The External Environment:

Opportunities,
Opportunities, Threats,
Threats, Industry
Industry
Competition,
Competition, and
and Competitor
Competitor
Analysis
Analysis

Ch2
Components of the General Environment
Economic

Demographic
Sociocultural
Industry
Environment

Competitive
Environment
Political/
Legal Global

Technological
Ch2
 SWOT Analysis
• Strengths
• Weaknesses
• Opportunities
• Threats

Ch2
The purpose of SWOT Analysis
• It is an easy-to-use tool for developing
an overview of a company’s strategic
situation
– It forms a basis for matching your
company’s strategy to its situation

Ch2
 The purpose of
Five-Forces Analysis
• The five forces are environmental
forces that impact on a company’s
ability to compete in a given market.
• The purpose of five-forces analysis is to
diagnose the principal competitive
pressures in a market and assess how
strong and important each one is.

Ch2
Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Ch2
 Threat of New Entrants
Economies of Scale

Barriers to Product Differentiation

Entry Capital Requirements

Switching Costs
Access to Distribution Channels

Cost Disadvantages Independent

of Scale
Government Policy

Expected Retaliation
Ch2
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining
Power of
Suppliers

Ch2
 Bargaining Power of Suppliers
Suppliers are likely to be powerful if:
Suppliers exert power
in the industry by:
* Threatening to raise
prices or to reduce quality
Powerful suppliers
can squeeze industry
profitability if firms
are unable to recover
cost increases
Supplier industry is dominated by a
few firms
Suppliers’ products have few substitutes
Buyer is not an important customer to
supplier
Suppliers’ product is an important
input to buyers’ product
Suppliers’ products are differentiated
Suppliers’ products have high
switching costs
Supplier poses credible threat of
forward integration
Ch2
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers

Ch2-
 Bargaining Power of Buyers
Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases

are large relative to seller’s sales Buyers compete
Purchase accounts for a significant with the supplying
fraction of supplier’s sales industry by:

Products are undifferentiated * Bargaining down prices

Buyers face few switching costs * Forcing higher quality

* Playing firms off of
Buyers’ industry earns low profits each other
Buyer presents a credible threat of
backward integration
Product unimportant to quality
Buyer has full information Ch2-
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Bargaining
Power of Power of
Suppliers Buyers

Threat of
Substitute
Products
Ch2-
 Threat of Substitute Products
Keys to evaluate substitute products:

Products Products with improving

with similar price/performance tradeoffs
function relative to present industry
limit the products
prices firms
can charge Example:
Electronic security systems in
place of security guards
Fax machines in place of
overnight mail delivery
Ch2-
 Porter’s Five Forces
Model of Competition
Threat of
Threat of
New
New
Entrants
Entrants

Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Suppliers in Industry Buyers

Threat of
Substitute
Products
Ch2-
 Rivalry Among Existing Competitors
Intense rivalry often plays out in the following ways:
Jockeying for strategic position
Using price competition
Staging advertising battles
Increasing consumer warranties or service
Making new product introductions

Occurs when a firm is pressured or sees an opportunity

Price competition often leaves the entire industry worse off
Advertising battles may increase total industry demand, but
may be costly to smaller competitors

Ch2-
Rivalry Among Existing Competitors
Cutthroat competition is more likely to occur when:
Numerous or equally balanced competitors
Slow growth industry
High fixed costs
High storage costs
Lack of differentiation or switching costs
Capacity added in large increments
Diverse competitors
High strategic stakes
High exit barriers
Ch2-
The Five Forces are Unique to
Your Industry
• Five-Forces Analysis is a framework for
analyzing a particular industry.
– Yet, the five forces affect all the other
businesses in that industry.

Ch2-
The auto manufacturing industry is considered to be highly
capital and labor intensive. The major costs for producing and
selling automobiles include:
1.Labor
2.Materials
3.Advertising
4.Original Equipment Manufacturers (OEMs)
5.Replacement Parts Production and Distribution
6.Rubber Fabrication

Ch2-
Key Players
In North America, the automobile
production market is dominated by
what's known as the Big Three:

1.General Motors - Produces

Chevrolet, Pontiac, Buick
and Cadillac, among others.

2.Chrysler - Chrysler, Jeep and

Dodge.

3.Ford Motor Co - Ford, Lincoln and Volvo.

