1. Competing For Advantage
Part III – Creating Competitive Advantage
Chapter 8 – Corporate Level Strategy
The Popularity of Merger and Acquisition Strategies - Mergers and acquisitions are popularly employed strategies to increase economic value through ownership and use of an acquired firm's assets. The need to respond to market conditions and competitive realities influences the popularity of acquisition strategies today.
This chapter presents statistics about the use of these strategies, resulting success and failure rates, and the expectations for their future use are also included.

2. Corporate-Level Strategies
Key Terms
Corporate-Level Strategy – specifies actions a firm takes to gain a competitive advantage by selecting and managing a portfolio of businesses that compete in different product markets or industries.
WHERE ARE WE GOING TO COMPETE?

3. Corporate-level strategy
Specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets
Expected to help firm earn above-average returns
Value ultimately determined by degree to which “the businesses in the portfolio are worth more under the management of the company then they would be under any other ownership
Synergy > = 3
Product diversification (PD): primary form of corporate-level strategy

4. Levels and Types of Diversification
Levels of Diversification - Different levels of diversification vary according to the connections between and among businesses with a corporation.
What are the five categories of diversification?
Low levels of diversification
Single business
Dominant business
Moderate to high levels of diversification
Related constrained
Related linked
Very high levels of diversification
Unrelated
Figure 8.1 defines five categories of diversification. In addition to the single and dominant business categories, which denote relatively low levels of diversification, more fully diversified firms are classified into related and unrelated categories. A firm is related through its diversification when there are several links between its business units; for example, units may share products or services, technologies, or distribution channels. The more links among businesses, the more constrained is the relatedness of diversification. Unrelatedness refers to the absence of direct links between businesses.

5. Curvilinear Relationship between Diversification and Performance
The relationship between the level of diversification and firm performance:
Research evidence suggests a curvilinear relationship exists between diversification levels and firm performance
Lower performance is expected for dominant business and unrelated business strategies
As illustrated in Figure 8.2, the dominant business and unrelated business strategies are expected to have lower performance than the related constrained diversification strategy. The related linked strategy would fall somewhere between the related constrained and the unrelated diversification strategies; the single business strategy is not included in the figure because it does not involve a significant level of diversification. There are many reasons why a diversification strategy that involves a portfolio of closely related firms is likely to be higher performing than other types of diversification strategies. However, it is important to note two caveats to this pattern of diversification and performance: first, some firms are successful with each type of diversification strategy; second, some research suggests that all diversification leads to trade-offs and a certain level of suboptimization.
Additional Discussion Notes for Moderate and High Levels of Diversification - These notes include additional materials that cover the strategies for firms with moderate and high levels of diversification.
Moderate and High Levels of Diversification
A firm generating more than 30% of its sales revenue outside a dominant business and whose businesses are related to each other in some manner uses a related diversification corporate-level strategy. When the links between the diversified firm’s businesses are rather direct, a related constrained diversification strategy is being used. A related, constrained firm shares a number of resources and activities among its businesses (Campbell Soup, Procter & Gamble, Xerox, and Merck & Company).
A highly diversified firm (no relationships between its businesses) follows an unrelated diversification strategy. United Technologies, Textron, and Samsung are examples of firms using this type of corporate-level strategy. In Latin America, China, Korea, and India, conglomerates (firms following the unrelated diversification strategy) continue to dominate the private sector (~30% of GNP). The largest business groups in India, Brazil, Mexico, Argentina, and Colombia are family-owned, diversified enterprises. However, the viability of these large diversified business groups is now questioned.

6. Unrelated Diversification
Key Terms
Financial Economies – cost savings realized through improved allocations of financial resources based on investments inside or outside the firm
Efficient internal capital market allocation
Buying/Selling other companies assets in the external market
Unrelated Diversification – Firms can use a corporate-level unrelated diversification strategy to create value.

7. Drawbacks for Unrelated
Demanding requirements
Limited to no opportunities to share advantages

8. Diversification and the Multidivisional Structure
Key Terms
Multidivisional Structure (M-form) – organizational structure which ties together several operating divisions, each representing a separate business or profit center to which responsibility for daily operations and business-unit strategy is delegated
Diversification and the Multidivisional Structure – The multidivisional organizational structure is used to support implementation of multi-business strategies.

