Corporate Strategies Chapter 6

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Corporate StrategiesChapter 6
Mr Jeff Stambaugh jeff.stambaugh_at_ttu.edu http//
ta.ba.ttu.edu/jstambaugh
Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2007
2
Chapter Objectives

• Understand multi-product strategies
  (diversification), including why and the pitfalls
  that could occur
  
• Understand various ways to achieve
  diversification
  
• Internal
• MA
• Strategic Alliances

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2005
3
Corporate Strategy

• What Businesses should we be in
• How can these businesses be managed to create
  synergy

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2005
4
Diversification Enhances Shareholder Value By

• Develop economies of scope
• Leverage existing core competences
• Share activities / info
• Expand into / build new competences
• Gain Market Power
• Wicker with Porters Five Forces (at all levels)
• For unrelated diversification
• Corporate parenting advantages
• I say Honda you say? Link

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2007
5
Economies of Scope

• Synergy in Core Competences
• Create value
• Hard to imitate / substitute for
• Businesses must tap into a common core competence
  (Apple) II
  
• Sharing (cost sharing and revenue enhancement)
• Common Resources (parts)
• Distribution Channels
• Cross-selling customers

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2007
6
Market Power

• Vertical
• Horizontal

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Warren Buffett
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7
Vertical Integration
Benefits
A secure source of raw materials or distribution
channels. Protection of and control over valuable
assets. Access to new business opportunities Si
mplified procurement and administrative
procedures.
Risks
Costs and expenses associated with increased
overhead and capital expenditures
Loss of flexibility resulting from large
investments. Problems associated with unbalanced
capacities along the value chain.
Additional administrative costs associated with
managing a more complex set of activities.
Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2007
8
Transaction Costs

• Search
• Negotiating
• Contracting
• Monitoring
• Enforcing
• plus concerns about putting your secrets
  out there
  

Make or Buy is a complicated decision
Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2007
9
Unrelated Diversification

• Management / Leadership as core competency Link
  
  
• Restructuring (what doesnt the market know)
• Efficient internal markets (resource allocation)

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2007
10
Current Trends

• Unrelated diversification is out after being
  in through the 1960s - 1980s
  
• Private equity firms
• Many firms are concentrating more on their core
  competencies (dis-integrating some companies)
  
• Survey says

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2005
11
How to Diversify

• Internal Growth
• Slow and Steady
• Mergers and Acquisition (MAs)
• Strategic Alliances

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2007
12
Famous Acquisitions / Mergers

• Google and YouTube (1.65B)
• News Corp and MySpace (580M)
• Disney and Pixar
• AOL and Time Warner
• NationsBank and Bank of America (plus Fleet
  Boston)
  
• Adidas and Reebok
• SBC and ATT and BellSouth
• GE and NBC
• Exxon and Mobil
• Compaq and HP
• Oracle and PeopleSoft
• Daimler (Mercedes Benz) and Chrysler
• US Airways and America West

So How Well Does It Work?
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Warren Buffett
Built by Stambaugh/2005
13
MAs Basics

• Why?
• Fast Growth (market power / reduce costs)
• Obtain resources / Create synergy
• Block Competitors / Force consolidation
• Enter new markets
• How?
• Screen / Approach Target
• Due Diligence
• Negotiate
• Integrate

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2007
14
How Not to Succeed
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Warren Buffett
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Keys To Success

• Synergy not more of same
• Dont overpay minimize acquisition premium
• Hostile takeovers and bidding wars
• Manage debt
• Keep it friendly
• Pay attention to integration
• Compatible Culture
• Get er done

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2007
16
Some Examples of Alliances

• ATT (SBC) / Yahoo / DISH network
• GM-Chinese Automakers
• Lockheed Martin-Augusta Westland
• Samsung Sony Flat Screen JV
• Star Airline Alliance (Oneworld, etc)
• Google Time Warner

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2005
17
Strategic Alliances

• About a lot more than diversification
• Enter new markets / Gain access to restricted
  markets
  
• Share risks
• Joint RD (combine new technologies)
• Outsource (opposite of diversification) to reduce
  costs
  
• Meet competitive challenges (create economies of
  scope and scale)
  
• LEARN!

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2007
18
The Story of the 787

• Estimated development costs--9 Billion
• Workshare
• Fuselage 4 Firms (US, Italy, Japan
• Wings 2 Firms (Japan)
• Tail 2 firms (US Italy)
• Landing Gear 1 firm (UK)
• Engines 3 firms (US UK)
• Assembly Goal 3 days!
• Boeing does 35 of total manufacturing

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2005
19
Risks in Alliances

• 50-70 end in failure (what constitutes
  failure?)
  
• Primary problems
• Culture clash (both cultural and corporate)
• Misrepresentation / misunderstanding of core
  competencies
  
• Unwillingness to share important resources
• Opportunism take the goodies and run

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2005
20
Risks in Alliances

• What to do?
• Pick wisely (Cultural fit? Values? Goals?
  Contributions?)
  
• What do THEY want out of this alliance!
• Contracts sufficient to the task
• Trust, trust, trust (but be ready to verify)
• Commit to the relationship (requiring substantial
  equity helps this commitment)
  

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2005
21
Managers Gone Wild! (or other reasons why these
things dont work)

• Size for sizes sake
• Ego (stupidity)
• Job protection

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2005
22
Summary

• Multi-product strategies often used
• Widely varying levels of diversification
• Trend is toward moderate / high (versus very
  high) diversification
  
• Key is to generate synergies by sharing resources
  and core competencies
  
• Internal growth, MA, and alliances all ways to
  pursue diversification
  
• Each involves significant tradeoffs

Never invest in a business you cannot understand
Warren Buffett
Built by Stambaugh/2007