1. 1 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill The Four Main Tasks in Crafting Corporate Strategy l Make moves to enter new businesses l Initiate actions to boost combined performance of businesses l Find ways to capture synergy among related business units l Establish investment priorities, steering resources into most attractive business units

2. 2 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill When to Diversify? l When it makes sense to diversify depends on 4 Growth potential in present business 4 Attractiveness of opportunities to transfer existing competencies to new businesses 4 Potential cost-saving opportunities to be realized by entering related businesses 4 Availability of adequate financial and organizational resources 4 Managerial expertise to cope with complexity of operating a multi-business enterprise

3. 3 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Why Diversify? l To build shareholder value 4 Make 2 + 2 = 5 l Diversification is capable of increasing shareholder value if it passes three tests: 1. Attractiveness Test 2. Cost of Entry Test 3. Better-Off Test

4. 4 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Corporate Strategy Alternatives Vertical Integration Single Business Concentration Diversify into Related Businesses Diversify into Unrelated Businesses Diversify into Related & Unrelated Businesses l Make new acquisitions l Divest weak units l Restructure portfolio l Retrench l Become a DMNC l Liquidate Post- Diversification Strategic Alternatives

5. 5 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Acquire a Company Already in the Target Industry l Most popular approach to diversification l Advantages 4 Quicker entry into target market 4 Easier to hurdle certain entry barriers D Technological inexperience D Gaining access to reliable suppliers D Being of a size to match rivals in terms of efficiency and costs D Getting adequate distribution access

6. 6 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Diversification via Internal Startup More attractive when l Ample time exists to create a new business from ground up l Incumbents slow in responding to new entry l Less expensive than acquiring an existing firm l Company already has most of needed skills l Additional capacity will not adversely impact supply-demand balance in industry l New start-up does not have to go head-to-head against powerful rivals

7. 7 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Diversification via Joint Ventures Good way to diversify when l Uneconomical or risky to go it alone l Pooling competencies of two partners provides more competitive strength l Foreign partners are needed to surmount 4 Import quotas 4 Tariffs 4 Nationalistic political interests 4 Cultural roadblocks

8. 8 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Drawbacks of Joint Ventures l Raises questions 4 Which partner will do what 4 Who has effective control l Potential conflicts 4 Control over strategy and long-term direction 4 How operations will be conducted 4 Control over cash flows and profits 4 Personalities and cultures of partners

9. 9 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Related Diversification and Strategic Fit l Types of strategic fit 4 Shared technology 4 Similar operating methods 4 Common labor skills 4 Common distribution channels 4 Common suppliers and raw materials sources 4 Similar kinds of managerial know-how 4 Ability to share common sales force 4 Customer overlap 4 Any area where meaningful sharing opportunities exist in businesses’ value chains

10. 10 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Related Diversification and Competitive Advantage l Competitive advantage can result from related diversification if opportunities exist to 4 Transfer expertise/capabilities/technology 4 Combine related activities into a single operation and reduce costs 4 Leverage use of firm’s brand name reputation 4 Conduct related value chain activities in a collaborative fashion to create valuable competitive capabilities

11. 11 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Common Approaches to Related Diversification l Sharing of sales force, advertising, or distribution activities l Exploiting closely related technologies l Transferring know-how and expertise from one business to another l Transferring brand name and reputation to a new product/service l Acquiring new businesses to uniquely help firm’s position in existing businesses

12. 12 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Concept: Economies of Scope l Arise from ability to eliminate costs by operating two or more businesses under same corporate umbrella l Exist when it is less costly for two or more businesses to operate under centralized management than to function independently l Cost saving opportunities can stem from interrelationships anywhere along businesses’ value chains

13. 13 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Concept: Strategic Fit l Exists among different businesses when their value chains are sufficiently similar to offer opportunities l Offers competitive advantage potential of 4 Lower costs 4 Efficient transfer of D Key skills D Technological expertise D Managerial know-how 4 Use of a common brand name

14. 14 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Technology Fits l Offer potential for sharing common technology or transferring technological know-how l Potential benefits 4 Cost-savings in technology development and new product R&D 4 Shorter times in getting new product to market 4 Interdependence between resulting products leads to increased sales 4 Technology-transfer allows more efficient performance of value chain activities

15. 15 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Operating Fits l Offer potential for activity sharing or skills transfer 4 Procuring materials 4 Conducting R&D 4 Improving production processes 4 Manufacturing components 4 Assembling finished goods 4 Performing administrative support functions

16. 16 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Potential Benefits of Operating Fits l Cost savings l Tapping into more scale economies and/or economies of scope l Increased operating efficiency l Most important skills transfer opportunities 4 If supply chain management or manufacturing expertise can benefit another business

17. 17 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Distribution and Customer-Related Fits l Arise when value chains of different businesses overlap so products are 4 Used by same customers 4 Distributed through common dealers and retailers 4 Marketed or promoted in similar ways 4 Sold under a common brand name

18. 18 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Potential Benefits of Distribution and Customer-Related Fits l Single sales force for related products l Advertising related products together l Use of common brand name l Joint delivery and shipping l Combining after-sale service and repair work l Joint order processing and billing l Joint promotional tie-ins 4 Cents-off couponing, trial offers, specials l Combining dealer networks

19. 19 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Managerial Fits l Emerge when different business units require comparable types of 4 Entrepreneurial know-how 4 Administrative know-how 4 Operating know-how l Allow accumulated managerial know-how in one business to be useful in managing another business

20. 20 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill l Involves diversifying into businesses with 4 No strategic fit 4 No meaningful value chain relationships 4 No unifying strategic theme l Approach is to venture into “any business in which we think we can make a profit” l Firms pursuing unrelated diversification are often referred to as conglomerates What Is Unrelated Diversification?

21. 21 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Acquisition Criteria For Unrelated Diversification Strategies l Can business meet corporate targets for profitability and ROI? l Will business require substantial infusions of capital? l Is business in an industry with growth potential? l Is business big enough to contribute to the parent firm’s bottom line? l Is there potential for union difficulties or adverse government regulations? l Is industry vulnerable to recession, inflation, high interest rates, or shifts in government policy?

22. 22 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Attractive Acquisition Targets l Companies with undervalued assets 4 Capital gains may be realized l Companies in financial distress 4 May be purchased at bargain prices and turned around l Companies with bright prospects but limited capital

23. 23 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Diversification and Shareholder Value l RELATED DIVERSIFICATION 4 A strategy-driven approach to creating shareholder value l UNRELATED DIVERSIFICATION 4 A finance-driven approach to creating shareholder value

24. 24 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Divestiture and Liquidation Strategies l Situations occur when a subsidiary has to be sold or shut down 4 Misfits cannot be completely avoided 4 Unfavorable changes in industry attractiveness 4 Sub-par performance of a subsidiary 4 Diversification may lack compatibility of values essential to cultural fit

25. 25 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Divestiture and Liquidation Strategy Options l Two types of divestiture options 4 Spin it off as independent company 4 Sell it l Liquidation 4 Most painful option 4 Involves terminating firm’s existence

26. 26 © The McGraw-Hill Companies, Inc., 1998 Irwin/McGraw-Hill Competitive Advantage Avenues for a DMNC via Related Diversification l Transfer of expertise in a core technology to other businesses l Collaborative and strategically coordinated R&D benefiting all the related businesses l Ability to use same distributors and retail dealers on a worldwide basis l Ability to leverage an established brand name l Use financial and organizational resources to cross-subsidize a competitive assault against rivals