corporate-level strategy (acquisitions and restructuring)

8/8/2019 Corporate-Level Strategy (Acquisitions and Restructuring)

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Corporate-Level Strategy

MANA 5336


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2

Directional Strategies


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4

Basic Growth Strategies:

Concentration Current product line in one industry

Vertical Integration

Market Development

Product Development Penetration

Diversification Into other product lines in other industries



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5

Expansion of Scope

Basic Concentration Strategies:

Vertical growth

Horizontal growth



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6

Vertical growth

Vertical integration Full integration

Taper integration

Quasi-integration

Backward integration

Forward integration



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Stages in the Raw-Material-to-

Consumer Value Chain

Upstream Downstream


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Stages in the Raw-Material-to-Consumer ValueChain in the Personal Computer Industry

End userDistributionAssemblyIntermediate

manufacturerRaw materials

Examples:Examples:

Dow ChemicalDow Chemical

Union CarbideUnion Carbide

KyoceraKyocera

Examples:Examples:

IntelIntel

SeagateSeagate

MicronMicron

Examples:Examples:

AppleApple

HpHp

DellDell

Examples:Examples:

Best BuyBest Buy

Office MaxOffice Max


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Vertical Integration

Integration backward into supplier functions Assures constant supply of inputs.

Protects against price increases.

Integration forward into distributor functions Assures proper disposal of outputs.

Captures additional profits beyond activity costs.

Integration choice is that of which value-addingactivities to compete in and which are better suited forothers to carry out.


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Creating Value Through Vertical Integration

Advantages of a vertical integration strategy: Builds entry barriers to new competitors by denying

them inputs and customers. Facilitates investment in efficiency-enhancing

assets that solve internal mutual dependenceproblems.

Protects product quality through control of inputquality and distribution and service of outputs.

Improves internal scheduling (e.g., JIT inventorysystems) responses to changes in demand.


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Creating Value Through Vertical

Integration

Disadvantages of vertical integration

Cost disadvantages of internal supply purchasing. Remaining tied to obsolescent technology.

Aligning input and output capacities withuncertainty in market demand is difficult for

integrated companies.


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12

Horizontal Growth

Horizontal integration



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13

Basic Diversification Strategies:

Concentric Diversification

Conglomerate Diversification



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14

Concentric Diversification

Growth into related industry

Search for synergies



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Concentration on a Single Business

SEARSCoca-C

ola

Coca-Cola

McDonalds

McDonalds

Southwest Airlines


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Concentration on a Single Business

Advantages Operational focus on a

single familiar industry ormarket.

Current resources andcapabilities add value.

Growing with the marketbrings competitiveadvantage.

Disadvantages No diversification of market

risks. Vertical integration may be

required to create valueand establish competitiveadvantage.

Opportunities to createvalue and make a profitmay be missed.


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Diversification

Related diversification

Entry into new business activity based on sharedcommonalities in the components of the valuechains of the firms.

Unrelated diversification

Entry into a new business area that has noobvious relationship with any area of the existingbusiness.


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Related Diversification

3M3M

HewlettPackardHewlettPackard

Marriott


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Unrelated Diversification

TycoAmerGroup

AmerGroup

ITTITT


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Diversification and Corporate Performance: A

Disappointing History

A study conducted by Business Weekand Mercer ManagementConsulting, Inc., analyzed 150 acquisitions that took place betweenJuly 2000 and July 2005. Based on total stock returns from three

months before, and up to three years after, the announcement: 30 percent substantially eroded shareholder returns.

20 percent eroded some returns.

33 percent created only marginal returns.

17 percent created substantial returns.

A study by Salomon Smith Barney of U.S. companies acquired since1997 in deals for $15 billion or more, the stocks of the acquiring firmshave, on average, under-performed the S&P stock index by 14percentage points and under-performed their peer group by fourpercentage points after the deals were announced.


