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Corporate Level Strategy: Creating Value through Diversification
Section 5 Corporate Level Strategy: Creating Value through Diversification
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Vertical Integration Forward or backwards Benefits Risks
Full integration Taper integration Benefits Barrier to entry Specialized assets Protecting product quality Improved scheduling Risks Costs Rapid technological changes Demand predictability
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Alternatives to Vertical Integration
Competitive bidding Long term contracts or strategic alliances Hostage taking Credible commitments Maintaining market discipline
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Outsourcing Cost reduction and differentiation
Hold-ups, scheduling and hallowing out
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Snack Foods Beverages Foods
Frito-Lay North America Frito-Lay International Quaker North America Pepsi-Cola North America Gatorade/Tropicana North America PepsiCo Beverages International
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Snack Foods Frito-Lay North America Lay’s Funyuns Ruffles Sunchips
Doritos Santitas Fritos Cheetos Rold Gold Funyuns Sunchips Cracker Jack Chester’s popcorn Grandma’s cookies Munchos Smartfood Baken-ets fried pork skins Oberto meat snacks
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Frito-Lay International
Snack Foods Frito-Lay International Bocabits wheat snacks Crujitos corn snacks Fandangos corn snacks Hamkas snacks Niknaks cheese sticks Quavers potato snacks Sabritas potato chips Twisties cheese snacks Walkers potato crisps Walkers Square potato snacks Walkers Monster Munch Corn snacks Miss Vickie’s potato chips Gamesa cookies Dippas Sonric’s sweet snacks
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Frito-Lay International
Snack Foods Frito-Lay International Bocabits wheat snacks Crujitos corn snacks Fandangos corn snacks Hamkas snacks Niknaks cheese sticks Quavers potato snacks Sabritas potato chips Twisties cheese snacks Walkers potato crisps Walkers Square potato snacks Walkers Monster Munch Corn snacks Miss Vickie’s potato chips Gamesa cookies Dippas Sonric’s sweet snacks
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Beverages Pepsi-Cola North America Pepsi-Cola Mountain Dew Slice Mug
Sierra Mist FruitWorks Lipton Dole Aquafina Frappuccino SoBe AMP
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Beverages Gatorade/Tropicana North America Gatorade Propel Tropicana
Dole juices
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Beverages PepsiCo Beverages International Loóza juices and nectars
Copella juices Frui’Vita juices Tropicana 100 juices
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Foods Quaker North America Quaker Oats
Cap’n Crunch cereal Life cereal Quisp cereal King Vitaman cereal Mother’s cereal Quaker rice cakes and granola bars Rice-A-Roni side dishes Near East couscous/pilafs Aunt Jemima mixes & syrups Quaker grits
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Foods Business Level Strategies
How are we going to compete and gain a competitive advantage in each of our businesses? Foods Business Level Strategies Quaker North America Quaker Oats Cap’n Crunch cereal Life cereal Quisp cereal King Vitaman cereal Mother’s cereal Quaker rice cakes and granola bars Rice-A-Roni side dishes Near East couscous/pilafs Aunt Jemima mixes & syrups Quaker grits
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Snack Foods Beverages Foods
Corporate Level Strategy 1) What businesses do we want to compete in? 2) How do manage effectively across businesses
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Where did they go?
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Crafting Corporate Strategy
Moves to enter new businesses Boosting combined performance of the businesses Capturing synergies and turning them into competitive advantages Establishing investment priorities and steering resources into business units
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How to Diversify? 1) Internal Development - corporate entrepreneurship
able to appropriate a larger portion of wealth avoids complexities of multiple partners time consuming and requires diversity of organizational capabilities
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How to Diversify? 2) Strategic Alliances and Joint Ventures
entering a new market via the combination of complementary resources - do more together cost reduction development/diffusion of technology Problems with appropriate partners - skills and compatibility trust and commitment communication
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Who Makes a Geo? Geo Storm was actually manufactured by Isuzu. The Storm is the Isuzu Impulse. Geo Prizm = Toyota Corolla Geo Tracker = Suzuki Sidekick Geo Metro = Suzuki Esteem or Swift w/hatchback No Geo cars were actually made by General Motors. They were all imported from foreign manufacturers.
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How to Diversify? 3) Merger & Acquisition - acquisition of assets and capabilities of another company high tech & technology intensive access to products consolidation access to segments
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Alternative 10 point option
In lieu of making a donation, you may write a 5 page, double spaced paper on how a specific company proactively pursues corporate responsible activities.