Ch2-
Two of the largest foreign car
manufacturers are:

1.Toyota Motor Co
2.Honda Motor Co

Ch2-
Porter's 5 Forces Analysis

1.Threat of New Entrants.

It's true that the average person can't come
along and start manufacturing automobiles.
Historically, it was thought that the American
automobile industry and the Big Three were safe.
But this did not hold true when Honda Motor Co.
opened its first plant in Ohio. The emergence of
foreign competitors with the capital, required
technologies and management skills began to
undermine the market share of North American
companies.
Ch2-
2. Power of Suppliers

The automobile supply business is quite

fragmented (there are many firms).
Many suppliers rely on one or two
automakers to buy a majority of their
products. If an automaker decided to
switch suppliers, it could be devastating
to the previous supplier's business. As a
result, suppliers are extremely
susceptible to the demands and
requirements of the automobile
manufacturer and hold very little Ch2-
3.Power of Buyers.
Historically, the bargaining power of automakers went
unchallenged. The American consumer, however,
became disenchanted with many of the products
being offered by certain automakers and began
looking for alternatives, namely foreign cars. On
the other hand, while consumers are very price
sensitive, they don't have much buying power as
they never purchase huge volumes of cars.

Ch2-
4.Availability of Substitutes.

Be careful and thorough when analyzing this

factor: we are not just talking about the
threat of someone buying a different car.
You need to also look at the likelihood of
people taking the bus, train or airplane to
their destination. The higher the cost of
operating a vehicle, the more likely people
will seek alternative transportation options

Ch2-
5.Competitive Rivalry.
Highly competitive industries generally earn low
returns because the cost of competition is high. The
auto industry is considered to be an oligopoly,
which helps to minimize the effects of price-based
competition. The automakers understand that price-
based competition does not necessarily lead to
increases in the size of the marketplace; historically
they have tried to avoid price-based competition, but
more recently the competition has intensified -
rebates, preferred financing and long-term
warranties have helped to lure in customers, but they
also put pressure on the profit margins for vehicle
sales.
Ch2-
BOSTON CONSULTING GROUP
MATRIX

Ch2-
 INTRODUCTION
 BOSTON CONSULTING GROUP (BCG)
MATRIX is developed by BRUCE
HENDERSON of the BOSTON
CONSULTING GROUP IN THE EARLY
1970’s.

 According to this technique, businesses or

products are classified as low or high
performers depending upon their market
growth rate and relative market share.

Ch2-
 Relative Market Share
and Market Growth
To understand the Boston Matrix
you need to understand how
market share and market growth
interrelate.

Ch2-
 MARKET SHARE
• Market share is the percentage of the total market that is being
serviced by your company, measured either in revenue terms
or unit volume terms.

• RELATIVE MARKET SHARE

• RMS = Business unit sales this year

Leading rival sales this year

• The higher your market share, the higher proportion of the

market you control.

Ch2-
 MARKET GROWTH
RATE
• Market growth is used as a measure of a market’s
attractiveness.

• MGR = Individual sales - individual sales

this year last year
Individual sales last year

• Markets experiencing high growth are ones where the

total market share available is expanding, and there’s
plenty of opportunity for everyone to make money.

Ch2-
THE BCG GROWTH-SHARE
MATRIX
• It is a portfolio planning model which is based on the
observation that a company’s business units can be
classified in to four categories:
 Stars
 Question marks
 Cash cows
 Dogs

• It is based on the combination of market growth and

market share relative to the next best competitor.

Ch2-
Ch2-
 STARS
High growth, High market share

• Stars are leaders in business.

• They also require heavy investment, to maintain its large market
share.
• It leads to large amount of cash consumption and cash generation.
• Attempts should be made to hold the market share otherwise the star
will become a CASH COW.

Ch2-
 CASH COWS
Low growth , High market share

• They are foundation of the company and often the

stars of yesterday.
• They generate more cash than required.
• They extract the profits by investing as little cash as
possible
• They are located in an industry that is mature, not
growing or declining.

Ch2-
 DOGS
Low growth, Low market share
• Dogs are the cash traps.
• Dogs do not have potential to bring in
much cash.
• Number of dogs in the company should
be minimized.
• Business is situated at a declining
stage.