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Unrelated (Conglomerate) Diversification Growth into unrelated industry

Concern with financial considerations



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Reasons for Diversification

Reasons to Enhance StrategicReasons to Enhance Strategic

CompetitivenessCompetitiveness

Economies of scope/scale

Market power Financial economics

IncentivesIncentives

ResourcesResources

ManagerialManagerial

MotivesMotives


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Incentives with NeutralIncentives with Neutral

Effects on StrategicEffects on Strategic

CompetitivenessCompetitiveness Anti-trust regulation

Tax laws

Low performance

Uncertain future cash flows

Firm risk reduction


ResourcesResources


MotivesMotives



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Incentives to Diversify

External Incentives:External Incentives: Relaxation of anti-trust regulation allows more relatedRelaxation of anti-trust regulation allows more related

acquisitions than in the pastacquisitions than in the past Before 1986, higher taxes on dividends favored spendingBefore 1986, higher taxes on dividends favored spending

retained earnings on acquisitionsretained earnings on acquisitions After 1986, firms made fewer acquisitions with retainedAfter 1986, firms made fewer acquisitions with retained

earnings, shifting to the use of debt to take advantage of taxearnings, shifting to the use of debt to take advantage of tax

deductible interest paymentsdeductible interest payments


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Incentives to Diversify

Internal Incentives:Internal Incentives: Poor performance may lead some firms to diversify anPoor performance may lead some firms to diversify an

attempt to achieve better returnsattempt to achieve better returns Firms may diversify to balance uncertain future cash flowsFirms may diversify to balance uncertain future cash flows Firms may diversify into different businesses in order toFirms may diversify into different businesses in order to

reduce riskreduce risk


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Resources and Diversification

Besides strong incentives, firms are more likely toBesides strong incentives, firms are more likely to

diversify if they have the resources to do sodiversify if they have the resources to do so

Value creation is determined more by appropriateValue creation is determined more by appropriateuse of resources than incentives to diversifyuse of resources than incentives to diversify


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Managerial Motives (ValueManagerial Motives (Value

Reduction)Reduction)

Diversifying managerial

employment risk

Increasing managerialcompensation


ResourcesResources


MotivesMotives



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Managerial Motives to Diversify

Managers have motives to diversifyManagers have motives to diversify diversification increases size; size is associated withdiversification increases size; size is associated with

executive compensationexecutive compensation diversification reduces employment riskdiversification reduces employment risk effective governance mechanisms may restrict sucheffective governance mechanisms may restrict such

motivesmotives


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Bureaucratic Costs and the Limits of

Diversification

Number of businesses Information overload can lead to poor resource allocation

decisions and create inefficiencies.

Coordination among businesses As the scope of diversification widens, control and bureaucratic

costs increase. Resource sharing and pooling arrangements that create value

also cause coordination problems.Limits of diversification

The extent of diversification must be balanced with itsbureaucratic costs.


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Relationship Between

Diversification and Performance

Per

for

man

ce

Per

for

man

ce

Level of DiversificationLevel of Diversification

Dominant

Business

Unrelated

Business

Related

Constrained


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Why Contraction of Scope?

The causes of corporate decline Poor management incompetence, neglect

Overexpansion empire-building CEOs

Inadequate financial controls no profit responsibility

High costs low labor productivity

New competition powerful emerging competitors

Unforeseen demand shifts major market changes Organizational inertia slow to respond to new competitive

conditions


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The Main Steps of Turnaround

Changing the leadership Replace entrenched management with new managers.

Redefining strategic focus Evaluate and reconstitute the organizations strategy.

Asset sales and closures Divest unwanted assets for investment resources.

Improving profitability Reduce costs, tighten finance and performance controls.Acquisitions

Make acquisitions of skills and competencies to strengthen corebusinesses.


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Adaptive Strategies

Maintenance of Scope

EnhancementStatus Quo


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Market Entry Strategies

Acquisition:Acquisition:a strategy through which one organization buys aa strategy through which one organization buys a

controlling interest in another organization with the intent ofcontrolling interest in another organization with the intent ofmaking the acquired firm a subsidiary business within its ownmaking the acquired firm a subsidiary business within its ownportfolioportfolio

Licensing:Licensing:a strategy where the organization purchases thea strategy where the organization purchases theright to use technology, process, etc.right to use technology, process, etc.

