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Today’s News Pepsi’s challengesPepsi’s challenges
Spun-off restaurantsSpun-off restaurants Acquired TropicanaAcquired Tropicana Pepsi Bottling IPOPepsi Bottling IPO
Disney -- Retail storesDisney -- Retail stores Baby merchandizeBaby merchandize White goodsWhite goods PaintPaint
AT&TAT&T Spin-off or sell Consumer Long Spin-off or sell Consumer Long
Distance unitDistance unit Maxtor acquires Quantum HDD unitMaxtor acquires Quantum HDD unit
Corporate Strategy
Q: What businesses are we in?Q: What businesses are we in?
How did we get there?How did we get there?
Single Business
Product Line Expansion
Geographic Expansion/Vertical Integration
DiversificationRelated / Unrelated
Diversification and Poker
J
3K
7Q10 2
4
3 4 7
3J
Why Diversify??
1994Q1 Q2 Q3 Q4
DivisionSales($)
IndustryGrowth
(%)
1993 1994 1995 1996 1997 1998
Benefits of Diversification
Reduce earnings volatilityReduce earnings volatility Minimize riskMinimize risk Move firm into attractive Move firm into attractive
industriesindustries Prolong “life” of firmProlong “life” of firm Improve long-term performanceImprove long-term performance Capture synergies and strategic Capture synergies and strategic
“fit” between businesses“fit” between businesses Steer corporate resourcesSteer corporate resources
Types of Diversification
VerticalVertical HorizontalHorizontal
RelatedRelated UnrelatedUnrelated
GlobalGlobal
Evaluation of Diversified Firms
Identify present corporate Identify present corporate strategystrategy extent and type of extent and type of
diversificationdiversification geographic scopegeographic scope new acquisitionsnew acquisitions recent divestituresrecent divestitures mode of new business mode of new business
entryentry
Evaluation of Diversified Firms
Reveal contextual position of Reveal contextual position of corporate portfolio corporate portfolio
BCG Growth-share Matrix
Indu
stry
Gro
wth
Rat
e
Hi
Lo
Relative Market Share
1.0< 1.0 > 1.0
Evaluation of Diversified Firms
• Reveal competitive position of corporate portfolio - G.E. Industry attractiveness/business strength matrix
Indu
stry
Lon
g T
erm
A
ttra
ctiv
enes
s H
M
L
Firm’s Competitive Position
Str. Avg. Weak
Diversified Inc.
HQ
Bus. 1 Bus. 2 Bus. 3
$ $$
GrowthSize
Remote Env.
GrowthSize
Remote Env.
GrowthSize
Remote Env.
Entering New Businesses
WHY?WHY? Does business fit?Does business fit?
FinanciallyStrategicallyCulturally
If not in this business today, would we want to get into it now?
HOW?HOW? AcquisitionAcquisition Internal start-upInternal start-up Joint venturesJoint ventures
Why M&A Activity?
Intensifying competitionIntensifying competition Global marketsGlobal markets Growth in new industriesGrowth in new industries NOTE:NOTE:
20% of 20% of all-timeall-time corporate corporate mergers have occurred mergers have occurred within last 18 monthswithin last 18 months
Justifications Attractiveness testAttractiveness test
Industry factorsIndustry factors Core competenciesCore competencies Strategic positionStrategic position
Cost of entry testCost of entry test Buy outstanding sharesBuy outstanding shares CashCash Contributions to merger or JVContributions to merger or JV
Better off testBetter off test Synergies, econ. of scale/scopeSynergies, econ. of scale/scope Consolidation of resources, activities Consolidation of resources, activities Competitive advantage?Competitive advantage?
Why MBC’s “Should” Outperform SBC’s Economies of ScopeEconomies of Scope
Intangible assets - brandIntangible assets - brand Consolidate operationsConsolidate operations
Efficient Resource AllocationEfficient Resource Allocation MBC as “internal” capital MBC as “internal” capital
marketmarket Increased SizeIncreased Size
Lower cost of capitalLower cost of capital Increased market powerIncreased market power
Why MBC’s Actually Underperform SBCs
Why does stock price of acquirer Why does stock price of acquirer always go down?always go down?
Diseconomies of ScopeDiseconomies of Scope Leadership - bureaucracyLeadership - bureaucracy
Capital AllocationCapital Allocation Democratic processDemocratic process Cross-subsidization (e.g., AT&T)Cross-subsidization (e.g., AT&T)
Misaligned IncentivesMisaligned Incentives Too short-termToo short-term
Underdeveloped Corporate Underdeveloped Corporate StrategyStrategy
International Diversification WHY?WHY?
slow domestic growth (earnings risk?)slow domestic growth (earnings risk?) intense domestic rivalryintense domestic rivalry no overseas competitionno overseas competition intense overseas competitionintense overseas competition
HOW?HOW? ExportingExporting FranchisingFranchising Joint venturesJoint ventures Wholly-owned subsidiariesWholly-owned subsidiaries
Greenfield (internal development)Greenfield (internal development) Mergers & AcquisitionsMergers & Acquisitions
Alternative Corporate Strategies
Portfolio “juggling” ...Portfolio “juggling” ...
Evolutionary ApproachEvolutionary Approach Corporate TransformationCorporate Transformation Sudden RedefinitionSudden Redefinition
Portfolio Managers TurnaroundTurnaround
restore competitiveness to poor performers
New advantages created within portfolio
RetrenchmentRetrenchment narrow scope of portfolio “stick to your knitting”
RestructuringRestructuring add new businesses / divest poor
performers
Evolutionary Approach:Leveraging Competence
Performance culture (3M, ABB)Performance culture (3M, ABB) Business system replicator Business system replicator
(Gillette)(Gillette) Capability leverager (Nike)Capability leverager (Nike) Valuator (Berkshire Hathaway)Valuator (Berkshire Hathaway) Inventor (H-P, J&J)Inventor (H-P, J&J) Synergy capturer (Kraft-Genl. Synergy capturer (Kraft-Genl.
Foods)Foods) Cost squeezer (Sunbeam)Cost squeezer (Sunbeam)
Disney: Capability Bundling
FilmsFilms VideosVideos Network TVNetwork TV Cable TVCable TV HotelsHotels Cruise linesCruise lines MerchandiseMerchandise Brand licensingBrand licensing NEW …NEW …
Retail StoresRetail Stores
Toy Story
TV Show
Merchan
dise
Food Items
Theme P
ark
Corp. Transformation Choosing new businessesChoosing new businesses PlannedPlanned Surprises Surprises
Change business portfolio (Monsanto)Change business portfolio (Monsanto) Change global portfolio (CitiBank)Change global portfolio (CitiBank) Capability bundling (Disney)Capability bundling (Disney) Industry consolidation (Chrysler)Industry consolidation (Chrysler)
TotalReturn
1994
S&P
MTC
Chemicals (18%)
Biotech (38%)
Transformation
TotalReturn
1993
S&P
Nokia
Motorola
Eriksson
NokiaNokia 1989: Diversified electrical 1989: Diversified electrical
conglomerateconglomerate 1993: 87% telecom focus1993: 87% telecom focus
Sudden Redefinition
Competitive/performance Competitive/performance crisiscrisis
Massive immediate Massive immediate corporate portfolio changecorporate portfolio change DeregulationDeregulation PatentsPatents Foreign competitionForeign competition M&A in same/related M&A in same/related
industriesindustries