporate Strategy

MGMT 4710 Professor Robert R. WigginsCorporate Strategy

Levels of Strategy• Functional Strategy

– How do we coordinate?

• Business-Level Strategy– How do we compete?

• Corporate-Level Strategy– Where do we compete?

MGMT 4710 Professor Robert R. Wiggins

Corporate Directional Strategies

Growth Stability Retrenchment

• Concentration• Vertical Growth• Horizontal Growth

• Diversification• Concentric• Conglomerate

• Pause/Caution• No Change• Profit

• Turnaround• Captive Company• Divestment• Liquidation


Diversification

• Corporate versus Market Diversification• Synergies

– Whole greater than sum of the parts– Very difficult to achieve

• Usual outcome?– Acquired firm gets the extra value– Bidding firm loses stock price


Levels and Types of Diversification

Low LevelsSingle-business A

Dominant-businessB

A

Moderate to High LevelsRelated-Constrained

A

CB

Related-Linked A

CBVery High Levels

Unrelated

A

CBMGMT 4710 Professor Robert R. Wiggins

Evaluating Reasons to Diversify

BalanceCash Flows

IncreaseMarketPower

ShareInfra-

structure

MaintainGrowth

Capitalizeon Core

Competencies

ReduceRisk

Most Powerto Create

Value

Least Powerto Create

Value

Recommendedas a Reasonto Diversify

NotRecommended

as a Reasonto Diversify


Reasons for Diversification

• Value-Enhancing Motives– Economies of Scope– Market Power– Financial Economies

• Value-Neutral Motives• Devaluation Motives


Value-Enhancing Motives for DiversificationEconomies of Scope

• Sharing Activities– Value Chain Analysis– Costs of economies of scope

• Transferring Core Competencies


Value-Enhancing Motives for DiversificationIncreasing Market Power

• Multipoint Competition• Mutual Forbearance• Vertical Integration


Value-Enhancing Motives for Diversification Financial Economies

• Internal Capital Market– Better information– Can keep secrets– Less drastic actions possible

• Restructuring


Vertical vs. Horizontal Diversification

VERTICO

RetailFood

Stores

RetailJewelry

HORIZINC

WholesaleFish

Market

FishingFleet

RANGE OF ALL POSSIBLE INDUSTRIESAbalone Zircons

StonePolishing

MiningOperations

Upstream(Backward)

Str

eam

of

Pro

cess

ing

Downstream(Forward)

Raw Materials

IntermediateProcessing

FinishedProduct


Vertical Integration

• Value of Vertical Integration– Inputs, Operations, Marketing Costs– Increasing coordination and control– Protection of technology

• Risks of Vertical Integration– Coordinating costs– Non-current technology– Transfer pricing


Pressure todisintegrate

Pressure tointegrate

Modular ProductHorizontal Industry

Integral ProductVertical Industry Technical

Advances

SupplierMarketPower

ProprietarySystem

Profitability

NicheCompetitors

HighDimensionalComplexity

OrganizationalRigidities

Integration/Disintegration


Computer Industry Structure

1980

Distribution

Applications

OperatingSystems

ComputerPlatforms

BasicCircuitry

IBM DEC

Dealers

Excel

IBM

Intel

VARs Direct Other

1-2-3 Other

Windows Linux Mac OtherNT NetWare Other

DEC PC Clones Mac

Other

1995


Diversification and Performance

Per

form

ance

Level of diversification

Dominant-business

Related-Constrained

Unrelated


Trade-off Between Growth and Profitability

CorporateProfitability

CorporateGrowth Rate

Pmax

G1


Incentives to Diversify

• Antitrust Policies and Tax Laws• Low Performance• Uncertain Future Cash Flows• Overall Firm Risk Reduction