Joint Venture:Joint Venture:a strategy where an organization joins witha strategy where an organization joins withanother organization(s) to form a new organizationanother organization(s) to form a new organization


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AcquisitionsAcquisitions

Reasons for Making Acquisitions

IncreaseIncrease

market powermarket power

OvercomeOvercome

entry barriersentry barriers

Cost of newCost of new

product developmentproduct development Increase speedIncrease speed

to marketto market

IncreaseIncrease

diversificationdiversification

Reshape firmsReshape firms

competitive scopecompetitive scope

Lower risk comparedLower risk compared

to developing newto developing new

productsproducts

Learn and developLearn and develop

new capabilitiesnew capabilities


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Reasons for Making Acquisitions:

Factors increasing market powerFactors increasing market power when a firm is able to sell its goods or services abovewhen a firm is able to sell its goods or services above

competitive levels orcompetitive levels or when the costs of its primary or support activities are belowwhen the costs of its primary or support activities are below

those of its competitorsthose of its competitors usually is derived from the size of the firm and its resourcesusually is derived from the size of the firm and its resources

and capabilities to competeand capabilities to compete Market power is increased byMarket power is increased by

horizontal acquisitionshorizontal acquisitions vertical acquisitionsvertical acquisitions

related acquisitionsrelated acquisitions

Increased Market PowerIncreased Market Power


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Barriers to entry includeBarriers to entry include economies of scale in established competitorseconomies of scale in established competitors

differentiated products by competitorsdifferentiated products by competitors

enduring relationships with customers that create productenduring relationships with customers that create product

loyalties with competitorsloyalties with competitors

acquisition of an established companyacquisition of an established company may be more effective than entering the market as amay be more effective than entering the market as a

competitor offering an unfamiliar good or service that iscompetitor offering an unfamiliar good or service that is

unfamiliar to current buyersunfamiliar to current buyers

Cross-border acquisitionCross-border acquisition

Overcome Barriers to EntryOvercome Barriers to Entry


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Significant investments of a firms resources areSignificant investments of a firms resources are

required torequired to develop new products internallydevelop new products internally introduce new products into the marketplaceintroduce new products into the marketplace

Acquisition of a competitor may result inAcquisition of a competitor may result in lower risk compared to developing new productslower risk compared to developing new products increased diversificationincreased diversification reshaping the firms competitive scopereshaping the firms competitive scope learning and developing new capabilitieslearning and developing new capabilities faster market entryfaster market entry rapid access to new capabilitiesrapid access to new capabilities


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An acquisitions outcomes can be estimated moreAn acquisitions outcomes can be estimated moreeasily and accurately compared to the outcomes of aneasily and accurately compared to the outcomes of an

internal product development processinternal product development process

Therefore managers may view acquisitions as loweringTherefore managers may view acquisitions as loweringriskrisk

Lower Risk Compared to DevelopingLower Risk Compared to Developing

New ProductsNew Products


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It may be easier to develop and introduce new productsIt may be easier to develop and introduce new productsin markets currently served by the firmin markets currently served by the firm

It may be difficult to develop new products for marketsIt may be difficult to develop new products for marketsin which a firm lacks experiencein which a firm lacks experience

it is uncommon for a firm to develop new products internally toit is uncommon for a firm to develop new products internally todiversify its product linesdiversify its product lines

acquisitions are the quickest and easiest way to diversify a firmacquisitions are the quickest and easiest way to diversify a firmand change its portfolio of businessesand change its portfolio of businesses

Increased DiversificationIncreased Diversification


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Firms may use acquisitions to reduce theirFirms may use acquisitions to reduce their

dependence on one or more products or marketsdependence on one or more products or markets Reducing a companys dependence on specificReducing a companys dependence on specific

markets alters the firms competitive scopemarkets alters the firms competitive scope

