Corporate-Level Strategy (Acquisitions and Restructuring)

Corporate-Level Strategy (Acquisitions and Restructuring) -...

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Unformatted text preview: Corporate-Level Strategy MANA 5336 Directional Strategies 2 Directional Strategies Expansion Adaptive Strategy: – Orientation toward growth Expand, cut back, status quo? Concentrate within current industry, diversify into other industries? Growth and expansion through internal development or acquisitions, mergers, or strategic alliances? 3 Directional Strategies 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 4 Directional Strategies Expansion of Scope Basic Concentration Strategies: Vertical growth Horizontal growth 5 Directional Strategies Vertical growth – Vertical integration Full integration Taper integration Quasi-integration – – Backward integration Forward integration 6 Stages in the Raw-Material-toConsumer Value Chain Upstream Downstream Stages in the Raw-Material-to-Consumer Value Chain in the Personal Computer Industry Raw materials Intermediate manufacturer Assembly Distribution End user Examples: Dow Chemical Union Carbide Kyocera Examples: Intel Seagate Micron Examples: Apple Hp Dell Examples: Best Buy Office Max 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-adding activities to compete in and which are better suited for others to carry out. 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 dependence problems. Protects product quality through control of input quality and distribution and service of outputs. Improves internal scheduling (e.g., JIT inventory systems) responses to changes in demand. 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 with uncertainty in market demand is difficult for integrated companies. Directional Strategies Horizontal Growth – Horizontal integration 12 Directional Strategies Basic Diversification Strategies: – Concentric Diversification Conglomerate Diversification – 13 Directional Strategies Concentric Diversification – – Growth into related industry Search for synergies 14 Concentration on a Single Business E S RS A Southwest Airlines alds on McD Coca- Co la Concentration on a Single Business Advantages – Disadvantages – – – – Operational focus on a single familiar industry or market. Current resources and capabilities add value. Growing with the market brings competitive advantage. – No diversification of market risks. Vertical integration may be required to create value and establish competitive advantage. Opportunities to create value and make a profit may be missed. Diversification Related – diversification Entry into new business activity based on shared commonalities in the components of the value chains of the firms. Unrelated – diversification Entry into a new business area that has no obvious relationship with any area of the existing business. Related Diversification Marriott 3M kard Pac lett Hew Unrelated Diversification co Ty Amer G roup ITT Diversification and Corporate Performance: A Disappointing History A study conducted by Business Week and Mercer Management Consulting, Inc., analyzed 150 acquisitions that took place between July 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 since 1997 in deals for $15 billion or more, the stocks of the acquiring firms have, on average, under-performed the S&P stock index by 14 percentage points and under-performed their peer group by four percentage points after the deals were announced. Directional Strategies Directional Strategies Unrelated (Conglomerate) Diversification – – Growth into unrelated industry Concern with financial considerations 22 Directional Strategies Reasons for Diversification Incentives Reasons to Enhance Strategic Reasons Competitiveness Competitiveness • Economies of scope/scale • Market power • Financial economics Resources Managerial Motives Reasons for Diversification Incentives Incentives with Neutral Effects on Strategic Competitiveness Competitiveness • • • • • Anti-trust regulation Tax laws Low performance Uncertain future cash flows Firm risk reduction Resources Managerial Motives Incentives to Diversify External Incentives: Relaxation of anti-trust regulation allows more related Relaxation acquisitions than in the past acquisitions Before 1986, higher taxes on dividends favored spending Before retained earnings on acquisitions retained After 1986, firms made fewer acquisitions with retained After earnings, shifting to the use of debt to take advantage of tax deductible interest payments deductible Incentives to Diversify Internal Incentives: Poor performance may lead some firms to diversify an Poor attempt to achieve better returns attempt Firms may diversify to balance uncertain future cash flows Firms may diversify into different businesses in order to Firms reduce risk reduce Resources and Diversification Besides strong incentives, firms are more likely to Besides diversify if they have the resources to do so diversify Value creation is determined more by appropriate Value use of resources than incentives to diversify use Reasons for Diversification Incentives Managerial Motives (Value Reduction) Reduction) • Diversifying managerial employment risk • Increasing managerial compensation Resources Managerial Motives Managerial Motives to Diversify Managers have motives to diversify – – – diversification increases size; size is associated with diversification executive compensation executive diversification reduces employment risk effective governance mechanisms may restrict such effective motives motives Bureaucratic Costs and the Limits of