9. Original Benefits of the M-form
It enables corporate officers to more accurately monitor the performance of each business, which simplifies the problem of control
It facilitates comparisons between divisions, which improves the resource allocation process
It stimulates managers of poorly performing divisions to look for ways of improving performance
As initially designed, there were three major benefits of the M-form:
It enabled corporate officers to more accurately monitor the performance of each business, which simplified the problem of control
It facilitated comparisons between divisions, which improved the resource allocation process
It stimulated managers of poorly performing divisions to look for ways of improving performance

10. Variations of the M-form
Cooperative
Strategic business-unit (SBU)
Competitive
Three variations of the M-form:
Cooperative
Strategic business-unit (SBU)
Competitive

11. Cooperative Form of the Multidivisional Structure
Cooperative Form of the Multidivisional Structure for Implementation of a Related Constrained Strategy
In Figure 8.4, product divisions are used as part of the representation of the cooperative form of the M-form. Market divisions could be used instead of or in addition to product divisions to develop the structure.
Additional Discussion Notes for Related Constrained Strategy - These notes include additional materials that illustrate use of the related constrained diversification strategy.
Related Constrained Strategy
Procter & Gamble, a related constrained firm, is supported by a cooperative structure of five global business product units (baby, feminine and family care, fabric and home care, food and beverage, and health and beauty care) and seven market development organizations (MDOs) formed around a global region. Using the five global product units to create strong brand through ongoing innovation, P&G interfaces with customers to ensure that a division’s marketing plans fully capitalize on local opportunities. Information is shared between the product-oriented and the marketing-oriented efforts to enhance the corporation’s performance. Indeed, some corporate staff members are responsible for focusing on making certain that knowledge is meaningfully categorized and then rapidly transferred throughout P&G’s businesses. Production competencies, marketing competencies, or channel dominance are examples of strengths that P&G’s divisions might share.

12. Cooperative Form of the Multidivisional Structure
All of the divisions share one or more corporate strengths
Interdivisional sharing depends on cooperation
Links resulting from effective integration mechanisms support sharing of both tangible and intangible resources
Centralization is one integrating mechanism that can be used to link activities among divisions, allowing firms to exploit common strengths and share competencies
Success is influenced by how well information is processed among divisions
Cooperative Form of the Multidivisional Structure for Implementation of a Related Constrained Strategy
The cooperative mulidivisional form of structure can be formed around products or markets to support a related constrained diversification strategy:
All of the divisions share one or more corporate strengths
Interdivisional sharing depends on cooperation
Links resulting from effective integration mechanisms support sharing of both tangible and intangible resources
Centralization is one integrating mechanism that can be used to link activities among divisions, allowing firms to exploit common strengths and share competencies
Success is influenced by how well information is processed among divisions
Success can be influenced by managerial commitment levels and the response to some lost managerial autonomy

13. SBU Form of the Multidivisional Structure
SBU Form of the Multidivisional Structure for Implementation of a Related Linked Strategy
The strategic business-unit form of the M-form consists of three levels: corporate headquarters, strategic business units (SBUs), and SBU divisions (see Figure 8.5).
Additional Discussion Notes for the SBU Form of Multidivisional Structure - These notes include additional materials that illustrate the complexity and use of the strategic business-unit form of multidivisional structure to implement a related linked diversification strategy.
Using the SBU Form of the Multidivisional Structure for Implementation of a Related Linked Diversification Strategy
Complexity is reflected by the organization’s size and product and market diversity. Related linked firm GE, for example, has twenty=eight strategic business units (SBUs), each with multiple divisions. GE Aircraft Engines, Appliances, Power Systems, NBC, and GE Capital are a few of the firm’s SBUs.
The scale of GE’s business units is striking. GE Aircraft Engines is the world’s leading manufacturer of jet engines. With almost thirty divisions, GE Capital is a diversified financial services company creating comprehensive solutions to increase client productivity and efficiency. The GE Power Systems business unit has twenty-one divisions including GE Energy Rentals, GE Distributed Power, and GE Water Technologies.
GE’s SBUs are making efforts to form competencies in services and technology as a source of competitive advantage. Recently, technology was identified as an advantage for the GE Medical Systems SBU, as that unit’s divisions share technological competencies to produce equipment, including computed tomography (CT) scanners, MRI systems, nuclear medicine cameras, and ultrasound systems. Once a competence is developed in one of GE Medical Systems’ divisions, it is quickly transferred to the other divisions in that SBU so that the competence can be leveraged to increase the unit’s overall performance.