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Extra Credit – 10 points Girls’ and Boys’ Town, the original Father Flanagan's Boys' Home, is a leader in the treatment and care of abused, abandoned and neglected girls and boys. Throughout its 86-year history, the nonprofit, nonsectarian organization has provided these children with a safe, caring, loving environment where they gain confidence to get better and learn skills to become productive citizens.
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Extra Credit – 10 points Bring one of the items listed below:
New/gently used backpacks or suitcases Socks - 5 pairs Shampoo and Conditioner – 3 pints New/gently used sporting equipment Refill bottle of 409/All purpose cleaner Laundry detergent
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Extra Credit Drop off BA1 Building - Room 307
Times: Wednesday 3/30 4:00 pm – 6:30 pm Thursday 3/31 8:30 am – 9:30 am 11:30 am – 8:00 pm Friday 4/1 8:30 am – 11:00 am Monday 4/4 1:00 pm – 6:00 pm Tuesday 4/5 8:30 am – 9:00 am 2:30 pm – 5:00 pm Wednesday 4/6 4:00 pm – 6:30 pm Thursday 4/7 8:30 am – 9:30 am
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Acquisitions Reasons of Acquisitions Increase Market Power
Overcome Entry Barriers Increased Speed Lower Risk Avoid Competition
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Acquisitions Reasons of Acquisitions Increase Market Power
Overcome Entry Barriers Increased Speed Lower Risk Avoid Competition Problems with Acquisitions Integration of two firms Overpayment/Debt Overestimation of Synergy Overdiversification Managerial energy absorption Become too large Substitute for innovation
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Acquisitions Poor Performance Who Wins? Acquired Firm Shareholders
Reasons of Acquisitions Increase Market Power Overcome Entry Barriers Increased Speed Lower Risk Avoid Competition Problems with Acquisitions Integration of two firms Overpayment/Debt Overestimation of Synergy Overdiversification Managerial energy absorption Become too large Substitute for innovation Results Poor Performance Who Wins? Acquired Firm Shareholders
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Monday October 27th WSJ Bank of American – Boston Fleet Financial
BoA down $8.29, or 10%, BFF rose 23% Anthem – WellPoint Health Networks Anthem down 8.2%, WellPoint up 8.8% United Health – MidAtlantic Med Services UH down 4.9%, MAMS up 9.7%
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Failures of Acquisitions
% average acquisition premium Acquiring firm’s value drops 4% in the 3 months following acquisitions % of acquisitions are later divested Acquirers underperform S&P by 14%, peers by 4% 3 month performance before and after 30% substantial losses, 20% some losses, 33% marginal returns, 17% substantial returns
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Why, then, do executives acquire?
Often, for personal reasons Firm size and executive compensation are related When do executives loss their jobs? 1) Acquired - larger firms harder to acquire 2) Performing poorly - employment risk is reduced as returns are less volatile
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Levels of Diversification
Single Business Unit - vast majority of sales comes from a single business Less ambiguity Ear to the ground re: industry and competition Eggs in one basket
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Related Diversification at Disney
Entertainment/Production Theme Parks Resorts Entertainment/Broadcasting Retailing Cruise Lines
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Levels of Diversification (cont.)
Related Diversification - entering product markets that share some resource or capability requirements with the current business – horizonal relationships across businesses Advantages of related diversification include: Leveraging Core Competencies Sharing Activities Market Power Vertical Integration - integration of preceding or successive productive processes - Shaw Industries buying a fiber company or floor covering retailer.
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Vertical Integration Benefits
can not be held hostage – reduces buyer/supplier power greater control over operations access to new business/technologies reduce procurement and sales efforts Risks increased overhead, capital and administrative costs loss of flexibility unbalanced capacities reaction of competitors
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Tyco Telecommunications Tyco Fire and Security Tyco Safety Products
Tyco Electronics Tyco Telecommunications Tyco Fire and Security Tyco Safety Products Tyco Healthcare Tyco Plastics Tyco Adhesives Tyco Flow Control Tyco Electrical and Metal Products Tyco Fire and Building Products Tyco Infrastructure Services
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Tyco Limits itself to businesses that can be held strictly accountable for a few key financial measures Mature, stable, low-tech industries which face certain environments and little R&D investments
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Levels of Diversification (cont.)
