1. Corporate Strategies Chapter 6 Built by Stambaugh/2009 Never invest in a business you cannot understand … Warren Buffett Jeff Stambaugh jeff.stambaugh@mwsu.edu http://faculty.mwsu.edu/business/jeff.stambaugh

2. Chapter Objectives Built by Stambaugh/2009 ■ Understand multi-product strategies (diversification), including why and the pitfalls that could occur ■ Understand various ways to achieve diversification ■ Internal ■ M&A ■ Strategic Alliances Never invest in a business you cannot understand … Warren Buffett

3. Corporate Strategy Built by Stambaugh/2009 ■ What Businesses should we be in ■ How can these businesses be managed to create synergy Never invest in a business you cannot understand … Warren Buffett

4. Diversification Enhances Shareholder Value By: Built by Stambaugh/2009 ■ Develop economies of scope ■ Leverage existing core competences ■ Share activities / info ■ Expand into / build new competences ■ Gain Market Power ■ Wicker with Porter’s Five Forces (at all levels) ■ For unrelated diversification: ■ Corporate parenting advantages ■ I say Honda you say? Link Link Never invest in a business you cannot understand … Warren Buffett

5. Economies of Scope Built by Stambaugh/2009 ■ Synergy in Core Competences ■ Create value ■ Hard to imitate / substitute for ■ Businesses must tap into a common core competence (Apple) II (Apple) II ■ Sharing (cost sharing and revenue enhancement) ■ Common Resources (parts) ■ Distribution Channels ■ Cross-selling customers Never invest in a business you cannot understand … Warren Buffett

6. Market Power Built by Stambaugh/2009 ■ Vertical ■ Horizontal Never invest in a business you cannot understand … Warren Buffett

7. Vertical Integration Built by Stambaugh/2009  A secure source of raw materials or distribution channels.  Protection of and control over valuable assets.  Access to new business opportunities  Simplified procurement and administrative procedures. Benefits Risks Costs and expenses associated with increased overhead and capital expenditures Loss of flexibility resulting from large investments. Problems associated with unbalanced capacities along the value chain. Additional administrative costs associated with managing a more complex set of activities. Never invest in a business you cannot understand … Warren Buffett

8. Vertical Integration Built by Stambaugh/2009 ■ Are existing suppliers doing adequate job ■ Are outsourced/partner functions a viable profit source (backward / forward integration) ■ Stability in demand ■ What percentage of production capability would be absorbed by existing products ■ Do we possess the core competences ■ Will vertical integration generate a negative reaction Never invest in a business you cannot understand … Warren Buffett

9. Transaction Costs Built by Stambaugh/2009 ■ Search ■ Negotiating ■ Contracting ■ Monitoring ■ Enforcing … plus concerns about putting “your secrets” out there Make or Buy is a complicated decision Never invest in a business you cannot understand … Warren Buffett

10. Unrelated Diversification Built by Stambaugh/2009 ■ Management / Leadership as core competency Link Link ■ Restructuring (what doesn’t the market know) ■ Efficient internal markets (resource allocation) Never invest in a business you cannot understand … Warren Buffett

11. Current Trends Built by Stambaugh/2009 ■ Unrelated diversification is “out” after being “in” through the 1960s - 1980s ■ Private equity firms ■ Many firms are concentrating more on their core competencies (dis-integrating some companies) ■ Survey says … Never invest in a business you cannot understand … Warren Buffett

12. How to Diversify Built by Stambaugh/2009 ■ Internal Growth ■ Slow and Steady ■ Mergers and Acquisition (M&As) ■ Strategic Alliances Never invest in a business you cannot understand … Warren Buffett

13. Famous Acquisitions / Mergers Built by Stambaugh/2009 ■ Google and YouTube ($1.65B) ■ News Corp and MySpace ($580M) ■ Disney and Pixar ■ AOL and Time Warner ■ Bank of America and Merrill Lynch ■ Adidas and Reebok ■ SBC and ATT and BellSouth ■ GE and NBC ■ Exxon and Mobil ■ JPMorgan and Wachovia ■ Oracle and PeopleSoft ■ Daimler (Mercedes Benz) and Chrysler ■ US Airways and America West So How Well Does It Work? Never invest in a business you cannot understand … Warren Buffett