14. SBU Form of the Multidivisional Structure
Divisions within each SBU are related in terms of shared products and/or markets
Divisions of one SBU have little in common with division of other SBUs
Divisions within each SBU share product or market competencies to develop economies of scope
Integrations used in cooperative form are equally effective for the SBU form
Each SBU is a profit center
Financial controls are more vital for evaluating performance
SBU Form of the Multidivisional Structure for Implementation of a Related Linked Strategy
The SBU form of structure can be formed to support a related linked diversification strategy:
Divisions within each SBU are related in terms of shared products and/or markets
Divisions of one SBU have little in common with division of other SBUs
Divisions within each SBU share product or market competencies to develop economies of scope
Integrations used in cooperative form are equally effective for the SBU form
Each SBU is a profit center
Financial controls are more vital for evaluating performance

15. Competitive Form of the Multidivisional Structure
Competitive Form of the Multidivisional Structure for Implementation of an Unrelated Strategy
The competitive form is a structure in which the firm’s divisions are completely independent (see Figure 8.6). Unlike the divisions in the cooperative structure (see Figure 8.4), the divisions that are part of the competitive structure do not share common corporate strengths (e.g., marketing competencies or channel dominance). Because strengths aren’t shared in the competitive structure, integrating devices aren’t developed for the divisions to use.
The efficient internal capital market that is the foundation for use of the unrelated diversification strategy requires organizational arrangements that emphasize divisional competition rather than cooperation.
Additional Discussion Notes for the Competitive Form of Multidivisional Structure - These notes include additional materials that illustrate the use of the competitive form of multidivisional structure to implement an unrelated diversification strategy.
Using the Competitive Form of the Multidivisional Structure for Implementation of an Unrelated Diversification Strategy
Started as a small textile company in 1923, Textron Inc. is an industrial conglomerate using the unrelated diversification strategy. It has grown through volume, geography, vertical or horizontal integration, and diversification. Its growth started when the firm vertically integrated in 1943 to gain control of declining revenues and underutilized production capacity. Facing another revenue decline in 1952, the company diversified by acquiring businesses in unrelated industries. Today, Textron has five divisions: aircraft, automotive, industrial products, fastening systems, and finance. Return on invested capital is the financial control Textron uses as the primary measure of divisional performance. According to the firm, “return on invested capital serves as both a compass to guide every investment decision and a measurement of Textron’s success.”

16. Competitive Form of the Multidivisional Structure
Divisions do not share common corporate strengths
Integration devices are not developed to coordinate activities across divisions
Efficient capital markets in unrelated strategies require organizational arrangements that emphasize divisional competition rather than cooperation
Specific performance expectations and accountability for independent divisions stimulate internal competition for future resources
Competitive Form of the Multidivisional Structure for Implementation of an Unrelated Strategy
The competitive form of structure can be formed to support an unrelated diversification strategy:
Divisions do not share common corporate strengths
Integration devices are not developed to coordinate activities across divisions
Efficient capital markets in unrelated strategies require organizational arrangements that emphasize divisional competition rather than cooperation
Specific performance expectations and accountability for independent divisions stimulate internal competition for future resources
Headquarters maintains a distant relationship to avoid intervention in divisional affairs
Strategic controls are used to monitor performance relative to targeted returns
Headquarters remains responsible for cash flow allocation, performance appraisal, resource allocation, and the legal aspects related to acquisitions