Ch2-
 QUESTION MARKS
High growth , Low market share
• Most businesses start of as question marks.
• They will absorb great amounts of cash if the
market share remains unchanged, (low).
• Why question marks?
• Question marks have potential to become star
and eventually cash cow but can also become a
dog.
• Investments should be high for question marks.

Ch2-
 WHY BCG MATRIX ?

To assess :
 Profiles of products/businesses
 The cash demands of products
 The development cycles of products
 Resource allocation and divestment decisions

Ch2-
MAIN STEPS OF BCG MATRIX
• Identifying and dividing a company into SBU.
• Assessing and comparing the prospects of each SBU
according to two criteria :
1. SBU’S relative market share.
2. Growth rate OF SBU’S industry.
• Classifying the SBU’S on the basis of BCG matrix.
• Developing strategic objectives for each SBU.

Ch2-
BCG MATRIX WITH CASH FLOW

Ch2-
 BENEFITS

• BCG MATRIX is simple and easy to

understand.
• It helps you to quickly and simply screen the
opportunities open to you, and helps you
think about how you can make the most of
them.
• It is used to identify how corporate cash
resources can best be used to maximize a
company’s future growth and profitability.

Ch2-
 LIMITATIONS
• BCG MATRIX uses only two dimensions, Relative market
share and market growth rate.
• Problems of getting data on market share and market
growth.
• High market share does not mean profits all the time.
• Business with low market share can be profitable too.

Ch2-
Snack Foods Beverage Foods
s

Frito-Lay North America

Frito-Lay International Quaker North America

Pepsi-Cola North America

Gatorade/Tropicana North America
PepsiCo Beverages International

Ch2-
 Snack Foods

Frito-Lay North America

Lay’s Funyuns
Ruffles Sunchips
Doritos Cracker Jack
Santitas Chester’s popcorn
Fritos Grandma’s cookies
Cheetos Munchos
Rold Gold Smartfood
Baken-ets fried pork skins
Oberto meat snacks

Ch2-
 Snack Foods
Bocabits wheat snacks
Crujitos corn snacks
Fandangos corn snacks
Hamkas snacks
Niknaks cheese sticks
Quavers potato snacks
Sabritas potato chips
Twisties cheese snacks
Frito-Lay International
Walkers potato crisps
Walkers Square potato snacks
Walkers Monster Munch Corn snacks
Miss Vickie’s potato chips
Gamesa cookies
Dippas
Sonric’s sweet snacks
Ch2-
 Snack Foods
Bocabits wheat snacks
Crujitos corn snacks
Fandangos corn snacks
Hamkas snacks
Niknaks cheese sticks
Quavers potato snacks
Sabritas potato chips
Twisties cheese snacks
Frito-Lay International
Walkers potato crisps
Walkers Square potato snacks
Walkers Monster Munch Corn snacks
Miss Vickie’s potato chips
Gamesa cookies
Dippas
Sonric’s sweet snacks
Ch2-
 Beverage
s

Pepsi-Cola North America

Pepsi-Cola Lipton
Mountain Dew Dole
Slice Aquafina
Mug Frappuccino
Sierra Mist SoBe
FruitWorks AMP

Ch2-
 Beverage
s

Gatorade/Tropicana North America

Gatorade
Propel
Tropicana
Dole juices

Ch2-
Beverage
s

PepsiCo Beverages International

Loóza juices and nectars

Copella juices
Frui’Vita juices
Tropicana 100 juices

Ch2-
 Foods

Quaker North America

Quaker Oats Quaker rice cakes and granola bars

Cap’n Crunch cereal Rice-A-Roni side dishes
Life cereal Near East couscous/pilafs
Quisp cereal Aunt Jemima mixes & syrups
King Vitaman cereal Quaker grits
Mother’s cereal

Ch2-
 How are we going
Foods to compete and
gain a competitive
advantage in
each of our
Business Level businesses?
Strategies Quaker North America

Quaker Oats Quaker rice cakes and granola bars

Cap’n Crunch cereal Rice-A-Roni side dishes
Life cereal Near East couscous/pilafs
Quisp cereal Aunt Jemima mixes & syrups
King Vitaman cereal Quaker grits
Mother’s cereal

