STRATEGY. Dr. Humam AL-Jazaeri Syrian Virtual University. MBAP Course. Winter Session Six

Transcription

1 STRATEGY Dr. Humam AL-Jazaeri Syrian Virtual University MBAP Course Winter 2010 Session Six 1

2 Part One Strategy: Conceptual & Analytical Framework 2

3 Corporate Level Strategy 3

4 Samsung: Business Portfolio Chart (1) Business Portfolio of Samsung, (%) of Net Sales, (2000) Chart (2) Business Portfolio in Samsung, (%) of Operating Profits, (2000) Semicoductor 38% Telecom Networks 22% Telecommu nication Networks 11% Home Appliances & Others 13% Digital Media 27% Semiconductor 81% Home Appliances & Others 2% Digital Media 6% 4

5 Portfolio Management During the 1970s and early 1980s, several leading consulting firms developed the concept of portfolio management to achieve a better understanding of the competitive position of an overall portfolio of businesses. Objectives Suggest strategic alternatives for each of the businesses; Identify priorities for the allocation of resources; and Assist a firm in achieving a balanced portfolio of businesses. 5

6 The Boston Consulting Group (BCG) Portfolio Matrix 6

7 STARS Business units competing in high-growth industries with relatively high market shares. These firms have long-term growth potential and should continue to receive substantial investment funding. QUESTION MARKS Business units competing in high-growth industries but having relatively weak market shares. Resources should be invested in them to enhance their competitive positions. CASH COWS Business units with high market shares in low-growth industries. These units have limited long-run potential but represent a source of current cash flows to fund investments in stars and question marks DOGS Business units with weak market shares in low-growth industries. Because they have weak positions and limited potential, most analysts recommend that they be divested. 7

8 ROYAL PHILIPS ELECTRONICS started making lightbulbs in Eindhoven in the Netherlands in In the first half of the 20 th century it produced X- ray machines and radio equipment, and in the 1970s it moved into the record business. By 2007, it employed 122,000 people in 60 countries in its diversified businesses. Until recently, however, Philips wasn t like most big companies. It was a huge, unwieldy conglomerate that made everything from lightbulbs, consumer electronics, mobile phones, microprocessors, and electric shavers to less-well-known products such as defibrillators and MRI machines. In fact, at one time Philips was even in the music business. Not surprisingly, the company even confused analysts. Can You Tell What It Is? asked Citigroup s Simon Smith in a report on Philips, describing the company as one of the last great misunderstood conglomerates of Europe. In recent years, Philips has been undergoing an endless round of restructuring in an effort to make it more competitive. Things came to a head in the 2001 recession when the company suffered huge losses and had to shed 55,000 jobs about one-fourth of its workforce. Thirty separate divisions were reduced to only five domestic appliances, lighting, medical, consumer electronics, and semiconductors. A net loss of $4.2 billion in 2002 turned into a net profit of $3.6 billion by Philips has continued its effective divestment strategy. It has been steadily exiting electronics markets where it doesn t hold a first- or second-place position most notably divesting its mobile phones operations after being eclipsed by Nokia Group. The streamlined company s goal is now to refocus on its fastest-growing and most profitable sectors, such as medical systems. Philips becomes a much more focused company. Its 2006 earnings hit $7 billion on revenues of $35 billion/ 8

9 The Role of Diversification Diversification strategies play a major role in the behavior of large firms. Product diversification concerns: The scope of the industries and markets in which the firm competes. How managers buy, create and sell different businesses to match skills and strengths with opportunities presented to the firm.

10 Business-Level Strategy VS. Corporal Level Strategy BUSINESS-LEVEL STRATEGY Competitive Each business unit in a diversified firm chooses a business-level strategy as its means of competing in individual product markets. CORPORATE-LEVEL STRATEGY Companywide Specifies actions taken by the firm to gain a competitive advantage by selecting and managing a group of different businesses competing in several industries and product markets.

11 Corporate-Level Strategy Core Questions Why do some diversification efforts pay off and others produce disappointing results? What businesses should a corporation compete in? How should these businesses be managed to jointly create more value than if they were freestanding units?

12 Failed and Successful Diversification Initiatives Failed Diversification Initiatives: Examples o o AOL paid $114 billion to acquire Time Warner in Over the next two years, AOL Time Warner lost $150 billion in market valuation. Sony acquired Columbia Pictures in 1989 for $4.8 billion although it had no competencies in movie production. Five years later, Sony was forced to take a $2.7 billion write-off on the acquisition. Successful Diversification: Example The Renault-Nissan alliance, under CEO Carlos Ghosn s leadership, has led to a quadrupling of its collective market capitalization from $20.4 billion to $84.9 billion by the end of 2006

