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Professor Robert R. Wiggins
Strategy Formulation:
Corporate Strategy
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Levels of Strategy• Functional Strategy
– How do we coordinate?
• Business-Level Strategy– How do we compete?
• Corporate-Level Strategy– Where do we compete?
MGMT 4710 Professor Robert R. Wiggins
Corporate Directional Strategies
Growth Stability Retrenchment
• Concentration• Vertical Growth• Horizontal Growth
• Diversification• Concentric• Conglomerate
• Pause/Caution• No Change• Profit
• Turnaround• Captive Company• Divestment• Liquidation
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Diversification
• Corporate versus Market Diversification• Synergies
– Whole greater than sum of the parts– Very difficult to achieve
• Usual outcome?– Acquired firm gets the extra value– Bidding firm loses stock price
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Levels and Types of Diversification
Low LevelsSingle-business A
Dominant-businessB
A
Moderate to High LevelsRelated-Constrained
A
CB
Related-Linked A
CBVery High Levels
Unrelated
A
CBMGMT 4710 Professor Robert R. Wiggins
Evaluating Reasons to Diversify
BalanceCash Flows
IncreaseMarketPower
ShareInfra-
structure
MaintainGrowth
Capitalizeon Core
Competencies
ReduceRisk
Most Powerto Create
Value
Least Powerto Create
Value
Recommendedas a Reasonto Diversify
NotRecommended
as a Reasonto Diversify
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Reasons for Diversification
• Value-Enhancing Motives– Economies of Scope– Market Power– Financial Economies
• Value-Neutral Motives• Devaluation Motives
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Value-Enhancing Motives for DiversificationEconomies of Scope
• Sharing Activities– Value Chain Analysis– Costs of economies of scope
• Transferring Core Competencies
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Value-Enhancing Motives for DiversificationIncreasing Market Power
• Multipoint Competition• Mutual Forbearance• Vertical Integration
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Value-Enhancing Motives for Diversification Financial Economies
• Internal Capital Market– Better information– Can keep secrets– Less drastic actions possible
• Restructuring
MGMT 4710 Professor Robert R. Wiggins
Vertical vs. Horizontal Diversification
VERTICO
RetailFood
Stores
RetailJewelry
HORIZINC
WholesaleFish
Market
FishingFleet
RANGE OF ALL POSSIBLE INDUSTRIESAbalone Zircons
StonePolishing
MiningOperations
Upstream(Backward)
Str
eam
of
Pro
cess
ing
Downstream(Forward)
Raw Materials
IntermediateProcessing
FinishedProduct
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Vertical Integration
• Value of Vertical Integration– Inputs, Operations, Marketing Costs– Increasing coordination and control– Protection of technology
• Risks of Vertical Integration– Coordinating costs– Non-current technology– Transfer pricing
MGMT 4710 Professor Robert R. Wiggins
Pressure todisintegrate
Pressure tointegrate
Modular ProductHorizontal Industry
Integral ProductVertical Industry Technical
Advances
SupplierMarketPower
ProprietarySystem
Profitability
NicheCompetitors
HighDimensionalComplexity
OrganizationalRigidities
Integration/Disintegration
MGMT 4710 Professor Robert R. Wiggins
Computer Industry Structure
1980
Distribution
Applications
OperatingSystems
ComputerPlatforms
BasicCircuitry
IBM DEC
Dealers
Excel
IBM
Intel
VARs Direct Other
1-2-3 Other
Windows Linux Mac OtherNT NetWare Other
DEC PC Clones Mac
Other
1995
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Diversification and Performance
Per
form
ance
Level of diversification
Dominant-business
Related-Constrained
Unrelated
MGMT 4710 Professor Robert R. Wiggins
Trade-off Between Growth and Profitability
CorporateProfitability
CorporateGrowth Rate
Pmax
G1
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Incentives to Diversify
• Antitrust Policies and Tax Laws• Low Performance• Uncertain Future Cash Flows• Overall Firm Risk Reduction
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Tobacco Company Diversification
30
40
50
60
70
80
90
100
110
60 61 62 63 64 65 66 67 68 69 70 71 72 73 74
Per
cent
of S
ales
Year