Ch2-
Snack Foods Beverage Foods
s

Corporate Level Strategy

1) What businesses do we want to compete in?
2) How do manage effectively across businesses
Ch2-
Ch2-
Ch2-
 Learning Outline
• Understand organizational strengths and
weaknesses
• Understand the relationship between organizational
resources, organizational capabilities, core
competencies, and distinctive organizational
capabilities
• Understand the Value Chain
– Outsourcing
• How to do an Internal Analysis
• How to evaluate S&Ws
54
Ch2-
 SWOT Analysis
Threats

Weaknesses Strengths
Organization

55 Opportunities
Ch2-
The Road to Competitive Advantage

Performance Results

Competitive Advantage

Distinctive Organizational
Capabilities

Organizational Organizational Core

Resources Capabilities Competencies

Financial assets Organizational

Physical assets processes and
Human resources routines
Intangible assets Accumulated
56
Structural-cultural knowledge
assets Ch2-
 The road to distinctive
organizational capabilities
Distinctive Organizational
Capabilities

Organizational Core
Capabilities Compete
ncies

Organizational Capabilities
Resources • Fundamental building block for
Tangible developing core competencies
Intangible • Organizational processes
and
57
routines to get the work done
Ch2-
 The road to distinctive
organizational capabilities
Distinctive Organizational
Capabilities

Organizati Core
onal Competencies
Capabiliti
es
Organizational Capabilities Core Competencies
•Fundamental building block for •Fundamental skills and capabilities
developing core competencies
• Organizational processes and
•Exploitable by organization
routines to get the work done •Major value-creating capabilities
•Not a source of competitive advantage
58
Ch2-
 Types of Core Competencies
• After-sale service capability
• Skills in manufacturing a high quality
product (BMW)
• System to fill customer orders accurately
and swiftly (Amazon; Dell)
• Expertise in integrating multiple
technologies to create families of new
products (W.L. Gore)

59
Ch2-
 The road to distinctive
organizational capabilities
Distinctive Organizational
Capabilities Distinctive Organizational
Capabilities
•Special and unique capabilities
•Distinguish from competitors
•Sustainable competitive Organizat Core
advantage ional Competencies
•Outperform competition Capabiliti
es

Core Competencies
• Not a source of competitive advantage
• Fundamental skills and capabilities
• Exploitable by organization
• Major value-creating capabilities
60
Ch2-
Honda’s Distinctive Capability

Expertise in gasoline engine

technology and small engine
design

61
Ch2-
Procter & Gamble’s Distinctive
Capabilities

Superb marketing-distribution skills

and R&D capabilities in five core
technologies - fats, oils, skin
chemistry, surfactants, emulsifiers

62
Ch2-
Company Country Original core Growth path
of Business Key skills
Origin

Honda Japan Motor cycles Piston engine Cars,

design lawnmowers,
and small
development generators

Gillette USA Shaving Advertising Other toiletries,

products effectiveness e.g.
deodorants

McDonald's USA Hamburger Site selection; Extension of

Quality opening
restaurants hours to
standardization include
breakfast;
product
innovation (fish,
pizza,
salads)
Ch2-
United does offer
more space in its
Economy Plus
seats. But only
travelers who pay
full fare or who are
elite members of
the miles program
can get them. Its
regular economy-
class seats
measure in at 31
inches of seat
pitch.

Ch2-
 From Distinctive capabilities to
competitive advantage
• Contributes to
Superior Customer
Value

• Is Difficult
Distinctive
for Competitors
• Can Be Used Organizational to Imitate
in a Variety Capabilities
of Ways
65
Ch2-
 Capabilities vs. Core Competencies
vs. Distinctive Capabilities

• A company capability is the product of

organizational learning and experience and
represents real proficiency in performing an
internal activity
• A core competence is a well-performed
internal activity that is central (not peripheral
or incidental) to a company’s competitiveness
and profitability
• A distinctive Capability is a competitively
valuable activity that a company performs
better than its rivals
66
Ch2-
 Value Chain Analysis

{ Firm Infrastructure

Human Resource Management

M
Support

AR
Activities Technological Development

G
IN
Procurement

Marketing
Outbound

and Sales
Operations

IN
Logistics

Logistics
Inbound

G
R
Service

A
M
{
67 Primary Activities
Ch2-
 From Value Chain Analysis
to Competitive Advantage