Diversification Number – of businesses among businesses Information overload can lead to poor resource allocation decisions and create inefficiencies. As the scope of diversification widens, control and bureaucratic costs increase. Resource sharing and pooling arrangements that create value also cause coordination problems. Coordination – – Limits – of diversification The extent of diversification must be balanced with its bureaucratic costs. Relationship Between Diversification and Performance Performance Dominant Business Related Constrained Unrelated Business Level of Diversification Restructuring: Contraction of Scope Why – – – restructure? Pull-back from overdiversification. Attacks by competitors on core businesses. Diminished strategic advantages of vertical integration and diversification. Contraction – – – – (Exit) strategies Retrenchment Divestment– spinoffs of profitable SBUs to investors; management buy outs (MBOs). Harvest– halting investment, maximizing cash flow. Liquidation– Cease operations, write off assets. Why Contraction of Scope? The – – – – – – – causes of corporate decline Poor management– incompetence, neglect Overexpansion– empire-building CEO’s 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 The Main Steps of Turnaround Changing – the leadership strategic focus Replace entrenched management with new managers. Evaluate and reconstitute the organization’s strategy. Redefining – Asset – sales and closures profitability Divest unwanted assets for investment resources. Reduce costs, tighten finance and performance controls. Make acquisitions of skills and competencies to strengthen core businesses. Improving – Acquisitions – Adaptive Strategies Maintenance of Scope Enhancement Status Quo Market Entry Strategies Acquisition: a strategy through which one organization buys a controlling interest in another organization with the intent of making the acquired firm a subsidiary business within its own portfolio portfolio Licensing: a strategy where the organization purchases the right to use technology, process, etc. Joint Venture: a strategy where an organization joins with another organization(s) to form a new organization another Reasons for Making Acquisitions Increase market power Learn and develop new capabilities Reshape firm’s competitive scope Overcome entry barriers Acquisitions Acquisitions Increase diversification Cost of new product development Increase speed to market Lower risk compared to developing new products Reasons for Making Acquisitions: Increased Market Power Factors increasing market power – – – when a firm is able to sell its goods or services above when competitive levels or competitive when the costs of its primary or support activities are below when those of its competitors those usually is derived from the size of the firm and its resources and capabilities to compete horizontal acquisitions vertical acquisitions related acquisitions Market power is increased by Market – – – Reasons for Making Acquisitions: Overcome Barriers to Entry Barriers to entry include – – – economies of scale in established competitors differentiated products by competitors enduring relationships with customers that create product enduring loyalties with competitors loyalties may be more effective than entering the market as a may competitor offering an unfamiliar good or service that is unfamiliar to current buyers unfamiliar acquisition of an established company acquisition – Cross-border acquisition Reasons for Making Acquisitions: Significant investments of a firm’s resources are Significant required to required – – develop new products internally introduce new products into the marketplace lower risk compared to developing new products increased diversification reshaping the firm’s competitive scope llearning and developing new capabilities earning faster market entry rapid access to new capabilities Acquisition of a competitor may result in – – – – – – Reasons for Making Acquisitions: Lower Risk Compared to Developing Lower New Products New An acquisition’s outcomes can be estimated more An easily and accurately compared to the outcomes of an internal product development process internal Therefore managers may view acquisitions as lowering Therefore risk risk Reasons for Making Acquisitions: Increased Diversification It may be easier to develop and introduce new products It in markets currently served by the firm in It may be difficult to develop new products for markets It in which a firm lacks experience in – – iit is uncommon for a firm to develop new products internally to t diversify its product lines diversify acquisitions are the quickest and easiest way to diversify a firm acquisitions and change its portfolio of businesses and Reasons for Making Acquisitions: Reshaping the Firms’ Competitive Scope Firms may use acquisitions to reduce their Firms dependence on one or more products or markets dependence Reducing a company’s dependence on specific Reducing markets alters the firm’s competitive scope markets Learning and Developing New Capabilities Learning Reasons for Making Acquisitions: Acquisitions may gain capabilities that the firm does Acquisitions not possess not Acquisitions may be used to – – – acquire a special technological capability broaden a firm’s knowledge base reduce inertia Problems With Acquisitions Integration difficulties Resulting firm is too large Inadequate evaluation of target Acquisitions Acquisitions Managers overly focused on acquisitions Large or extraordinary debt Inability to achieve synergy Too much diversification Problems With Acquisitions