17. Competitive Form of the Multidivisional Structure
Headquarters maintains a distant relationship to avoid intervention in divisional affairs
Headquarters remains responsible for cash flow allocation, performance appraisal, resource allocation, and the legal aspects related to acquisitions
Competitive Form of the Multidivisional Structure for Implementation of an Unrelated Strategy
The competitive form of structure can be formed to support an unrelated diversification strategy:
Divisions do not share common corporate strengths
Integration devices are not developed to coordinate activities across divisions
Efficient capital markets in unrelated strategies require organizational arrangements that emphasize divisional competition rather than cooperation
Specific performance expectations and accountability for independent divisions stimulate internal competition for future resources
Headquarters maintains a distant relationship to avoid intervention in divisional affairs
Strategic controls are used to monitor performance relative to targeted returns
Headquarters remains responsible for cash flow allocation, performance appraisal, resource allocation, and the legal aspects related to acquisitions

18. Benefits of Internal Competition
Internal competition creates flexibility
Internal competition challenges the status quo and inertia
Internal competition motivates effort

19. Competing For Advantage
Part III – Creating Competitive Advantage
Chapter 9 – Acquisition and Restructuring Strategy
The Popularity of Merger and Acquisition Strategies - Mergers and acquisitions are popularly employed strategies to increase economic value through ownership and use of an acquired firm's assets. The need to respond to market conditions and competitive realities influences the popularity of acquisition strategies today.
This chapter presents statistics about the use of these strategies, resulting success and failure rates, and the expectations for their future use are also included.

20. Mergers, Acquisitions, and Takeovers: What Are the Differences?
Key Terms
Merger - strategy through which two firms agree to integrate their operations on a relatively co-equal basis.
Acquisition - strategy through which one firm buys a controlling, 100 percent interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio.
Mergers, Acquisitions, and Takeovers: What Are the Differences? - Define and compare these strategies.
Additional Discussion Notes for Mergers, Acquisitions, and Takeovers - These notes include additional materials that cover the historical use of acquisition strategies.
Stats and Background
There were five waves of mergers and acquisitions in the 20th century, with the last two in the 1980s and 1990s. About 40%–45% of the acquisitions in recent years were made across country borders. There were 55,000 acquisitions valued at $1.3 trillion in the 1980s, but acquisitions in the 1990s exceeded $11 trillion in value. The annual value of mergers and acquisitions peaked in 2000 at about $3.4 trillion and fell to about $1.75 trillion in Slightly more than 15,000 acquisitions were announced in 2001 compared to over 33,000 in 2000.
Although acquisitions have slowed, their number remains high. Firms make acquisitions to increase market power, reduce competitive threat, to enter a new market, to spread risk, or as a way to obtain options that allow shifts in core business. Studies show that shareholders of acquired firms often earn above-average returns from an acquisition, while shareholders of acquiring firms typically earn returns from the transaction that are close to zero.

21. Mergers, Acquisitions, and Takeovers – What Are the Differences?
Key Terms
Takeover – special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bid
Hostile Takeover – unfriendly takeover strategy that is unexpected and undesired by the target firm
Mergers, Acquisitions, and Takeovers: What Are the Differences? - Define and compare these strategies.

22. Mergers and Acquisitions
Reasons of Acquisitions
Market Power
Horizontal
Vertical
Related
Overcome Entry Barriers
Reduce Costs/Risks of NPD
Speed
Diversify product offerings
Develop/acquire new capabilities

23. Mergers and Acquisitions
Problems with Acquisitions
Integration of two firms
Overpayment/Debt
Overestimation of Synergy
Overdiversification
Managerial energy absorption
Become too large
Substitute for innovation
Inadequate evaluation
Transaction costs

24. Mergers and Acquisitions
Results
Poor
Performance
Who Wins?
Acquired Firm
Shareholders

25. 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

26. 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

27. Effective Acquisitions
Complementary assets or resources
Friendly acquisitions facilitate integration of firms
Effective due-diligence process (assessment of target firm by acquirer, such as books, culture, etc.)
Financial slack
Low debt position
High debt can…
Increase the likelihood of bankruptcy
Lead to a downgrade in the firm’s credit rating
Preclude needed investment in activities that contribute to the firm’s long-term success
Innovation
Flexibility and adaptability

28. 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