CEO Fired

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CEO Fired
CEO fired November 2000, so 5 year back period is
most relevant.

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Corporate Strategy

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

Single Business
Apple Dell Busch Newell Coke Starbucks Pennzoil Pr
inter cos
Product Line Expansion
Geographic Expansion/ Vertical Integration
Cat Food Monsanto Nucor Virgin
Diversification Related / Unrelated
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Why Diversify??
Division Sales ()
Q1 Q2 Q3
Q4
2001
Industry Growth ()
1996 1997 1998 1999 2000
2001
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Benefits of Diversification

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

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Types of Diversification

• Vertical
• Horizontal
• Related
• Unrelated
• Geographic

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Views of diversification have evolved over time,
from driving growth, to deworsification losing
focus, to related growth.
Lexmark
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Why the evolution?

• Change of goals from growth to profitability
• Economic downturns of mid 70s, early 80s, and
  89-90
• Pressure on management from LBOs institutional
  shareholders
• Reduced transaction costs
• Less confidence in universality of mgt
  techniques
• GE share resources transfer capabilities

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US Single businesses are plunging from 1949-74,
while Related has strong upward trend. Unrelated
is increasing as well.Diversification
Strategies, Fortune 500, 1949-74.
Source Contemporary Strategy Analysis (4th
edition), Robert M. Grant, Table 15.1, p. 447
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US Single businesses are plunging from 1949-74,
while Related has strong upward trend. Unrelated
is increasing as well.Diversification
Strategies, Fortune 500, 1949-74.
Source Contemporary Strategy Analysis (4th
edition), Robert M. Grant, Table 15.1, p. 447
10
European trends were similar to the US, with
Single businesses plunging, Related has strong,
though plateauing, upward trend. Unrelated is
increasing as well.Diversification Strategies,
European Large Companies, 1950 - 1993. Red is
UK, Blue is France, and Black is Germany.
Source Contemporary Strategy Analysis (4th
edition), Robert M. Grant, Table 15.2, p. 448
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European trends were similar to the US, with
Single businesses plunging, Related has strong,
though plateauing, upward trend. Unrelated is
increasing as well.Diversification Strategies,
European Large Companies, 1950 - 1993. Red is
UK, Blue is France, and Black is Germany. Single
companies are focused dots, Related are aligned
diamonds, and Unrelated are boxes with everything
thrown in.
Source Contemporary Strategy Analysis (4th
edition), Robert M. Grant, Table 15.2, p. 448
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Incremental product diversity can lower
incremental ROA, but if still above WACC, may be
beneficial.
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Diversified Inc.
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Growth Size Remote Env.
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Growth Size Remote Env.



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Entering New Businessesand Evaluating Current
Portfolio

• 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
• Reinvest?
• Spin-off/shut down?

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Why MA Activity?

• Intensifying competition
• Global markets
• Growth in new industries
• NOTE
• 20 of all-time MA activity has occurred within
  last 3-4 years

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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?

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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

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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

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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

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Alternative Corporate Strategies

• Portfolio reconfiguration
• Evolutionary Approach
• Corporate Transformation
• Sudden Redefinition

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Portfolio Management

• 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

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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)

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Disney Capability Leverager

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

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

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

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

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

Total Return
Nokia
Motorola
SP
Eriksson
1993
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Sudden Redefinition

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

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Strategic Planning at Exxon
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Evaluation of Diversified Firms

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