Corporate StrategiesChapter 6

Built by Stambaugh/2009 Never invest in a business you cannot understand … Warren Buffett

Jeff Stambaughjeff.stambaugh@mwsu.edu

http://faculty.mwsu.edu/business/jeff.stambaugh

Chapter Objectives

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■ Understand multi-product strategies (diversification), including why and the pitfalls that could occur

■ Understand various ways to achieve diversification■ Internal■ M&A■ Strategic Alliances

Never invest in a business you cannot understand … Warren Buffett

Corporate Strategy

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■ What Businesses should we be in■ How can these businesses be managed to create

synergy

Never invest in a business you cannot understand … Warren Buffett

Diversification Enhances Shareholder Value By:

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■ Develop economies of scope■ Leverage existing core competences■ Share activities / info■ Expand into / build new competences

■ Gain Market Power■ Wicker with Porter’s Five Forces (at all levels)

■ For unrelated diversification:■ Corporate parenting advantages

■ I say Honda you say? Link

Never invest in a business you cannot understand … Warren Buffett

Economies of Scope

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■ Synergy in Core Competences■ Create value■ Hard to imitate / substitute for■ Businesses must tap into a common core competence (Apple) II

■ Sharing (cost sharing and revenue enhancement)■ Common Resources (parts)■ Distribution Channels■ Cross-selling customers

Never invest in a business you cannot understand … Warren Buffett

Market Power

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■ Vertical■ Horizontal

Never invest in a business you cannot understand … Warren Buffett

Vertical Integration

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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.

Benefits

RisksCosts and expenses associated with increased overhead and

capital expendituresLoss 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.

Never invest in a business you cannot understand … Warren Buffett

Vertical Integration

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■ Are existing suppliers doing adequate job■ Are outsourced/partner functions a viable profit

source (backward / forward integration)■ Stability in demand■ What percentage of production capability would be

absorbed by existing products■ Do we possess the core competences■ Will vertical integration generate a negative reaction

Never invest in a business you cannot understand … Warren Buffett

Transaction Costs

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■ Search■ Negotiating■ Contracting■ Monitoring■ Enforcing … plus concerns about putting “your secrets” out

there

Make or Buy is a complicated decision

Never invest in a business you cannot understand … Warren Buffett

Unrelated Diversification

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■ Management / Leadership as core competency Link ■ Restructuring (what doesn’t the market know)■ Efficient internal markets (resource allocation)

Never invest in a business you cannot understand … Warren Buffett

Current Trends

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■ Unrelated diversification is “out” after being “in” through the 1960s - 1980s

■ Private equity firms■ Many firms are concentrating more on their core

competencies (dis-integrating some companies)■ Survey says …

Never invest in a business you cannot understand … Warren Buffett

How to Diversify

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■ Internal Growth■ Slow and Steady

■ Mergers and Acquisition (M&As)■ Strategic Alliances

Never invest in a business you cannot understand … Warren Buffett

Famous Acquisitions / Mergers

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■ Google and YouTube ($1.65B)■ News Corp and MySpace ($580M)■ Disney and Pixar■ AOL and Time Warner■ Bank of America and Merrill Lynch■ Adidas and Reebok■ SBC and ATT and BellSouth■ GE and NBC■ Exxon and Mobil■ JPMorgan and Wachovia■ Oracle and PeopleSoft■ Daimler (Mercedes Benz) and Chrysler■ US Airways and America West

So How Well Does It Work?So How Well Does It Work?

Never invest in a business you cannot understand … Warren Buffett

M&As Basics

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■ Why?■ Fast Growth (market power / reduce costs)■ Obtain resources / Create synergy■ Block Competitors / Force consolidation■ Enter new markets

■ How?■ Screen / Approach Target■ Due Diligence■ Negotiate■ Integrate

Never invest in a business you cannot understand … Warren Buffett

How Not to Succeed

Built by Stambaugh/2009 Never invest in a business you cannot understand … Warren Buffett

Keys To Success

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■ Synergy … not more of same■ Don’t overpay … minimize acquisition premium

■ Hostile takeovers and bidding wars■ Manage debt

■ Keep it friendly■ Pay attention to integration

■ Compatible Culture■ Get ‘er done

Never invest in a business you cannot understand … Warren Buffett

Jack Welch’s Keys To M&A Success

Built by Stambaugh/2009

■ Merger of equals don’t work■ No “reverse hostages”■ Culture fit as important as strategic fit■ Get the integration done w/i 90 days■ Reap best from both sides (no conqueror syndrome)■ Don’t overpay

Never invest in a business you cannot understand … Warren Buffett

Some Examples of Alliances

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■ ATT (SBC) / Yahoo / DISH network■ GM-Chinese Automakers■ Lockheed Martin-Augusta Westland■ Samsung – Sony Flat Screen JV■ Star Airline Alliance (Oneworld, etc)■ Google – Yahoo (Maybe)■ GE – Tatung HDTV

Never invest in a business you cannot understand … Warren Buffett

Strategic Alliances

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■ About a lot more than diversification■ Enter new markets / Gain access to restricted markets■ Share risks■ Joint R&D (combine new technologies)■ Outsource (opposite of diversification) to reduce costs■ Meet competitive challenges (create economies of scope

and scale)■ LEARN!

Never invest in a business you cannot understand … Warren Buffett

The Story of the 787

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■ Estimated development costs--$9 Billion

■ Workshare■ Fuselage: 4 Firms (US, Italy,

Japan■ Wings: 2 Firms (Japan)■ Tail: 2 firms (US & Italy)■ Landing Gear: 1 firm (UK)■ Engines: 3 firms (US & UK)

■ Assembly Goal: 3 days!■ Boeing does ~35% of total

manufacturing

Never invest in a business you cannot understand … Warren Buffett

Risks in Alliances

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■ 50-70% end in failure (what constitutes failure?)■ Primary problems

■ Culture clash (both cultural and corporate)■ Misrepresentation / misunderstanding of core

competencies■ Unwillingness to share important resources■ Opportunism: take the goodies and run

Never invest in a business you cannot understand … Warren Buffett

Risks in Alliances

Built by Stambaugh/2009

■ What to do?■ Pick wisely (Cultural fit? Values? Goals?

Contributions?)■ What do THEY want out of this alliance!What do THEY want out of this alliance!

■ Contracts sufficient to the task■ Trust, trust, trust (but be ready to verify)■ Commit to the relationship (requiring substantial

equity helps this commitment)

Never invest in a business you cannot understand … Warren Buffett

Managers Gone Wild! (or other reasons why these things don’t work)

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■ Size for size’s sake■ Ego (stupidity)■ Job protection

Never invest in a business you cannot understand … Warren Buffett

Summary

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■ Multi-product strategies often used■ Widely varying levels of diversification

■ Trend is toward moderate / high (versus very high) diversification

■ Key is to generate synergies by sharing resources and core competencies

■ Internal growth, M&A, and alliances all ways to pursue diversification

■ Each involves significant tradeoffs

Never invest in a business you cannot understand … Warren Buffett