Sustainable competitive advantage

can be created by
1.Managing value chain activities
better than rivals and/or
2.Developing distinctive value chain
capabilities to serve customers!
68
Ch2-
 Other types of Internal Analysis
• Internal audit
– Look at all functional areas and see which are
performing well
• Capabilities assessment profile
– Analyze capabilities to identify potential
sources of competitive advantage

69
Ch2-
 Appeal of Outsourcing

• Outsourcing non-critical activities allows a

firm to concentrate its energies and
resources on those value-chain activities
where it
– Can create unique value
– Can be best in the industry

• Advantages to outsourcing
– Decrease internal bureaucracies
– Flatten organization structure
– Provide firm with heightened strategic focus
70
Ch2-
How do you do an internal
analysis?
Step 1 Prepare current product-market profile.

Identify sources of competitive

Step 2 advantage and disadvantage in
the main product-market segments.

Describe all the organizational

Step 3 capabilities and competencies.

Sort the core capabilities and

Step 4 competencies according to
strategic importance.

Identify and agree on

Step 5 the key capabilities
71 and competencies.
Ch2-
 Identify Strategy-Critical Activities

• Which activities are strategy-critical

depends
– Particulars of a firm’s strategy
– Value-chain make-up
– Competitive requirements
– External market conditions
• Identify strategy-critical activities
– What business processes have to be performed extra well
or in timely fashion to achieve competitive advantage?
– In what value-chain activities would poor work performance
impair strategic success?

72
Ch2-
 Criteria to Judge Organizational
Strengths and Weaknesses
Past Performance Trends Comparison Against Competito

Are organizational
resources and capabilities
strengths or weaknesses?

Specific Goals or Targets Personal Opinions of

Strategic
Decision Makers or
Consultants
73
Ch2-
 PRACTICAL USE

• MAHINDRA & MAHINDRA

• HLL
• IES

Ch2-
 BCG MATRIX

scorpio

Jeep
balero

Ch2-
 CONCLUSION

Though BCG MATRIX has its limitations it is one of

the most FAMOUS AND SIMPLE portfolio planning
matrix ,used by large companies having multi-
products.

Ch2-
 Section 5

Corporate Level Strategy:

Creating Value through
Diversification

Ch2-
 Vertical Integration
• Forward or backwards
– Full integration
– Taper integration
• Benefits
– Barrier to entry
– Specialized assets
– Protecting product quality
– Improved scheduling
• Risks
– Costs
– Rapid technological changes
– Demand predictability

Ch2-
 Alternatives to Vertical Integration

• Competitive bidding
• Long term contracts or strategic alliances
– Hostage taking
– Credible commitments
– Maintaining market discipline

Ch2-
 Outsourcing

• Cost reduction and differentiation

• Hold-ups, scheduling and hallowing out

Ch2-
 Snack Foods Beverages Foods

Frito-Lay North America

Quaker North America
Frito-Lay International

Pepsi-Cola North America

Gatorade/Tropicana North America
PepsiCo Beverages International
Ch2-
 Snack Foods

Frito-Lay North America

Lay’s Funyuns
Ruffles Sunchips
Doritos Cracker Jack
Santitas Chester’s popcorn
Fritos Grandma’s cookies
Cheetos Munchos
Rold Gold Smartfood
Baken-ets fried pork skins
Oberto meat snacks Ch2-
 Snack Foods

Frito-Lay International

Bocabits wheat snacks Walkers potato crisps

Crujitos corn snacks Walkers Square potato snacks
Fandangos corn snacks Walkers Monster Munch Corn snacks
Hamkas snacks Miss Vickie’s potato chips
Niknaks cheese sticks Gamesa cookies
Quavers potato snacks Dippas
Sabritas potato chips Sonric’s sweet snacks
Twisties cheese snacks
Ch2-
 Snack Foods

Frito-Lay International

Bocabits wheat snacks Walkers potato crisps

Crujitos corn snacks Walkers Square potato snacks
Fandangos corn snacks Walkers Monster Munch Corn snacks
Hamkas snacks Miss Vickie’s potato chips
Niknaks cheese sticks Gamesa cookies
Quavers potato snacks Dippas
Sabritas potato chips Sonric’s sweet snacks
Twisties cheese snacks
Ch2-
 Beverages

Pepsi-Cola North America

Pepsi-Cola Lipton
Mountain Dew Dole
Slice Aquafina
Mug Frappuccino
Sierra Mist SoBe
FruitWorks AMP