Unrelated Diversification - few similarities in the resources and capabilities required among the firm’s businesses Conglomerate Diversification - no relatedness between businesses
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Unrelated/Conglomerate Diversification
Attempts to create value through the management of vertical relationships among the businesses Approve plans and budgets, competent legal, financial, accounting, HR or other support function Effective control systems Restructuring - buy low, sell high spinoffs turnaround
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Creating Value through Restructuring
Good, consistent job of making good investments Favorable negotiations Shrewd selling at the top Shifting investment to high growth/return businesses
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When/Why to Diversify? To create shareholder value
Porter’s Three Point Test 1) Attractiveness Test 2) Cost of Entry Test 3) Better off Test Should pass all 3
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Portfolio analysis BCG Growth-Share Matrix GE- Nine Cell Matrix
question marks, dogs, cash cows, stars GE- Nine Cell Matrix
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Boston Consulting Group Matrix
Relative Market Share Question Marks Stars Growth Rate Cash Cows Dogs 16
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BCG Matrix for PepsiCo - Early 1990s
Relative Market Share High Taco Bell Growth Rate 10% Pizza Hut Frito Lay Low Soft Drinks KFC Low High 1.0 17
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BCG Matrix for PepsiCo - Early 1990s
Relative Market Share Pizza Hut Taco Bell High Growth Rate Frito Lay 5% KFC Soft Drinks Low Low High .75 18
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Competitive Strengths
GE 9 Cell Matrix Competitive Strengths High Low High Invest Grow Attractiveness Hold Harvest Divest Low 19
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GE 9 Cell Matrix for Pepsico Competitive Strengths
High Low High Snack Foods Attractiveness Soft Drinks Low 20
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GM provides health care for 1
GM provides health care for 1.1 million workers and retirees, which adds about $1,500 to the average cost of every vehicle it sells in the U.S. For 2005, GM has forecast $5.6 billion in health- care costs, up about $1 billion from It has blamed its recent fall in profit on the rising cost of providing medical care for workers and retirees.
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United does offer more space in its Economy Plus seats
United does offer more space in its Economy Plus seats. But only travelers who pay full fare or who are elite members of the miles program can get them. Its regular economy-class seats measure in at 31 inches of seat pitch.
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Board of Directors Governance mechanism of owners to oversee, evaluate and ratify the actions of management setting corporate strategy, direction, mission, values hire/fire CEO/TMT control, monitor, supervise TMT review/approve resource allocations protect shareholders interests
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Board of Directors Sam Nunn- ex-Senator from Georgia sits on Coke’s and Dell’s Board Nancy Reagan sat on Revlon’s board Hank Aaron sat on Coke’s board Sally Ride sat on three boards Martha Stewart and Kim Alexis sat on Drugstore.com Al Haig and Colin Powell sat on AOL’s board
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Board Involvement Mostly little or no involvement
Boards tend to be dominated by management Keys to board power CEO/Chairman duality insiders vs. outsiders outsiders often weak, unknowledgeable effective board process
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Trends in Governance Institutional investors becoming increasingly powerful Special interests groups and social institutional owners Internationalization of board composition Presiding and Lead Directors – 1/3 of S&P 500 – Presiding run meetings sans CEOs, Leads are actively involved
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Executive Compensation - 2002
Median CEO pay rose 14% to $13.2 million is a year when S&P was down over 22% One company’s stock slides 71%, CEO compensation falls 12% ….. to only $82 million ….. Dennis Kozlowski – Tyco’s frequently indicted CEO ….. which is not as bad as what the CFO made - $136 million Bob Nardelli at HD has a “target bonus” minimum of $3 million and could get as much as $82 million upon his exit. James McNerney – “cause shall not include any one or more of the following: bad judgment or negligence.”
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Steve Jobs, Apple 78.1M -34.6 David Cote, Honeywell 68.5M -27.3% John Chamber, Cisco 54.8M -27.7 Pat Russo, Lucent 38.2M -75.4% Scott McNealy, Sun Microsystems 31.7M -74.7%
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Executive Compensation
Aligning the interests of shareholders and managers by rewarding them for pursuing their interests Peter Drucker - “There are only bad and worse executive compensation packages. Most encourage the top management to milk the company” Warren Buffett - “...mediocre CEOs are getting incredibly overpaid” Top execs make over 200 times the average worker, up from 44 only 30 years ago.
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Executive Compensation
Bonuses, incentives and stock ownership difficulty in evaluating decision making financial objectives used lengthy feedback period beyond managerial control managerial manipulation Stock Options riding the stock market wave strike period is too long growth, not cost-cutting, should be rewarded require holding the stock after exercise make exercise conditional on certain criteria
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Corporate Social Performance
Friedman – “The Social Responsibility of Business Is to Increase Its Profits“ Corporations as Citizens Corporations dependent upon its stakeholders Corporations that are attentive to its stakeholders can gain competitive advantages Corporations, which control resources beyond those held by individuals, have an even greater responsibility to be “good citizens”
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