1Review

Managing Corporate Strategy: Themes & Retrospective

Performance & diversification Finance critique:

What is value-added of HQ?Shareholders can diversify away non-systemic risk

themselves if markets efficient

Strategy critique:One half to 70% of acquisitions in new industries are later

divested (Porter 1987) • Might something useful be learned even if later divestment?

What is strategic logic for diversification? What holds it together? What is value-added?

What is acquisition premium? What are coordination costs?

2Review

Performance & diversification (continued)

Some studies (Rumelt 1974, 1982; Lubatkin 1989) indicate related diversification yields better performance Complications:

What is related?• Technology, capabilities?• Customers?• Geography?• Centre of gravity?

What is source of gain in related diversification:• “Synergy”?, Market power? or efficiency? (Ravenscraft & Scherer 1974)• One time or continuing gain? (Salter & Weinhold 1978)

Despite complications in defining relatedness, 1980s unrelated diversification still popular 1990s emphasis on core business & horizontal or related mergers,

divestiture of unrelated businesses

Product / Customer

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3Review

Models for corporate strategy Strategy models

Capabilities (Haspeslagh & Jemison 1991) Acquisition benefits: operational resource sharing, functional

skill transfer, general management skill transfer, combination benefit

Corporate goals: Domain strengthening, domain extension, domain exploration

Business goals: acquiring a specific capability, acquiring platform, acquiring business position

Core competence (Prahalad & Hamel 1990 Core competence, core product, end product

Restructuring, turnaround skills (Salter & Weinhold 1988) Value creation, value transfer / capture, value destruction

4Review

Models for corporate strategy (continued)

Strategy models (continued) Restructuring, turnaround skills (Salter & Weinhold 1988)

Value creation, value transfer / capture, value destruction Sharing activities (Porter 1985)

Value chain Centre of gravity (Galbraith)

Product/market portfolio models BCG (corporate level) internal capital market

• Challenge: defining industry boundary & efficient markets GE-McKinsey Model (corporate & business level) PIMS Model (business level) Portfolio of core competencies (capabilities level)

5Review

Portfolio of Core Competencies (adapted from Hamel & Prahalad, Competing for the Future, 1994: 227)

CoreCompetence

MarketExisting New

Existing

Fill in the blanksWhat opportunities exist toimprove position in existingmarkets by better leveragingcore competencies?Cannon transfers microelectronicskills from copiers to its cameras

White spacesWhat new products or servicescould be created by creativelyredeploying or recombiningexisting core competencies?Cannon recombine precisionmechanics, fine optics, digitalimaging to enter fax machines &bubble jet printers

New

Premier plus 10What new core competencieswill be needed to protect &extend positions in currentmarkets?Cannon develops digital imagingcompetence to protect copierbusiness

Mega-OpportunitiesWhat new core competenciesneed to be developed toparticipate in most excitingfuture markets?Monsanto shifts from agro-chem. togenetically engineered seeds thatproduce own pesticides.

6Review

Models for corporate strategy (continued)

Finance models Risk-return model (Salter & Weinhold 1979)

Can management reduce risk (manage Beta?) Can we measure synergy for adding shareholder value? (Rappaport &

Friskey 1986) Does Beta accurately link risk & return? (Fama French 1992)

Valuation models Book value, liquidation value, price/earnings multiples, etc. Discounted cash flow, WACC, MVA, EVA Option value, perpetuity value

Corporate governance model (Berle & Means 1932, Jensen 1984, Rao & Lee-Sing 1995)

Separation of ownership / management ==>Agency theory Takeovers are about market for corporate governance rather than

diversification

7Review

Models for corporate strategy (restated)

Strategy models Fundamental corporate strategy issues

How is economic value created through multi-market activity?

How can corporation be structured & coordinated to realize benefits & create value?

Make/buy decision: what should be inside/outside the firm?

