Slide 1: Today’s News  Pepsi’s challenges  Spun-off restaurants  Acquired Tropicana  Pepsi Bottling IPO  Disney -- Retail stores  Baby merchandize  White goods  Paint  AT&T  Spin-off or sell Consumer Long Distance unit  Maxtor acquires Quantum HDD unit
Slide 2: Corporate Strategy Q: What businesses are we in? How did we get there? Single Business Product Line Expansion Geographic Expansion/ Vertical Integration Diversification Related / Unrelated
Slide 3: Diversification and Poker J 3 8 8 K Q 10  2 7 4 3 4 7 J 3
Slide 4: Why Diversify?? Division Sales ($) Q1 Q2 1994 Q3 Q4 Industry Growth (%) 1993 1994 1995 1996 1997 1998
Slide 5: Benefits of Diversification  Reduce earnings volatility  Minimize risk  Move firm into attractive industries  Prolong “life” of firm  Improve long-term performance  Capture synergies and strategic “fit” between businesses  Steer corporate resources
Slide 6: Types of Diversification  Vertical  Horizontal  Related  Unrelated  Global
Slide 7: Evaluation of Diversified Firms  Identify present corporate strategy  extent and type of diversification  geographic scope  new acquisitions  recent divestitures  mode of new business entry
Slide 8: Evaluation of Diversified Firms  Reveal contextual position of corporate portfolio BCG Growth-share Matrix Industry Growth Rate Hi Lo < 1.0 1.0 > 1.0 Relative Market Share
Slide 9: Evaluation of Diversified Firms • Reveal competitive position of corporate portfolio - G.E. Industry attractiveness/business strength matrix Industry Long Term Attractiveness H M L Str. Avg. Weak Firm’s Competitive Position
Slide 10: Diversified Inc. HQ Bus. 1 Growth Size Remote Env. Bus. 2 Growth Size Remote Env. Bus. 3 Growth Size Remote Env. $ $ $
Slide 11: Entering New Businesses  WHY?  Does business fit?  Financially  Strategically  Culturally  If not in this business today, would we want to get into it now?  HOW?  Acquisition  Internal start-up  Joint ventures
Slide 12: Why M&A Activity?  Intensifying competition  Global markets  Growth in new industries  NOTE:  20% of all-time corporate mergers have occurred within last 18 months
Slide 13: Justifications  Attractiveness test  Industry factors  Core competencies  Strategic position  Cost of entry test  Buy outstanding shares  Cash  Contributions to merger or JV  Better off test  Synergies, econ. of scale/scope  Consolidation of resources, activities  Competitive advantage?
Slide 14: Why MBC’s “Should” Outperform SBC’s  Economies of Scope  Intangible assets - brand  Consolidate operations  Efficient Resource Allocation  MBC as “internal” capital market  Increased Size  Lower cost of capital  Increased market power
Slide 15: Why MBC’s Actually Underperform SBCs  Why does stock price of acquirer always go down?  Diseconomies of Scope  Leadership - bureaucracy  Capital Allocation  Democratic process  Cross-subsidization (e.g., AT&T)  Misaligned Incentives  Too short-term  Underdeveloped Corporate Strategy
Slide 16: International Diversification  WHY?  slow domestic growth (earnings risk?)  intense domestic rivalry  no overseas competition  intense overseas competition  HOW?  Exporting  Franchising  Joint ventures  Wholly-owned subsidiaries Greenfield (internal development)  Mergers & Acquisitions 
Slide 17: Alternative Corporate Strategies  Portfolio “juggling” ...  Evolutionary Approach  Corporate Transformation  Sudden Redefinition
Slide 18: Portfolio Managers  Turnaround  restore competitiveness to poor performers  New advantages created within portfolio  Retrenchment  narrow scope of portfolio  “stick to your knitting”  Restructuring  add new businesses / divest poor performers
Slide 19: Evolutionary Approach: Leveraging Competence  Performance culture (3M, ABB)  Business system replicator (Gillette)  Capability leverager (Nike)  Valuator (Berkshire Hathaway)  Inventor (H-P, J&J)  Synergy capturer (Kraft-Genl. Foods)  Cost squeezer (Sunbeam)
Slide 20: Disney: Capability Bundling  Films Toy Story  Videos  Network TV  Cable TV  Hotels ark  Cruise lines eP em  Merchandise Th  Brand licensing  NEW … is e nd ha Retail Stores rc e TV Sh ow Fo od ms I te M
Slide 21: Corp. Transformation  Choosing new businesses  Planned Surprises  Change business portfolio (Monsanto)  Change global portfolio (CitiBank)  Capability bundling (Disney)  Industry consolidation (Chrysler) Total Return Biotech (38%) S&P MTC Chemicals (18%) 1994
Slide 22: Transformation  Nokia  1989: Diversified electrical conglomerate  1993: 87% telecom focus Total Return Nokia Motorola S&P Eriksson 1993
Slide 23: Sudden Redefinition  Competitive/performance crisis  Massive immediate corporate portfolio change  Deregulation  Patents  Foreign competition  M&A in same/related industries