Reshaping the Firms Competitive ScopeReshaping the Firms Competitive Scope


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Acquisitions may gain capabilities that the firm doesAcquisitions may gain capabilities that the firm does

not possessnot possess Acquisitions may be used toAcquisitions may be used to

acquire a special technological capabilityacquire a special technological capability

broaden a firms knowledge basebroaden a firms knowledge base

reduce inertiareduce inertia

Learning and Developing New CapabilitiesLearning and Developing New Capabilities


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AcquisitionsAcquisitions

Problems With AcquisitionsIntegrationIntegration

difficultiesdifficulties

InadequateInadequate

evaluation of targetevaluation of target

Large orLarge orextraordinary debtextraordinary debt

Inability toInability to

achieve synergyachieve synergy

Too muchToo muchdiversificationdiversification

Managers overlyManagers overly

focused on acquisitionsfocused on acquisitions

Resulting firmResulting firm

is too largeis too large


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Problems With Acquisitions

Integration challenges includeIntegration challenges include melding two disparate corporate culturesmelding two disparate corporate cultures linking different financial and control systemslinking different financial and control systems

building effective working relationships (particularly whenbuilding effective working relationships (particularly whenmanagement styles differ)management styles differ)

resolving problems regarding the status of the newlyresolving problems regarding the status of the newlyacquired firms executivesacquired firms executives

loss of key personnel weakens the acquired firmsloss of key personnel weakens the acquired firmscapabilities and reduces its valuecapabilities and reduces its value

Integration DifficultiesIntegration Difficulties


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Evaluation requires that hundreds of issues beEvaluation requires that hundreds of issues beclosely examined, includingclosely examined, including financing for the intended transactionfinancing for the intended transaction

differences in cultures between the acquiring and target firmdifferences in cultures between the acquiring and target firm

tax consequences of the transactiontax consequences of the transaction actions that would be necessary to successfully meld theactions that would be necessary to successfully meld the

two workforcestwo workforces

Ineffective due-diligence process mayIneffective due-diligence process may

result in paying excessive premium for the target companyresult in paying excessive premium for the target company

Inadequate Evaluation of TargetInadequate Evaluation of Target


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Firm may take on significant debt to acquire aFirm may take on significant debt to acquire acompanycompany

High debt canHigh debt can increase the likelihood of bankruptcyincrease the likelihood of bankruptcy

lead to a downgrade in the firms credit ratinglead to a downgrade in the firms credit rating preclude needed investment in activities that contribute topreclude needed investment in activities that contribute to

the firms long-term successthe firms long-term success

Large or Extraordinary DebtLarge or Extraordinary Debt


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Synergy exists when assets are worth more whenSynergy exists when assets are worth more when

used in conjunction with each other than when theyused in conjunction with each other than when theyare used separatelyare used separately

Firms experience transaction costs (e.g., legal fees)Firms experience transaction costs (e.g., legal fees)

when they use acquisition strategies to createwhen they use acquisition strategies to createsynergysynergy

Firms tend to underestimate indirect costs ofFirms tend to underestimate indirect costs of

integration when evaluating a potential acquisitionintegration when evaluating a potential acquisition

Inability to Achieve SynergyInability to Achieve Synergy


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Diversified firms must process more information ofDiversified firms must process more information of

greater diversitygreater diversity

Scope created by diversification may causeScope created by diversification may causemanagers to rely too much on financial rather thanmanagers to rely too much on financial rather than

strategic controls to evaluate business unitsstrategic controls to evaluate business unitsperformancesperformances

Acquisitions may become substitutes for innovationAcquisitions may become substitutes for innovation

Too Much DiversificationToo Much Diversification


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Managers in target firms may operate in a state ofManagers in target firms may operate in a state ofvirtual suspended animation during an acquisitionvirtual suspended animation during an acquisition

Executives may become hesitant to make decisionsExecutives may become hesitant to make decisionswith long-term consequences until negotiations havewith long-term consequences until negotiations havebeen completedbeen completed