• Core activities vs. risk of hollowing out• Use of following for non-core activities

– contracts– joint ventures, alliances

8Review

Tests for expanding scope:

2 External tests “Economic scope” test:

Economic value created? Unique advantage? Are profits appropriable?

“Organizational scope” test (governance): Make/buy: Why should activity be in-house rather than

external via following? Contracts: license, sub-contract, franchise, alliance, joint venture,

etc.

3 Internal testsResource test: (unique versus generic resources) (fit with existing

resources)

Scope economies test (“synergy”): Value chain & multi-market competition advantages vs. costs (required complementary activities, opportunity costs; cannibalization of existing products)

Systems & logic test: fit with existing management systems, organization structure, & strategic logic

9Review

Means for expanding scope

MODE PRO CON

Acquire Speed Acquisition premium,how to internalize

Joint venture,alliance

Complementaryresources,economic

Control, differencein goals, knowhowloss to partner?

Venturing, do ityourself

Profit optionvalue

Slow, uncertain,Haphazard always?

License out Ease, speed Milk rather thangrow position

10Review

Coordinating the diversified firmControl mechanisms

Organization structure coordination mechanisms, conflict resolution

Outcome control versus behaviour control Technology dominant logic, common language,

assumptions, time frame, development cycles Culture & style culture, style, symbolic actions, stories Rewards & incentives HRM: management development, career paths, training,

socialization Planning & control: strategic planning, resource allocation

(capital budgeting & people), reporting systems, MIS, expenditure controls

11Review

Managing change in the diversified firm

Levers of control (Simons 1994) Belief systems core values, purpose, direction Boundary systems risks to avoid, policies, resource

allocation, strategic planning Diagnostic control systems critical performance

variables, plans & budgets, profit centres, project monitoring, brand reviews

Interactive control systems agendas, face-to-face meetings, debates on data, assumptions and action plans

12Review

Managing Core Skills

Develop byCorporate Level

Centralcompetence(HR at Ciba 1994 post cube)

Create commonprocedure(HR at Ciba in cube)

Develop byDivision Level

Stimulateinformal network(HP “next bench”)

Best practice(Cooper)

Develop /|\

Transfer ==>

Skill TransferControlled byDivision

Skill TransferControlled byCorporate Level

13Review

Four Challenges in Managing Acquisitions

Consistency with strategyQuality of acquisition decision

making Obtaining input from operations into

decisionCapability to integrateCapacity for learning

14Review

Acquisition Process & Value Creation Haspeslagh & Jemison 1991

Acquisition justification

Acquisition integration

Results

(value creation / destruction)

Idea

Decision-Making Process Problems

Integration Process Problems

Key Players (typical)• Top management• CFO• Legal• Corporate Strategy

Key Players (typical)• Division head• Operational units

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15Review

Dimensions of acquisitions

Four types of capability transfer to gain acquisitions benefits: Operational resource sharing (scale & scope economies)

Functional skill transfer (to / from acquisition, embeddedness challenge)

General management skill transfer (to / from acquisition, systems, etc.)

Combination benefits (market power, lower borrowing costs, reputation)

Three types of corporate strategy goals: Domain strengthening: (augmenting capabilities in existing domains)

Domain extension: (applying firm’s capabilities to/from adjacent business)

Domain exploration: (moving into new business & capabilities) Three types of business strategy goals:

Acquiring a specific capability

Acquiring a platform Acquiring an existing business position

16Review

Three modes of integration

Absorption: full consolidation of operations, organization & culture

Creation of ABB from ASEA and Brown Boveri)

Preservation: how to manage at arm's length to learn from acquired firm

Ciba-Geigy managed Airwick (as stand-alone consumer product firm)

Symbiotic: coexist then interdependent (“reaching out”); mutual redefinition of

purpose Compaq / Digital

17Review

TYPES OF ACQUISITION INTEGRATION APPROACHES (Haspeslagh & Jemison 1991)

Need for Strategic Interdependence

Low High

High Preservation Symbiosis

LowNone(Holding Co.) Absorption

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