Professional Documents
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OUTLINE
Introduction: The Basic Issues The Trend over Time Motives for Diversification
- Growth and Risk Reduction - Shareholder Value: Porters Essential Tests
Competitive Advantage from Diversification Diversification and Performance: Empirical Evidence Relatedness in Diversification
Diversification decisions involve these same two issues: How attractive is the sector to be entered? Can the firm achieve a competitive advantage?
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Percentage of Specialized Companies (single-business, vertically-integrated and dominant-business) Percentage of Diversified Companies (related-business and unrelated business)
Note:
During the 1980s and 1990s the trend reversed as large companies refocused upon their core businesses
70 60 50 40 30 20 10 0 1950 1960 1970 1983 1993 Single business Dominant business Related business Unrelated business
MANAGEMENT PRIORITIES
Competitive advantage through speed & flexibility Creating opportunities for future growth Joint ventures and alliances Creating growth options through focused diversification
Economies of scope & synergy Portfolio planning models Capital asset pricing model
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RISK SPREADING
--Diversification reduces variance of profit flows --But, doesnt create value for shareholdersthey can hold diversified portfolios of securities. --Capital Asset Pricing Model shows that diversification lowers unsystematic risk not systematic risk.
PROFIT
--For diversification to create shareholder value, then bringing together of different businesses under common ownership & must somehow increase their profitability.
2. The Cost of Entry Test : the cost of entry must not capitalize all future profits.
3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa. (i.e. some form of synergy must be present)
Additional source of value from diversification: Option value
ECONOMIES OF SCOPE
Sharing tangible resources (research labs, distribution systems) across multiple businesses Sharing intangible resources (brands, technology) across multiple businesses Transferring functional capabilities (marketing, product development) across businesses Applying general management capabilities to multiple businesses
Economies of scope not a sufficient basis for ECONOMIES diversification ----must be supported by transaction costs FROM Diversification firm can avoid transaction costs by INTERNALIZING operating internal capital and labor markets TRANSACTION Key advantage of diversified firm over external markets--S superior access to information
Relatedness in Diversification
Economies of scope in diversification derive from two types of relatedness: Operational Relatedness-- synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D) Strategic Relatedness-- synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses. Problem of operational relatedness:- the benefits in terms of economies of scope may be dwarfed by the administrative costs involved in their exploitation.
Stock market returns to acquiring firms negative on average Related vs. unrelated diversification
Conglomerate discount & stick to the knitting But GE, LVMH, Virgin Group are anomalies
Resource allocation between businesses. Business strategy formulation Monitoring and controlling business
performance
PIMS a database which quantifies the impact of strategy on performance. Used to appraise SBU performance and guide business strategy formulation
Allocating resources-- the analysis indicates both the investment requirements of different businesses and their likely returns Formulating business-unit strategy-- the analysis yields simple strategy recommendations (e.g..: build, hold, or harvest) Setting performance targets-- the analysis indicates likely performance outcomes in terms of cash flow and ROI Portfolios balance-- the analysis can assist in corporate goals such as a balanced cash flow and balance of growing and declining businesses.
HIGH
Strategy:
analyze to determine whether business can be grown into a star, or will degenerate into a dog
Strategy:
HIGH
12
Cable TV Networks
Cable
Film production
-4
Music
Relative market share
-8
AOL
Position in 2003
Company 2 value as is
Strategic and operating opportunities
RESTRUCTURING FRAMEWORK
4
Disposal/acquisition opportunities
Business Plans
Stewardship Review
Stewardship Basis
Financial Forecast
Corporate Plan
Investment Reappraisals
Annual Budget
Setting & monitoring the achievement of performance targets Primarily through performance management system, including operating budgets and HR appraisals
Primarily through strategic planning system & capital expenditure approval system
Goold & Campbells Corporate Management Styles: Financial and Strategic Control
Hig h Strategi c planning Strategic control Holding compan y Flexible strategic Tight strategic CONTROL INFLUENCE Financial control
Centralized
Low
Tight financial
SHARING OCCURS AT TWO LEVELS: Corporate levelcommon corporate services Business levelsharing resources, transferring capabilities
PORTERS ANALYSIS OF BUSINESS LINKAGES AND CORPORATE STRATEGY TYPES Portfolio management Parent creates value by operating an internal capital market RestructuringParent create value by acquiring and restructuring Inefficiently-managed businesses Transferring skillsParent creates value by transferring capabilities between businesses Sharing activitiesParent creates value by sharing resources between businesses
What Corporate Management Activities are Implied by Porters Concepts of Corporate Strategy
(1) Portfolio Management Using superior information and analysis to acquire attractive companies at favorable prices (e.g. Berkshire Hathaway). Minimizing cost of capital (e.g. GE) Create efficientt internal system for capital allocation (e.g. Exxon-Mobil) Efficient monitoring of business unit performance (e.g BP-Amoco).
(2) Restructuring: Intervening to cut costs and divest under performing assets (e.g. Hanson during 1980s & early 1990s)
(3) Transferring skills: Transferring best practices (e.g. Hewlett-Packard) Transferring innovations (e.g. Sharp) Transferring key personnel between businesses (e.g. Sony) (4) Sharing activities: Common corporate services (e.g. 3M) Sharing operational resources and functions (e.g. sales and distribution, manufacturing facilities).
Matrix organizationboth product and country / regional coordination; flexible reporting requirements
Radical decentralizationABBs corporate HQ was tiny (<100 staff). Decision making authority lay with individual national subsidiaries (mostly small or medium-sized businesses). Bottom-up management. Each business had its own balance sheet and could retain 1/3 of net income. Informal collaboration and integration.
Yet, for all of ABBs apparent success at reconciling coordination with decentralization, by 2002-03, deteriorating profitability and complexity of matrix structure caused ABB to dismantle its matrix and adopt simpler line of business structure
Rethinking the Management of Multibusiness Corporations: Bartlett & Ghoshals Analysis of Key Management Processes
RENEWAL PROCESS
Developing and nurturing organizational values Establishing strategic mission & performance standards Top Management
Front-line Management
Case: Virgin
What common resources and capabilities link the separate Virgin companies? Which businesses, if any, should Branson consider divesting? What criteria should Branson apply in deciding what new diversification to pursue? What is the Virgin business model? What changes in the financial structure, organizational structure, and management systems of the Virgin groupwould you recommend?