Strategic Management: Value Creation, Sustainability, and Performance, 3e, 2014 Corporate Strategy Chapter 10

1. Compare corporate strategy decisions to business level strategy decisions. 2. Historical acquisition performance and reasons why. 3. Why companies diversify. 4. Related versus unrelated diversification. 5. Why companies use either type. 6. Tools for managing diversified companies. Learning Objectives

Business strategy  Value chain, Resources, Differentiation versus Low Cost approach Corporate strategy  Decide which industries to enter / exit  Combine divisions in Strategic Business Units  Establish investment priorities across SBUs  Transfer resources and management between SBUs  Structure the multi-divisional company Corporate versus Business Strategy

Diversification among Fortune 500  1949 …………. 30%  1974 …………. 64%  2014 …………. 70% Mergers & acquisition activity  2008: $1.5 Trillion (14% of U.S. GDP)  2014: $2.6 Trillion (through 1 st 3 quarters) Historical Perspective on Diversification Sources: Rumelt 1982, Financial Times 2014; West 2014

Growth Market power Market entry Risk spreading Motivations for Diversification

Types of Diversification

Related Diversification Source of Synergies Market Fit Operational Fit Management Fit Results of Synergies Scope Economizing Economizing; Resources Leverage Achieve synergies with existing businesses Synergies depend on fit in parts of value chain

No synergies anticipated Depends on financial market imperfections  Management identifies under-valued firms with significant growth prospects  Unfavorable view of entire industry includes target firm  Target firm is unable to access market financing on favorable terms Unrelated Diversification

Wide distribution, slightly positive average Diversification Performance

Selecting attractive industries Good strategic rationale Strong due diligence Capturing estimated synergies Post-acquisition integration Favorable Diversification Performance

Acquisition premiums  Poor due diligence, Bidding wars, CEO hubris, bandwagon effects Capturing estimated synergies* Loss of focus on core businesses Accelerating growth is difficult Post-acquisition integration* (* Note: also in list of favorable factors – must do these well ! ) Unfavorable Diversification Performance

Portfolio Management

Evaluates SBUs on market-related factors. Value chain, extraordinary resources, core competences are less important. Static views – do not account for how resources can be shared / leveraged. BCG matrix depends on assumption that high market share is related to superior profitability – not universally true. Portfolio Management Drawbacks

Downscoping  Shedding divisions to strategically re-focus Divestiture  Some of the parts are worth more than the sum of the parts Decision process for divestiture  Consider same factors as for diversification, only in reverse  Unattractive industry, no strategic rationale, inability to capture synergies any longer Restructuring & Divestiture