Today

1
Todays News

• Pepsis challenges
• Spun-off restaurants
• Acquired Tropicana
• Pepsi Bottling IPO
• Disney -- Retail stores
• Baby merchandize
• White goods
• Paint
• ATT
• Spin-off or sell Consumer Long Distance unit
• Maxtor acquires Quantum HDD unit

2
Corporate Strategy

• Q What businesses are we in?
• How did we get there?

Single Business
Product Line Expansion
Geographic Expansion/ Vertical Integration
Diversification Related / Unrelated
3
Diversification and Poker
J
8
3
8
K
2
10
7
Q
4
7
4
J
3
3
4
Why Diversify??
Division Sales ()
Q1 Q2 Q3
Q4
1994
Industry Growth ()
1993 1994 1995 1996 1997
1998
5
Benefits of Diversification

• Reduce earnings volatility
• Minimize risk
• Move firm into attractive industries
• Prolong life of firm
• Improve long-term performance
• Capture synergies and strategic fit between
  businesses
• Steer corporate resources

6
Types of Diversification

• Vertical
• Horizontal
• Related
• Unrelated
• Global

7
Evaluation of Diversified Firms

• Identify present corporate strategy
• extent and type of diversification
• geographic scope
• new acquisitions
• recent divestitures
• mode of new business entry

8
Evaluation of Diversified Firms

• Reveal contextual position of corporate portfolio

BCG Growth-share Matrix
Hi
Industry Growth Rate
Lo
1.0
lt 1.0
gt 1.0
Relative Market Share
9
Evaluation of Diversified Firms

• Reveal competitive position of corporate
  portfolio - G.E. Industry attractiveness/business
  strength matrix

H
Industry Long Term Attractiveness
M
L
Str.
Avg.
Weak
Firms Competitive Position
10
Diversified Inc.
HQ
Bus. 1
Bus. 2
Bus. 3
Growth Size Remote Env.
Growth Size Remote Env.
Growth Size Remote Env.



11
Entering New Businesses

• WHY?
• Does business fit?
• Financially
• Strategically
• Culturally
• If not in this business today, would we want to
  get into it now?
• HOW?
• Acquisition
• Internal start-up
• Joint ventures

12
Why MA Activity?

• Intensifying competition
• Global markets
• Growth in new industries
• NOTE
• 20 of all-time corporate mergers have occurred
  within last 18 months

13
Justifications

• Attractiveness test
• Industry factors
• Core competencies
• Strategic position
• Cost of entry test
• Buy outstanding shares
• Cash
• Contributions to merger or JV
• Better off test
• Synergies, econ. of scale/scope
• Consolidation of resources, activities
• Competitive advantage?

14
Why MBCs Should Outperform SBCs

• Economies of Scope
• Intangible assets - brand
• Consolidate operations
• Efficient Resource Allocation
• MBC as internal capital market
• Increased Size
• Lower cost of capital
• Increased market power

15
Why MBCs Actually Underperform SBCs

• Why does stock price of acquirer always go down?
• Diseconomies of Scope
• Leadership - bureaucracy
• Capital Allocation
• Democratic process
• Cross-subsidization (e.g., ATT)
• Misaligned Incentives
• Too short-term
• Underdeveloped Corporate Strategy

16
International Diversification

• WHY?
• slow domestic growth (earnings risk?)
• intense domestic rivalry
• no overseas competition
• intense overseas competition
• HOW?
• Exporting
• Franchising
• Joint ventures
• Wholly-owned subsidiaries
• Greenfield (internal development)
• Mergers Acquisitions

17
Alternative Corporate Strategies

• Portfolio juggling ...
• Evolutionary Approach
• Corporate Transformation
• Sudden Redefinition

18
Portfolio Managers

• Turnaround
• restore competitiveness to poor performers
• New advantages created within portfolio
• Retrenchment
• narrow scope of portfolio
• stick to your knitting
• Restructuring
• add new businesses / divest poor performers

19
Evolutionary ApproachLeveraging Competence

• Performance culture (3M, ABB)
• Business system replicator (Gillette)
• Capability leverager (Nike)
• Valuator (Berkshire Hathaway)
• Inventor (H-P, JJ)
• Synergy capturer (Kraft-Genl. Foods)
• Cost squeezer (Sunbeam)

20
Disney Capability Bundling

• Films
• Videos
• Network TV
• Cable TV
• Hotels
• Cruise lines
• Merchandise
• Brand licensing
• NEW
• Retail Stores

Toy Story
Theme Park
TV Show
Food Items
Merchandise
21
Corp. Transformation

• Choosing new businesses
• Planned Surprises
• Change business portfolio (Monsanto)
• Change global portfolio (CitiBank)
• Capability bundling (Disney)
• Industry consolidation (Chrysler)

Total Return
MTC
Biotech (38)
SP
Chemicals (18)
1994
22
Transformation

• Nokia
• 1989 Diversified electrical conglomerate
• 1993 87 telecom focus

Total Return
Nokia
Motorola
SP
Eriksson
1993
23
Sudden Redefinition

• Competitive/performance crisis
• Massive immediate corporate portfolio change
• Deregulation
• Patents
• Foreign competition
• MA in same/related industries