Ch2-
 Beverages

Gatorade/Tropicana North America

Gatorade
Propel
Tropicana
Dole juices

Ch2-
Beverages

PepsiCo Beverages International

Loóza juices and nectars

Copella juices
Frui’Vita juices
Tropicana 100 juices

Ch2-
 Foods

Quaker North America

Quaker Oats Quaker rice cakes and granola bars

Cap’n Crunch cereal Rice-A-Roni side dishes
Life cereal Near East couscous/pilafs
Quisp cereal Aunt Jemima mixes & syrups
King Vitaman cereal Quaker grits
Mother’s cereal

Ch2-
 How are we going to
Foods compete and
gain a competitive
advantage in
each of our
Business Level businesses?
Strategies
Quaker North America

Quaker Oats Quaker rice cakes and granola bars

Cap’n Crunch cereal Rice-A-Roni side dishes
Life cereal Near East couscous/pilafs
Quisp cereal Aunt Jemima mixes & syrups
King Vitaman cereal Quaker grits
Mother’s cereal

Ch2-
Snack Foods Beverages Foods

Corporate Level Strategy

1) What businesses do we want to compete in?
2) How do manage effectively across businesses
Ch2-
Where did they go?

Ch2-
 Crafting Corporate Strategy

Moves to enter new businesses

Boosting combined performance of the
businesses
Capturing synergies and turning them into
competitive advantages
Establishing investment priorities and
steering resources into business units

Ch2-
 How to Diversify?

1) Internal Development - corporate

entrepreneurship
– able to appropriate a larger portion of wealth
– avoids complexities of multiple partners
– time consuming and requires diversity of
organizational capabilities

Ch2-
 How to Diversify?
2) Strategic Alliances and Joint Ventures
– entering a new market via the combination of
complementary resources - do more together
– cost reduction
– development/diffusion of technology
Problems with
– appropriate partners - skills and compatibility
– trust and commitment
– communication

Ch2-
 Who Makes a Geo?

Geo Storm was actually manufactured by Isuzu.

The Storm is the Isuzu Impulse.
Geo Prizm = Toyota Corolla
Geo Tracker = Suzuki Sidekick
Geo Metro = Suzuki Esteem or Swift
w/hatchback
No Geo cars were actually made by General
Motors. They were all imported from foreign
manufacturers.

Ch2-
Ch2-
Ch2-
 How to Diversify?

3) Merger & Acquisition - acquisition of

assets and capabilities of another
company
– high tech & technology intensive
– access to products
– consolidation
– access to segments

Ch2-
 Alternative 10 point option

• In lieu of making a donation, you may

write a 5 page, double spaced paper on
how a specific company proactively
pursues corporate responsible activities.

Ch2-
 Extra Credit – 10 points
• Girls’ and Boys’ Town, the original Father
Flanagan's Boys' Home, is a leader in the
treatment and care of abused, abandoned and
neglected girls and boys. Throughout its 86-
year history, the nonprofit, nonsectarian
organization has provided these children with a
safe, caring, loving environment where they
gain confidence to get better and learn skills to
become productive citizens.

Ch2-1
 Extra Credit – 10 points

Bring one of the items listed below:

New/gently used backpacks or suitcases
Socks - 5 pairs
Shampoo and Conditioner – 3 pints
New/gently used sporting equipment
Refill bottle of 409/All purpose cleaner
Laundry detergent

Ch2-1
 Extra Credit Drop off
BA1 Building - Room 307
Times: Wednesday 3/30 4:00 pm – 6:30 pm
Thursday 3/31 8:30 am – 9:30 am
11:30 am – 8:00 pm
Friday 4/1 8:30 am – 11:00 am
Monday 4/4 1:00 pm – 6:00 pm
Tuesday 4/5 8:30 am – 9:00 am
2:30 pm – 5:00 pm
Wednesday 4/6 4:00 pm – 6:30 pm
Thursday 4/7 8:30 am – 9:30 am
11:30 am – 8:00 pm

