Strategy Formulation: Corporate Strategy

Transcription

1 Strategy Formulation: Levels of Strategy Functional Strategy How do we coordinate? Business-Level Strategy How do we compete? Corporate-Level Strategy Where do we compete? Corporate Directional Strategies Diversification Growth Stability Retrenchment Concentration Vertical Growth Horizontal Growth Diversification Concentric Conglomerate Pause/Caution No Change Profit Turnaround Captive Company Divestment Liquidation Corporate versus Market Diversification Synergies Whole greater than sum of the parts Very difficult to achieve Usual outcome? cquired firm gets the extra value Bidding firm loses stock price Levels and Types of Diversification Levels Single-business Dominant-business Related-Constrained Moderate to Levels Related-Linked Very Levels Unrelated B B C B C B C Evaluating Reasons to Diversify Least Power to Create Value Reduce Risk Not Recommended as a Reason to Diversify Maintain Growth Balance Cash Flows Share Infrastructure Increase Market Power Most Power to Create Value Capitalize on Core Competencies Recommended as a Reason to Diversify

2 Reasons for Diversification Value-Enhancing Motives Economies of Scope Market Power Financial Economies Value-Neutral Motives Devaluation Motives Value-Enhancing Motives for Diversification Economies of Scope Sharing ctivities Value Chain nalysis Costs of economies of scope Transferring Core Competencies Value-Enhancing Motives for Diversification Increasing Market Power Multipoint Competition Mutual Forbearance Vertical Integration Value-Enhancing Motives for Diversification Financial Economies Internal Capital Market Better information Can keep secrets Less drastic actions possible Restructuring Vertical vs. Horizontal Diversification VERTICO RNGE OF LL POSSIBLE INDUSTRIES balone Zircons Fishing Fleet Wholesale Fish Market Retail Food Stores HORIZINC Mining Operations Stone Polishing Retail Jewelry Stream of Processing Upstream (Backward) Raw Materials Intermediate Processing Finished Product Downstream (Forward) Vertical Integration Value of Vertical Integration Inputs, Operations, Marketing Costs Increasing coordination and control Protection of technology Risks of Vertical Integration Coordinating costs Non-current technology Transfer pricing

3 Integration/Disintegration Niche Competitors Integral Product Vertical Industry Modular Product Horizontal Industry Technical dvances Computer Industry Structure Distribution Dealers VRs Direct Other Dimensional Complexity Supplier Market Power pplications Operating Systems Excel Other Windows Linux Mac Other NT NetWare Other Organizational Rigidities Pressure to disintegrate Pressure to integrate Proprietary System Profitability Computer Platforms Basic Circuitry IBM DEC IBM DEC PC Clones Mac Intel Other Diversification and Trade-off Between Growth and Profitability Corporate Profitability P max Dominantbusiness Related- Constrained Level of diversification Unrelated G 1 Corporate Growth Rate Incentives to Diversify ntitrust Policies and Tax Laws Uncertain Future Cash Flows Overall Firm Risk Reduction Tobacco Company Diversification Percent of Sales PM B RJR L&M 95%-100% Singlebusiness 70%-90% Dominantbusiness Under 70% Diversified Year Source: Hitt, Ireland, Hoskisson (1993), Strategic Management, West Publishing

4 Tobacco Company Exports Exports (in billions) Year Source: US News & World Report, 9/21/98 issue Firm and Diversification Resources Managerial Motives Incentives Internal Governance Capital Market intervention and market for managerial talent Diversification Strategy Strategy Implementation Firm BCG Matrix Industry Growth Rate (percentage) Stars Relative Market Share Position Cash Cows Question Marks Dogs The Growth-Share Matrix Competitive Strength Moderate Stage of Market Life Cycle Introduction Growth Maturity Decline The Parenting-Fit Matrix Negative Effects Positive Contributions Ballast lien Territory Value Trap Modes of Diversification cquisitions Fast Costly (debt, additional equity) Strategic lliances Shared risk Coordination problems Internal Development Keeps things in the family Slow

5 Merger and cquisitions Terminology Merger cquisition Takeover Vertical Integration Horizontal cquisition Related cquisition nti-takeover Tactics Scorched Earth White Knight Greenmail Golden Parachutes Poison Pills Pac-Man Reasons for cquisitions and Problems in chieving Success Increased Market Power Overcome Entry Barriers Increased Speed er Risk cquisitions Integration of two firms Overpayment Cost Reasons for cquisitions Poor Poor Increased Diversification void Competition Overestimate of Synergy Depends On Managerial expertise Type of diversification Can Lead to Overuse of Financial Controls Emphasis on financial outcomes Short-term performance orientation skewing Reduced R&D Reduced long-term performance Reasons for cquisitions Poor Managerial Energy bsorption Poor

6 Managerial Energy bsorption For the cquiring (Bidder) Firm nalyzing and selecting targets Determining acquisition strategies Negotiating with the target For the cquired (Target) Firm Negotiating with the bidder Developing employment strategies Dealing with stakeholders, media, etc. Fending off hostile takeovers Reasons for cquisitions Poor Managerial Energy bsorption Excess Debt Too Large Substitute for Innovation Poor Restructuring ttributes of Successful cquisitions Careful Selection of Targets Relationship with Targets Financial Slack Debt Position fter Complementary Resources Continued R&D and Innovation Flexibility and daptation Friendly cquisition Reasons for Restructuring Poor Need funds to purchase other firms Need funds to pay for debt incurred (LBOs) Better uses of capital become available Restructuring and Outcomes lternatives Short-Term Outcomes Long-Term Outcomes Downsizing Reduced Labor Costs Loss of Human Capital Downscoping Leveraged Buyout Reduced Debt Costs Strategic Controls Debt Costs er er er Risk