Tobacco Company Diversification

30

40

50

60

70

80

90

100

110

60 61 62 63 64 65 66 67 68 69 70 71 72 73 74

Per

cent

of S

ales

Year

95%-100%Single-business

70%-90%Dominant-business

Under 70%Diversified

RJR

PM

L&M

AB

Source: Hitt, Ireland, Hoskisson (1993), Strategic Management, West Publishing


Tobacco Company Exports

Exp

orts

(in

bill

ions

)

Year1960 1970 1980 1990 1996

20.2 29.2

82

164.3

243.9

Source: US News & World Report, 9/21/98 issueMGMT 4710 Professor Robert R. Wiggins

Corporate Strategy

Firm Performance and Diversification

Resources

ManagerialMotives

Incentives

DiversificationStrategy

FirmPerformance

Capital Marketintervention and

market for managerial talent

InternalGovernance

StrategyImplementation


BCG MatrixRelative Market Share Position

Ind

ust

ry G

row

th R

ate

(per

cen

tag

e)

High

High

Stars

Low

QuestionMarks

Low

Cash Cows Dogs


The Growth-Share MatrixIntroduction Decline

High

LowCo

mp

etit

ive

Str

eng

thC

om

pet

itiv

e S

tren

gth

Stage of Market Life CycleStage of Market Life Cycle

Moderate

Growth Maturity


Ballast

Value Trap

The Parenting-Fit Matrix

Neg

ativ

e E

ffec

tsN

egat

ive

Eff

ects

Positive ContributionsPositive Contributions

High

Low

Low High

AlienTerritory


Modes of Diversification• Acquisitions

– Fast– Costly (debt, additional equity)

• Strategic Alliances– Shared risk– Coordination problems

• Internal Development– Keeps things “in the family”– Slow


Merger and Acquisitions Terminology

• Merger• Acquisition• Takeover• Vertical Integration• Horizontal Acquisition• Related Acquisition


Anti-Takeover Tactics• Scorched Earth • White Knight • Greenmail• Golden Parachutes • Poison Pills• Pac-Man


Reasons for Acquisitions and Problems in Achieving Success

Acquisitions

IncreasedMarket Power

OvercomeEntry Barriers

IncreasedSpeed

Lower Risk

IncreasedDiversification

AvoidCompetition

Integration oftwo firms

Overpayment

High Cost

Overestimateof Synergy


Reasons for Acquisitions’Poor Performance

PoorPerformance

Overdiversification


Overdiversification

• Overdiversification Depends On– Managerial expertise– Type of diversification

• Can Lead to Overuse of Financial Controls– Emphasis on financial outcomes– Short-term performance orientation– Performance skewing– Reduced R&D– Reduced long-term performance



PoorPerformance

Overdiversification

ManagerialEnergy Absorption


Managerial Energy Absorption

• For the Acquiring (Bidder) Firm– Analyzing and selecting targets– Determining acquisition strategies– Negotiating with the target

• For the Acquired (Target) Firm– Negotiating with the bidder– Developing employment strategies– Dealing with stakeholders, media, etc.– Fending off hostile takeovers



PoorPerformance

Overdiversification

ManagerialEnergy Absorption

Excess Debt

Too Large

Substitutefor Innovation

Restructuring


Attributes of Successful Acquisitions• Careful Selection of Targets• Relationship with Targets• Financial Slack• Low Debt Position After• Complementary Resources• Continued R&D and Innovation• Flexibility and Adaptation• Friendly Acquisition


Reasons for Restructuring

• Poor Performance• Overdiversification• Need funds to purchase other firms• Need funds to pay for debt incurred

(LBOs)• Better uses of capital become

available


Restructuring and OutcomesAlternatives Short-Term Outcomes Long-Term Outcomes

Downsizing

ReducedLabor Costs

Loss ofHuman Capital

LowerPerformance

Downscoping

ReducedDebt Costs

HigherPerformance

Strategic Controls

LeveragedBuyout

HighDebt Costs

Higher Risk

Documents

Strategy Formulation: Corporate Strategy - wiggo.com Formulation: Corporate Strategy ... Corporate Strategy Levels of Strategy ... • Turnaround • Captive Company • Divestment