14. M&As Basics Built by Stambaugh/2009 ■ Why? ■ Fast Growth (market power / reduce costs) ■ Obtain resources / Create synergy ■ Block Competitors / Force consolidation ■ Enter new markets ■ How? ■ Screen / Approach Target ■ Due Diligence ■ Negotiate ■ Integrate Never invest in a business you cannot understand … Warren Buffett

15. How Not to Succeed Built by Stambaugh/2009 Never invest in a business you cannot understand … Warren Buffett

16. Keys To Success Built by Stambaugh/2009 ■ Synergy … not more of same ■ Don’t overpay … minimize acquisition premium ■ Hostile takeovers and bidding wars ■ Manage debt ■ Keep it friendly ■ Pay attention to integration ■ Compatible Culture ■ Get ‘er done Never invest in a business you cannot understand … Warren Buffett

17. Jack Welch’s Keys To M&A Success Built by Stambaugh/2009 ■ Merger of equals don’t work ■ No “reverse hostages” ■ Culture fit as important as strategic fit ■ Get the integration done w/i 90 days ■ Reap best from both sides (no conqueror syndrome) ■ Don’t overpay Never invest in a business you cannot understand … Warren Buffett

18. Some Examples of Alliances Built by Stambaugh/2009 ■ ATT (SBC) / Yahoo / DISH network ■ GM-Chinese Automakers ■ Lockheed Martin-Augusta Westland ■ Samsung – Sony Flat Screen JV ■ Star Airline Alliance (Oneworld, etc) ■ Google – Yahoo (Maybe) ■ GE – Tatung HDTV Never invest in a business you cannot understand … Warren Buffett

19. Strategic Alliances Built by Stambaugh/2009 ■ About a lot more than diversification ■ Enter new markets / Gain access to restricted markets ■ Share risks ■ Joint R&D (combine new technologies) ■ Outsource (opposite of diversification) to reduce costs ■ Meet competitive challenges (create economies of scope and scale) ■ LEARN! Never invest in a business you cannot understand … Warren Buffett

20. The Story of the 787 Built by Stambaugh/2009 ■ Estimated development costs--$9 Billion ■ Workshare ■ Fuselage: 4 Firms (US, Italy, Japan ■ Wings: 2 Firms (Japan) ■ Tail: 2 firms (US & Italy) ■ Landing Gear: 1 firm (UK) ■ Engines: 3 firms (US & UK) ■ Assembly Goal: 3 days! ■ Boeing does ~35% of total manufacturing Never invest in a business you cannot understand … Warren Buffett

21. Risks in Alliances Built by Stambaugh/2009 ■ 50-70% end in failure (what constitutes failure?) ■ Primary problems ■ Culture clash (both cultural and corporate) ■ Misrepresentation / misunderstanding of core competencies ■ Unwillingness to share important resources ■ Opportunism: take the goodies and run Never invest in a business you cannot understand … Warren Buffett

22. Risks in Alliances Built by Stambaugh/2009 ■ What to do? ■ Pick wisely (Cultural fit? Values? Goals? Contributions?) ■ What do THEY want out of this alliance! ■ Contracts sufficient to the task ■ Trust, trust, trust (but be ready to verify) ■ Commit to the relationship (requiring substantial equity helps this commitment) Never invest in a business you cannot understand … Warren Buffett

23. Managers Gone Wild! (or other reasons why these things don’t work) Built by Stambaugh/2009 ■ Size for size’s sake ■ Ego (stupidity) ■ Job protection Never invest in a business you cannot understand … Warren Buffett

24. Summary Built by Stambaugh/2009 ■ Multi-product strategies often used ■ Widely varying levels of diversification ■ Trend is toward moderate / high (versus very high) diversification ■ Key is to generate synergies by sharing resources and core competencies ■ Internal growth, M&A, and alliances all ways to pursue diversification ■ Each involves significant tradeoffs Never invest in a business you cannot understand … Warren Buffett