Gregory G. Dess
G. T. Lumpkin
Marilyn L. Taylor
Making Diversification Work
•
What businesses should a corporation
compete in?
•
How should these businesses be managed
to jointly create more value than if they were freestanding units?
Making Diversification Work
•
Diversification initiatives must create value
for shareholders
•
Mergers and acquisitions
•
Strategic alliances
•
Joint ventures
•
Internal development
•
Diversification should create synergy
Synergy
•
Related businesses (horizontal
relationships)
•
Sharing tangible resources
•
Sharing intangible resources
•
Unrelated businesses (hierarchical
relationships)
•
Value creation derives from corporate
office
•
Leveraging support activities
Creating Value
Leveraging core competencies
•
3M leverages it competencies in adhesives
technologies to many industries, including automotive, construction, and
telecommunications
Sharing activities
•
McKesson, a large distribution company,
sells many product lines, such as pharmaceuticals and liquor, through its
superwarehouses
Pooled negotiating power
•
The Times Mirror Company increases its
power over customers by providing “one-stop shopping” for advertisers to reach
customers through multiple media—television and newspapers—in several huge
markets such as New York and Chicago
Vertical integration
•
Shaw industries, a giant carpet
manufacturer, increases its control over raw materials by producing much of its
own polypropylene fiber, a key input to its manufacturing process
Corporate restructuring and parenting
•
The corporate office of Cooper
Industries adds value to its acquired businesses by performing such activities
as auditing their manufacturing operations, improving their accounting
activities, and centralizing union negotiations
Portfolio management
•
Novartis, formerly Ciba-Geigy, uses
portfolio management to improve many key activities, including resource
allocation and reward and evaluation systems
Related Diversification: Economies of Scope and
Revenue Enhancement
•
Economies of scope
•
Cost savings from leveraging core
competencies or sharing related activities among businesses in the corporation
•
Leverage or reuse key resources
n Favorable
reputation
n Expert
staff
n Management
skills
n Efficient
purchasing operations
n Existing
manufacturing facilities
Leveraging Core Competencies
•
Core competencies
•
The glue that binds existing businesses
together
•
Engine that fuels new business growth
•
Collective learning in a firm
n How
to coordinate diverse production skills
n How
to integrate multiple streams of technologies
n How
to market diverse products and services
Three Criteria of Core Competencies
•
Three criteria (of core competencies)
that lead to the creation of value and synergy
•
Core competencies must enhance competitive
advantage(s) by creating superior customer value
•
Develop strengths relative to
competitors
•
Build on skills and innovations
•
Appeal to customers
Three Criteria of Core Competencies
•
Three criteria (of core competencies)
that lead to the creation of value and synergy
•
Core competencies must be difficult for
competitors to imitate or find substitutes for
•
Easily imitated or replicated core
competencies are not a sound basis for sustainable advantages
•
Specialized technical skills acquired
only in company work experience are an example
Sharing Activities
•
Corporations can also achieve synergy by
sharing tangible and value-creating activities across their business units
•
Common manufacturing facilities
•
Distribution channels
•
Sales forces
•
Sharing activities provide two payoffs
•
Cost savings
•
Revenue enhancements
Cost Savings through Sharing Activities
•
Most common type of synergy
•
Savings obtained through
•
Eliminating duplicate jobs
•
Eliminating duplicate facilities
•
Eliminating related expenses
•
Savings may be offset by
•
Greater costs of coordinating shared
activities
•
Costs of compromising design or
performance of a shared activity
Enhancing Revenue through Sharing Activities
•
Acquiring firm and its target may achieve
a higher level of sales growth together than either could have achieved on its
own
•
Combined distribution channels can
escalate sales of the acquiring company’s products
•
Enhanced effectiveness of
differentiation strategies
•
Can have a negative effect on a given
business’s differentiation
Related Diversification: Market Power
•
Two principal means to achieve synergy
through market power
•
Pooled negotiating power
•
Vertical integration
•
Government regulations may restrict this
power
Pooled Negotiating Power
•
Similar businesses working together can
have stronger bargaining position relative to
•
Suppliers
•
Customers
•
Competitors
•
Abuse of bargaining power may affect
relationships with customers, suppliers and competitors
Vertical Integration
•
Benefits
•
Secure source of supply of raw materials
•
Secure distribution channels
•
Protection and control over assets and
services
•
Access to new business opportunities and
technologies
•
Simplified procurement and
administrative procedures
•
Risks
•
Costs and expenses associated with
increased overhead and capital expenditures
•
Loss of flexibility resulting from
inability to respond quickly to changes in the external environment
•
Problems associated with unbalanced’
capacities or unfilled demand along the value chain
•
Additional administrative costs
Vertical Integration: Benefits and Risks
•
A secure source of raw materials or
distribution channels.