Ch2-1
Ch2-1
Ch2-1
Acquisitions
Reasons of Acquisitions

Increase Market Power

Overcome Entry Barriers

Increased Speed

Lower Risk

Avoid Competition

Ch2-1
Acquisitions
Reasons of Acquisitions Problems with Acquisitions

Increase Market Power Integration of two firms

Overcome Entry Barriers Overpayment/Debt

Increased Speed Overestimation of Synergy

Lower Risk Overdiversification

Avoid Competition Managerial energy absorption

Become too large

Substitute for innovation

Ch2-1
Acquisitions
Reasons of Acquisitions Problems with Acquisitions Results

Increase Market Power Integration of two firms Poor

Overcome Entry Barriers Overpayment/Debt
Performance
Increased Speed Overestimation of Synergy

Lower Risk Overdiversification

Avoid Competition Managerial energy absorption

Become too large

Substitute for innovation Who Wins?

Acquired Firm
Shareholders
Ch2-1
 Monday October 27th WSJ

• Bank of American – Boston Fleet Financial

– BoA down $8.29, or 10%, BFF rose 23%
• Anthem – WellPoint Health Networks
– Anthem down 8.2%, WellPoint up 8.8%
• United Health – MidAtlantic Med Services
– UH down 4.9%, MAMS up 9.7%

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 Failures of Acquisitions
30 - 40% average acquisition premium
Acquiring firm’s value drops 4% in the 3 months
following acquisitions
30 - 50% of acquisitions are later divested
Acquirers underperform S&P by 14%, peers by 4%
3 month performance before and after
– 30% substantial losses, 20% some losses, 33%
marginal returns, 17% substantial returns

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 Why, then, do executives acquire?

Often, for personal reasons

Firm size and executive compensation are
related
When do executives loss their jobs?
– 1) Acquired - larger firms harder to acquire
– 2) Performing poorly - employment risk is
reduced as returns are less volatile

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 Levels of Diversification

Single Business Unit - vast majority of sales

comes from a single business

Less ambiguity
Ear to the ground re: industry and competition
Eggs in one basket

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Ch2-1
 Related Diversification at Disney

Entertainment/Production

Theme Parks

Resorts

Entertainment/Broadcasting

Retailing

Cruise Lines
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Levels of Diversification (cont.)
Related Diversification - entering product markets
that share some resource or capability
requirements with the current business – horizonal
relationships across businesses
Advantages of related diversification include:
➤ Leveraging Core Competencies
➤ Sharing Activities
➤ Market Power
➤ Vertical Integration - integration of preceding or
successive productive processes - Shaw Industries
buying a fiber company or floor covering retailer.
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 Vertical Integration
Benefits
– can not be held hostage – reduces buyer/supplier power
– greater control over operations
– access to new business/technologies
– reduce procurement and sales efforts
Risks
– increased overhead, capital and administrative costs
– loss of flexibility
– unbalanced capacities
– reaction of competitors

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Ch2-1
Tyco Electronics
Tyco Telecommunications
Tyco Fire and Security
Tyco Safety Products
Tyco Healthcare
Tyco Plastics
Tyco Adhesives
Tyco Flow Control
Tyco Electrical and Metal Products
Tyco Fire and Building Products
Tyco Infrastructure Services
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 Tyco

Limits itself to businesses that can be held

strictly accountable for a few key financial
measures
Mature, stable, low-tech industries which
face certain environments and little R&D
investments

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Levels of Diversification (cont.)
Unrelated Diversification - few similarities in the
resources and capabilities required among the
firm’s businesses
Conglomerate Diversification - no relatedness
between businesses

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 Unrelated/Conglomerate
Diversification
Attempts to create value through the management
of vertical relationships among the businesses
Approve plans and budgets, competent legal,
financial, accounting, HR or other support
function
Effective control systems
Restructuring - buy low, sell high
– spinoffs
– turnaround

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 Creating Value through Restructuring

Good, consistent job of making good

investments
Favorable negotiations
Shrewd selling at the top
Shifting investment to high growth/return
businesses

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 When/Why to Diversify?