95%-100%Single-business
70%-90%Dominant-business
Under 70%Diversified
RJR
PM
L&M
AB
Source: Hitt, Ireland, Hoskisson (1993), Strategic Management, West Publishing
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Tobacco Company Exports
Exp
orts
(in
bill
ions
)
Year1960 1970 1980 1990 1996
20.2 29.2
82
164.3
243.9
Source: US News & World Report, 9/21/98 issueMGMT 4710 Professor Robert R. Wiggins
Corporate Strategy
Firm Performance and Diversification
Resources
ManagerialMotives
Incentives
DiversificationStrategy
FirmPerformance
Capital Marketintervention and
market for managerial talent
InternalGovernance
StrategyImplementation
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
BCG MatrixRelative Market Share Position
Ind
ust
ry G
row
th R
ate
(per
cen
tag
e)
High
High
Stars
Low
QuestionMarks
Low
Cash Cows Dogs
MGMT 4710 Professor Robert R. Wiggins
The Growth-Share MatrixIntroduction Decline
High
LowCo
mp
etit
ive
Str
eng
thC
om
pet
itiv
e S
tren
gth
Stage of Market Life CycleStage of Market Life Cycle
Moderate
Growth Maturity
MGMT 4710 Professor Robert R. Wiggins
Ballast
Value Trap
The Parenting-Fit Matrix
Neg
ativ
e E
ffec
tsN
egat
ive
Eff
ects
Positive ContributionsPositive Contributions
High
Low
Low High
AlienTerritory
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Modes of Diversification• Acquisitions
– Fast– Costly (debt, additional equity)
• Strategic Alliances– Shared risk– Coordination problems
• Internal Development– Keeps things “in the family”– Slow
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Merger and Acquisitions Terminology
• Merger• Acquisition• Takeover• Vertical Integration• Horizontal Acquisition• Related Acquisition
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Anti-Takeover Tactics• Scorched Earth • White Knight • Greenmail• Golden Parachutes • Poison Pills• Pac-Man
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Reasons for Acquisitions and Problems in Achieving Success
Acquisitions
IncreasedMarket Power
OvercomeEntry Barriers
IncreasedSpeed
Lower Risk
IncreasedDiversification
AvoidCompetition
Integration oftwo firms
Overpayment
High Cost
Overestimateof Synergy
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Reasons for Acquisitions’Poor Performance
PoorPerformance
Overdiversification
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Overdiversification
• Overdiversification Depends On– Managerial expertise– Type of diversification
• Can Lead to Overuse of Financial Controls– Emphasis on financial outcomes– Short-term performance orientation– Performance skewing– Reduced R&D– Reduced long-term performance
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Reasons for Acquisitions’Poor Performance
PoorPerformance
Overdiversification
ManagerialEnergy Absorption
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Managerial Energy Absorption
• For the Acquiring (Bidder) Firm– Analyzing and selecting targets– Determining acquisition strategies– Negotiating with the target
• For the Acquired (Target) Firm– Negotiating with the bidder– Developing employment strategies– Dealing with stakeholders, media, etc.– Fending off hostile takeovers
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Reasons for Acquisitions’Poor Performance
PoorPerformance
Overdiversification
ManagerialEnergy Absorption
Excess Debt
Too Large
Substitutefor Innovation
Restructuring
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Attributes of Successful Acquisitions• Careful Selection of Targets• Relationship with Targets• Financial Slack• Low Debt Position After• Complementary Resources• Continued R&D and Innovation• Flexibility and Adaptation• Friendly Acquisition
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Reasons for Restructuring
• Poor Performance• Overdiversification• Need funds to purchase other firms• Need funds to pay for debt incurred
(LBOs)• Better uses of capital become
available
MGMT 4710 Professor Robert R. WigginsCorporate Strategy
Restructuring and OutcomesAlternatives Short-Term Outcomes Long-Term Outcomes
Downsizing
ReducedLabor Costs
Loss ofHuman Capital
LowerPerformance
Downscoping
ReducedDebt Costs
HigherPerformance
Strategic Controls
LeveragedBuyout
HighDebt Costs
Higher Risk