•
Protection of and control over valuable
assets.
•
Access to new business opportunities
•
Simplified procurement and
administrative procedures
•
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.
Vertical Integration
In making decisions associated with vertical
integration, four issues should be considered
- Are we satisfied with the quality of the value that our present suppliers and distributors are providing?
- Are there activities in our industry value chain presently being outsourced or performed independently by others that are a viable source of future profits?
- Is there a high level of stability in the demand for the organization’s products?
- How high is the proportion of additional production capacity actually absorbed by existing products or by the prospects of new and similar products?
Unrelated Diversification: Financial Synergies and
Parenting
•
Most benefits from unrelated
diversification are gained from vertical (hierarchical) relationships
•
Parenting and restructuring of
businesses
•
Allocate resources to optimize
n Profitability
n cash
flow
n Growth
•
Appropriate human resources practices
•
Financial controls
Corporate Parenting
•
Parenting—creating value within business
units
•
Experience of the corporate office
•
Support of the corporate office
Corporate Restructuring
•
Find poorly performing firms
•
With unrealized potential
•
On threshold of significant positive
change
Corporate Restructuring
•
Corporate management must
•
Have insight to detect undervalued
companies or businesses with high potential for transformation
•
Have requisite skills and resources to
turn the businesses around
•
Restructuring can involve changes in
•
Assets
•
Capital structure
•
management
Portfolio Management
•
Creation of synergies and shareholder
value by portfolio management and the corporate office
•
Allocate resources (cash cows to stars
and some question marks)
•
Expertise of corporate office in
locating attractive firms to acquire
•
Creation of synergies and shareholder
value by portfolio management and the corporate office
•
Provide financial resources to business
units on favorable terms reflecting the corporation’s overall ability to raise
funds
•
Provide high quality review and coaching
for units
•
Provide a basis for developing strategic
goals and reward/evaluation systems
Means to Achieve Diversification
•
Acquisitions or mergers
•
Pooling resources of other companies
with a firm’s own resource base
•
Joint venture
•
strategic alliance
•
Internal development
•
New products
•
New markets
•
New technology
Strategic Alliances and Joint Ventures
•
Introduce successful product or service
into a new market
•
Lacks requisite marketing expertise
n Doesn’t
understand customer needs
n Doesn’t
know how to promote the product
n Doesn’t
have access to proper distribution channels
•
Join other firms to reduce manufacturing
(or other) costs in the value chain
•
Pool capital
•
Pool value-creating activities
•
Pool facilities
•
Economies of scale
•
Develop or diffuse new technologies
•
Use expertise of two or more companies
•
Develop products technologically beyond
the capability of the companies acting independently
Unmet Expectations: Strategic Alliances and Joint
Ventures
•
Improper partner
•
Each partner must bring desired
complementary strengths to partnership
•
Strengths contributed by each should be
unique
•
Partners must be compatible
•
Partners must trust one another
Real Options Analysis
•
Stock options (financial assets)
•
Real options ( real assets or physical
things)
•
Investments can be staged
•
Strategic decision-makers have
“tollgates”
•
Increased knowledge about outcomes at
the time of the next investment decision
Managerial Motives Can Erode Value Creation
•
Growth for growth’s sake
•
Egotism
•
Antitakeover tactics
•
Greenmail
•
Golden parachute
•
Poison pills
No comments:
Post a Comment