CHAPTER 6

Corporate Strategy

CORPORATE STRATEGY

• Portfolio or “mix” of businesses of a company• Parallels investment portfolio concept from finance• Corporate strategy IS NOT business or business

level strategy• Corporate strategy is about combination of

businesses within a company• Focuses on owner/stockholder as main

stakeholder—creation of value for owners through “mix” of businesses

• Diversification

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

Business 1

Business 2

MOVING ALONG THE VALUE CHAIN

• Vertical– Backward integration– Forward integration

• Horizontal– Diversification– Alliances

SYNERGY

• Related businesses (horizontal relationships)– Sharing tangible resources– Sharing intangible resources

• Unrelated businesses (hierarchical relationships)– Value creation derives from corporate office– Leveraging support activities

DIVERSIFICATION REASONS CONTINUUM

Least Power to

Create Value

Most Power to

Create Value

Reducing

Risk

Maintaining

Growth

Balancing

Cash

Flows

Sharing

Infrastructure

Increasing

Market

Power

Capitalizing

on Core

Competencies

Not

Recommended

as a Reason

to Diversify

Recommended

as a Reason

to Diversify

ADDING VALUE

• The critical question

• Deploying and exploiting current resources

• Developing and expanding new resources

Exploit v. Expand

ADDING VALUE THROUGH DIVERSIFICATION BY EXPLOITING

CURRENT RESOURCES

Value From

“Front-end,” customer-facing part of the business

• Expand customer base• Better serve existing

customers, through more, better products

“Back-end” operational parts of the business

• Create economies of scope or increase scale

• Broaden existing production capacity

• Adopt new technology platforms

ADDING VALUE THROUGH DIVERSIFICATION BY ENHANCING

CURRENT RESOURCES

Value From

“Front-end,” customer-facing part of the business

• Gain new market knowledge• Add new brands• Identify new trends earlier

“Back-end” operational parts of the business

• Improve quality, productiviy, or other best practices

• Access innovative process or product technologies

• Enhance R&D capabilities or outputs

MECHANISMS TO CREATE VALUE

Slack

Synergy

Shared Knowledge

Similar Business Models

Spreading Capital

Stepping stone

DESTROYING VALUE THROUGH DIVERSIFICATION

• Hubris• Sunk Cost Fallacy• Imitation• Poor Governance and Incentives• Poor Management• Lack of Resources

2 WAYS TO DIVERSIFY

Go it alone—Greenfield

Buy your way in—acquisition

ENTRY MODE

Greenfield • Existing resources

move from existing to new business– Brand– Customer knowledge– Technology overlap

• Speed not essential

Acquisition• Resources don’t

move from existing to new business– No brand equity– New customers– New technology

• Speed essential

ACQUISITION AND INTEGRATION

• Have real, value-creating reasons for the acquisition

• Perform Due Diligence• Determine appropriate acquisition premium• Integrate the acquisition

ACQUISITION INTEGRATION STRATEGIES

Bury—completely absorb target, also termed takeover

Build—a new organization, best of breed, often from merger

Blend—loose coupling, leverage target

Bolt-on—two companies, one owner

INTEGRATING BUSINESS UNITS

INTEGRATING BUSINESS UNITS

Source of value

creation

Employing Slack

Creating Synergy

Stepping Stones

Shared Knowledge

Similar Models

Spread capital

Degree of Integration

Tightly integrated

Well integrated

Integrated Moderately integrated

Loosely integrated

Not integrated

Reason Best exploit economies of scope, knowledge, and skills.

Cost sharing requires integrated operations

Innovation builds on common resources

Building new knowledge and skill requires close proximity and exchange but also freedom of action by the acquired firm

Sharing overlapping knowledge, but allowing each business to exploit unique knowledge

Only those areas with common model will gain through shared practices.

Keep units separate to monitor performance and create accountability

THE PORTFOLIO APPROACH

• Historical starting point for strategic analysis and choice in multibusiness firms

• Portfolio techniques focusing on – “balancing” the flow of cash resources among

various businesses– while identifying their basic strategic purpose

within the overall portfolio

PORTFOLIO MANAGEMENT

Key

Each circle represents one of the firm’s business units

Size of circle represents the relative size of the business unit in terms of revenue

The Industry Attractiveness – Business strength Matrix

Strong Average Weak

High Premium – invest for growth

Selective – invest for growth

Protect/refocus – selectively invest for earnings

Medium Challenge—invest for growth

Prime—selectively invest for earnings

Restructure – harvest or divest

Low Opportunistic – selectively invest for earn

Opportunistic – preserve for harvest

Harvest or divest

Business Strength

Indu

stry

Attr

activ

enes

s

EXAMPLE• Church & Dwight has a well balanced portfolio of

products, which includes– Arm & Hammer– Trojan condoms– Oxi Clean– AIM toothpastes– First Response– Nair– Xtra laundry detergent– Brillo

Source: www.churchdwight.com

PORTFOLIO MANAGEMENT (CONT.)

• 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

LIMITATIONS OF PORTFOLIO APPROACH

• Does not address how value is created across business units

• Accurate measurement for matrix classification not easy • Relationship between market share and profitability

varies across industries and market segments• Limited strategic options came to be seen more as basic

strategic missions• Ignores capital raised in capital markets, focusing

excessively on internal cash flows• Failed to compare the competitive advantage a business

received from being owned by a particular company with the costs of owning it

WHAT DID YOU LEARN TODAY?