To create shareholder value

Porter’s Three Point Test
1) Attractiveness Test
2) Cost of Entry Test
3) Better off Test
Should pass all 3

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 Portfolio analysis

• BCG Growth-Share Matrix

– question marks, dogs, cash cows, stars
• GE- Nine Cell Matrix

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Boston Consulting Group Matrix
Relative Market Share

Question
Stars
Marks
Growth
Rate

Cash
Dogs
Cows

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 BCG Matrix for PepsiCo - Early 1990s
Relative Market Share

High Taco
Bell
Growth

Pizza
10%
Rate

Hut

Frito
Low Lay
Soft
KFC Drinks

High 1.0 Low

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 BCG Matrix for PepsiCo - Early 1990s
Relative Market Share

Pizza
Taco Hut
Bell
High
Growth

Frito
5%
Rate

Lay
KFC
Low Soft
Drinks

High .75 Low

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 GE 9 Cell Matrix
High Competitive Strengths Low

High
Invest
Grow
Attractiveness

Hold

Harvest
Divest
Low

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GE 9 Cell Matrix for Pepsico
High Competitive Strengths Low

High
Snack Foods
Attractiveness

Soft Drinks

Low

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GM provides health care for 1.1 million workers and
retirees, which adds about $1,500 to the average
cost of every vehicle it sells in the U.S.

For 2005, GM has forecast $5.6 billion in health-

care costs, up about $1 billion from 2004. It has
blamed its recent fall in profit on the rising cost of
providing medical care for workers and retirees.

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United does offer
more space in its
Economy Plus seats.
But only travelers
who pay full fare or
who are elite
members of the
miles program can
get them. Its regular
economy-class seats
measure in at 31
inches of seat pitch.
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 Board of Directors

Governance mechanism of owners to

oversee, evaluate and ratify the actions of
management
– setting corporate strategy, direction, mission,
values
– hire/fire CEO/TMT
– control, monitor, supervise TMT
– review/approve resource allocations
– protect shareholders interests

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 Board of Directors

Sam Nunn- ex-Senator from Georgia sits on

Coke’s and Dell’s Board
Nancy Reagan sat on Revlon’s board
Hank Aaron sat on Coke’s board
Sally Ride sat on three boards
Martha Stewart and Kim Alexis sat on
Drugstore.com
Al Haig and Colin Powell sat on AOL’s board

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 Board Involvement

Mostly little or no involvement

Boards tend to be dominated by
management
Keys to board power
– CEO/Chairman duality
– insiders vs. outsiders
• outsiders often weak, unknowledgeable
– effective board process

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 Trends in Governance

Institutional investors becoming increasingly

powerful
Special interests groups and social
institutional owners
Internationalization of board composition
Presiding and Lead Directors – 1/3 of S&P
500 – Presiding run meetings sans CEOs,
Leads are actively involved

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Executive Compensation - 2002

Median CEO pay rose 14% to $13.2 million is a year when S&P
was down over 22%
One company’s stock slides 71%, CEO compensation falls 12%
….. to only $82 million
….. Dennis Kozlowski – Tyco’s frequently indicted CEO
….. which is not as bad as what the CFO made - $136 million
Bob Nardelli at HD has a “target bonus” minimum of $3 million and
could get as much as $82 million upon his exit.
James McNerney – “cause shall not include any one or more of the
following: bad judgment or negligence.”

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Steve Jobs, Apple 78.1M -34.6
David Cote, 68.5M -27.3%
Honeywell
John Chamber, Cisco 54.8M -27.7
Pat Russo, Lucent 38.2M -75.4%
Scott McNealy, Sun 31.7M -74.7%
Microsystems

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 Executive Compensation
Aligning the interests of shareholders and managers by
rewarding them for pursuing their interests
Peter Drucker - “There are only bad and worse executive
compensation packages. Most encourage the top
management to milk the company”
Warren Buffett - “...mediocre CEOs are getting incredibly
overpaid”
Top execs make over 200 times the average worker, up
from 44 only 30 years ago.

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 Executive Compensation
Bonuses, incentives and stock ownership
– difficulty in evaluating decision making
• financial objectives used
– lengthy feedback period
– beyond managerial control
– managerial manipulation
Stock Options
– riding the stock market wave
– strike period is too long
– growth, not cost-cutting, should be rewarded
– require holding the stock after exercise
– make exercise conditional on certain criteria

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 Corporate Social Performance
• Friedman – “The Social Responsibility of
Business Is to Increase Its Profits“
• Corporations as Citizens
• Corporations dependent upon its stakeholders
• Corporations that are attentive to its
stakeholders can gain competitive advantages
• Corporations, which control resources beyond
those held by individuals, have an even greater
responsibility to be “good citizens”

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