* ^ceo fired ceo fired november 2000, so 5 year back period is most relevant
TRANSCRIPT
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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 BusinessSingle Business
Product Line ExpansionProduct Line Expansion
Geographic Expansion/Geographic Expansion/Vertical IntegrationVertical Integration
DiversificationDiversificationRelated / UnrelatedRelated / Unrelated
AppleDellBuschNewellCokeStarbucksPennzoilPrinter co’s Cat Food
MonsantoNucorVirgin
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Why Diversify??
2001Q1 Q2 Q3 Q4
DivisionSales($)
IndustryGrowth
(%)
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 70’s, early 80’s, and 89-90>Pressure on management from LBO’s & 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
1949 1954 1959 1964 1969 1974Single Business >95% 42% 34% 23% 22% 15% 14%Vertically integrated >70% 13% 12% 13% 14% 12% 12%Dominant >70% <95% 15% 17% 18% 18% 13% 10%Related >70% 26% 32% 39% 37% 41% 42%Unrelated <70% 4% 5% 7% 9% 19% 21%
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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.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1949 1954 1959 1964 1969 1974
Single Business >95%
Vertically integrated >70%
Dominant >70% <95%
Related >70%
Unrelated <70%
Source: Contemporary Strategy Analysis (4th edition), Robert M. Grant, Table 15.1, p. 447
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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.
Source: Contemporary Strategy Analysis (4th edition), Robert M. Grant, Table 15.2, p. 448
1950 1960 1970 1983 1993Single France 45% 35% 20% 24% 20%Dominant France 18% 22% 27% 11% 15%Related France 31% 36% 41% 53% 52%Unrelated France 5% 5% 9% 12% 14%Single Germany 39% 27% 27% 18% 13%Dominant Germany 22% 24% 15% 17% 8%Related Germany 31% 38% 38% 40% 48%Unrelated Germany 9% 11% 19% 25% 32%Single UK 24% 18% 6% 7% 5%Dominant UK 50% 36% 32% 16% 10%Related UK 27% 48% 57% 67% 62%Unrelated UK 0% 0% 6% 11% 24%
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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
0%
10%
20%
30%
40%
50%
60%
70%
1950 1960 1970 1983 1993
Single France
Dominant France
Related France
Unrelated France
Single Germany
Dominant Germany
Related Germany
Unrelated Germany
Single UK
Dominant UK
Related UK
Unrelated UK
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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.
HQ
Bus. 1 Bus. 2 Bus. 3
$ $$
GrowthSize
Remote Env.
GrowthSize
Remote Env.
GrowthSize
Remote Env.
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Entering New Businessesand Evaluating Current Portfolio
• WHY?– Does business fit?
o Financially
o Strategically
o 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 M&A Activity?• Intensifying competition
• Global markets
• Growth in new industries
• NOTE:
– 20% of all-time M&A 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 MBC’s 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., AT&T)
• 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 Approach:Leveraging Competence
• Performance culture (3M, ABB)
• Business system replicator (Gillette)
• Capability leverager (Nike)
• Valuator (Berkshire Hathaway)
• Inventor (H-P, J&J)
• 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
TV Show
Merchan
diseFood Item
sThem
e Park
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Corp. Transformation• Choosing new businesses• Planned Surprises
– Change business portfolio (Monsanto)– Change global portfolio (CitiBank)– Industry consolidation (Chrysler)
TotalReturn
1994
S&P
MTC
Chemicals (18%)
Biotech (38%)
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Transformation
TotalReturn
1993
S&P
Nokia
Motorola
Eriksson
• Nokia– 1989: Diversified electrical conglomerate– 1993: 87% telecom focus
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Sudden Redefinition• Competitive/performance crisis
• Massive immediate corporate portfolio change– Deregulation– Patents– Foreign competition– M&A 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