Integration Difficulties Integration challenges include – – – – – melding two disparate corporate cultures linking different financial and control systems building effective working relationships (particularly when building management styles differ) management resolving problems regarding the status of the newly resolving acquired firm’s executives acquired lloss of key personnel weakens the acquired firm’s oss capabilities and reduces its value capabilities Problems With Acquisitions Inadequate Evaluation of Target Evaluation requires that hundreds of issues be Evaluation closely examined, including closely – – – – financing for the intended transaction differences in cultures between the acquiring and target firm tax consequences of the transaction actions that would be necessary to successfully meld the actions two workforces two result in paying excessive premium for the target company Ineffective due-diligence process may – Problems With Acquisitions Large or Extraordinary Debt Firm may take on significant debt to acquire a Firm company company High debt can High – – – increase the likelihood of bankruptcy lead to a downgrade in the firm’s credit rating preclude needed investment in activities that contribute to preclude the firm’s long-term success the Problems With Acquisitions Inability to Achieve Synergy Synergy exists when assets are worth more when Synergy used in conjunction with each other than when they are used separately are Firms experience transaction costs (e.g., legal fees) Firms when they use acquisition strategies to create synergy synergy Firms tend to underestimate indirect costs of Firms integration when evaluating a potential acquisition integration Problems With Acquisitions Too Much Diversification Diversified firms must process more information of Diversified greater diversity Scope created by diversification may cause Scope managers to rely too much on financial rather than strategic controls to evaluate business units’ performances performances Acquisitions may become substitutes for innovation Problems With Acquisitions Managers Overly Focused on Acquisitions Managers in target firms may operate in a state of Managers virtual suspended animation during an acquisition virtual Executives may become hesitant to make decisions Executives with long-term consequences until negotiations have been completed been Acquisition process can create a short-term Acquisition perspective and a greater aversion to risk among top-level executives in a target firm top-level Problems With Acquisitions Too Large Additional costs may exceed the benefits of the Additional economies of scale and additional market power economies Larger size may lead to more bureaucratic controls Larger Formalized controls often lead to relatively rigid and Formalized standardized managerial behavior standardized Firm may produce less innovation Firm Strategic Alliance A strategic alliance is a cooperative strategy in which – – firms combine some of their resources and capabilities to create a competitive advantage A strategic alliance involves strategic – exchange and sharing of resources and capabilities – co-development or distribution of goods or services Strategic Alliance Firm A Resources Capabilities Core Competencies Firm B Resources Capabilities Core Competencies Combined Combined Resources Capabilities Core Competencies Mutual interests in designing, manufacturing, or distributing goods or services Types of Cooperative Strategies Joint venture: two or more firms create an Joint independent company by combining parts of their assets assets Equity strategic alliance: partners who own different Equity percentages of equity in a new venture percentages Nonequity strategic alliances: contractual Nonequity agreements given to a company to supply, produce, or distribute a firm’s goods or services without equity sharing sharing Strategic Alliances Human Resource Mgmt. Technological Development gin ar M M ar gin Support Activities Firm Infrastructure Service Marketing & Sales Procurement Outbound Logistics Operations Inbound Logistics Vertical Alliance Primary Activities Supplier Human Resource Mgmt. Technological Development gin ar M M ar gin • vertical complementary strategic vertical alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firms for • outsourcing is one example of outsourcing this type of alliance this Support Activities Firm Infrastructure Service Marketing & Sales Procurement Outbound Logistics Operations Inbound Logistics Primary Activities Strategic Alliances Buyer Human Resource Mgmt. Technological Development Buyer Potential Competitors Support Activities Human Resource Mgmt. Technological Development gin ar M M ar gin gin ar M M ar gin Support Activities Marketing & Sales Procurement Outbound Logistics Operations Inbound Logistics Firm Infrastructure Firm Infrastructure Service Service Marketing & Sales Procurement Outbound Logistics Operations Inbound Logistics • horizontal complementary strategic alliance is formed horizontal between partners who agree to combine their resources and skills to create value in the same stage of the value chain skills • focus on long-term product development and distribution opportunities • the partners may become competitors • requires a great deal of trust between the partners Primary Activities Primary Activities ...
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This note was uploaded on 12/21/2010 for the course BUSA 5336 taught by Professor Jeff during the Summer '09 term at UT Arlington.

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