Acquisition process can create a short-termAcquisition process can create a short-termperspective and a greater aversion to risk amongperspective and a greater aversion to risk amongtop-level executives in a target firmtop-level executives in a target firm

Managers Overly Focused on AcquisitionsManagers Overly Focused on Acquisitions


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Additional costs may exceed the benefits of theAdditional costs may exceed the benefits of theeconomies of scale and additional market powereconomies of scale and additional market power

Larger size may lead to more bureaucratic controlsLarger size may lead to more bureaucratic controls

Formalized controls often lead to relatively rigid andFormalized controls often lead to relatively rigid and

standardized managerial behaviorstandardized managerial behavior Firm may produce less innovationFirm may produce less innovation

Too LargeToo Large


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Strategic Alliance

A strategic alliance is a cooperative strategy in whichA strategic alliance is a cooperative strategy in which

firms combine some of their resources and capabilitiesfirms combine some of their resources and capabilities to create a competitive advantageto create a competitive advantage

A strategic alliance involvesA strategic alliance involves exchange and sharing of resources and capabilitiesexchange and sharing of resources and capabilities

co-development or distribution of goods or servicesco-development or distribution of goods or services


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CombinedCombined

ResourcesResources

CapabilitiesCapabilities

Core CompetenciesCore Competencies

ResourcesResources



ResourcesResources



Strategic AllianceFirm AFirm A Firm BFirm B

Mutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,

or distributing goods or servicesor distributing goods or services


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Types of Cooperative Strategies

Joint venture: two or more firms create anJoint venture: two or more firms create an

independent company by combining parts of theirindependent company by combining parts of their

assetsassets Equity strategic alliance: partners who own differentEquity strategic alliance: partners who own different

percentages of equity in a new venturepercentages of equity in a new venture

Nonequity strategic alliances: contractualNonequity strategic alliances: contractual

agreements given to a company to supply, produce,agreements given to a company to supply, produce,or distribute a firms goods or services without equityor distribute a firms goods or services without equitysharingsharing


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Strategic Alliances

Margin

Margin

Primary Activities

SupportActiv

ities

Service

Marketing & Sales

Outbound Logistics

Operations

Inbound LogisticsFirm

Infrastructu

re

HumanResourceMgmt.

TechnologicalD

evelopment

Procurement

Margin Margin

Primary Activities

SupportA

ctivities

Service

Marketing & Sales

Outbound Logistics

Operations


Infrastructu

re

HumanRes

ourc

eMgmt.

TechnologicalD

evelopment

Procurement

Vertic

alAlli a

nce

Vertic

alAlli a

nce

SupplierSupplier

vertical complementary strategicvertical complementary strategic

alliance is formed between firmsalliance is formed between firmsthat agree to use their skills andthat agree to use their skills andcapabilities in different stages ofcapabilities in different stages ofthe value chain to create valuethe value chain to create valuefor both firmsfor both firms

outsourcing is one example ofoutsourcing is one example ofthis type of alliancethis type of alliance


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Strategic Alliances

Margin Margin

Primary Activities

SupportA

ctivities

Service

Marketing & Sales

Outbound Logistics

Operations


Infrastructu

re

HumanResourc

eMgmt.

TechnologicalD

evelopment

Procurement

Margin Margin

Primary Activities

SupportA

ctiv

ities

Service

Marketing & Sales

Outbound Logistics

Operations


Infrastructu

re

HumanResourc

eMgmt.

TechnologicalD

evelopment

Procurement

BuyerBuyer

Potential CompetitorsPotential Competitors

horizontal complementary strategic alliance is formedhorizontal complementary strategic alliance is formed

between partners who agree to combine their resources andbetween partners who agree to combine their resources and

skills to create value in the same stage of the value chainskills to create value in the same stage of the value chain focus on long-term product development and distribution

opportunities the partners may become competitorsthe partners may become competitors

BuyerBuyer

corporate-level strategy (acquisitions and restructuring)

Documents