13 Diversification Diversification initiatives whether through mergers and acquisitions, strategic alliances and joint ventures, or internal development must be justified by the creation of value to shareholders. BUT this is not always the case! Acquiring firms typically pay high premiums when they acquire a target firm (the case of Kraft/Cadbury). WHY THEN COMPANIES SHOULD EVEN BOTHER WITH DIVERSIFICATION INITIATIVES? The answer is SYNERGY* * Derived from the Greek word Synergos: WORKING TOGETHER

14 What does Synergy means in Business Terms? I. A corporation may diversify into Related Businesses. Primary potential benefits come from HORIZONTAL RELATIONSHIP. Business units sharing intangible resources (e.g. core competencies such as marketing) and tangible resources (e.g. production facilities and distribution channels). Example: Procter & Gamble. II. A corporation may diversify into Unrelated Businesses. Primary potential benefits come from HIERARCHICAL RELATIONSHIPS. Business units share few similarities in the product they make or the industries in which they compete, whilst value creation is derived from the corporate office. Example General Electric.

15 Levels of Diversification: Low Level Single Business More than 95% of revenue comes from a single business. A Dominant Business Between 70% and 95% of revenue comes from a single business. A B

16 Levels of Diversification: Moderate to High Related Constrained Less than 70% of revenue comes from a single business and all businesses share product, technological and distribution linkages. Related Linked: Mixed Related & Unrelated Less than 70% of revenue comes from the dominant business, and there are only limited links between businesses. A A B C B C

17 Levels of Diversification: Very High Levels Unrelated Diversification Less than 70% of revenue comes from the dominant business, and there are no common links between businesses. A B C

18 Related Diversification Economies of Scope Cost savings that occur when a firm transfers capabilities and competencies developed in one of its businesses to another of its businesses. Value is created from economies of scope through: Operational relatedness in sharing activities. Corporate relatedness in transferring skills or corporate core competencies among units.

19 Operational Relatedness in Sharing Activities Created by sharing either a primary activity such as inventory delivery systems, or a support activity such as purchasing. Activity sharing requires sharing strategic control over business units. Activity sharing may create risk because business-unit ties create links between outcomes.

20 Corporate Relatedness in Transferring Competencies Corporate Relatedness Using complex sets of resources and capabilities to link different businesses through managerial and technological knowledge, experience, and expertise. Creates value in two ways: Eliminates resource duplication in the need to allocate resources for a second unit to develop a competence that already exists in another unit. Provides intangible resources (resource intangibility) that are difficult for competitors to understand and imitate. A transferred intangible resource gives the unit receiving it an immediate competitive advantage over its rivals.

21 Related Diversification: Market Power Market power exists when a firm can: Sell its products above the existing competitive level and/or Reduce the costs of its primary and support activities below the competitive level. Multipoint Competition Two or more diversified firms simultaneously compete in the same product areas or geographic markets. Vertical Integration Backward integration a firm produces its own inputs. Forward integration a firm operates its own distribution system for delivering its outputs.

22 Vertical Integration: Important Considerations 1. Is the company satisfied with the quality and the price that its present suppliers and distributors are providing? 2. Are there activities in the industry value chain presently being outsourced or performed independently by others that are a viable source of future profits? 3. Is there a high level of stability in the demand for the organization s products? 4. How high is the proportion of additional production capacity actually absorbed by existing products or by the prospects of new and similar products? 5. Does the company have the necessary competencies to execute the vertical integration strategy? 6. Will the vertical integration initiative have potential negative impacts on the firm s stakeholders?

23 Unrelated Diversification Restructuring creates financial economies A firm creates value by buying and selling other firms assets in the external market. Resource allocation decisions may become complex, so success often requires: Focus on mature, low-technology businesses. Focus on businesses not reliant on a client orientation.

24 YALE ENDOWMENT FUND: Asset Allocations Seeking the least correlated assets in Financial Portfolio Management Funds 26

25 External Incentives to Diversify Anti-trust Legislation Antitrust laws in 1960s and 1970s discouraged mergers that created increased market power (vertical or horizontal integration. Mergers in the 1960s and 1970s thus tended to be unrelated. Relaxation of antitrust enforcement results in more and larger horizontal mergers. Early 2000: antitrust concerns seem to be emerging and mergers now more closely scrutinized.

26 External Incentives to Diversify Anti-trust Legislation Tax Laws High tax rates on dividends cause a corporate shift from dividends to buying and building companies in highperformance industries Tax Reform Act (U.S.) Reduced individual ordinary income tax rate from 50 to 28 percent. Treated capital gains as ordinary income. Thus created incentive for shareholders to prefer dividends to acquisition investments.

27 Internal Incentives to Diversify Low Performance High performance eliminates the need for greater diversification. Low performance acts as incentive for diversification. Firms plagued by poor performance often take higher risks (diversification is risky).

28 Internal Incentives to Diversify Low Performance Uncertain Future Cash Flows Diversification may be defensive strategy if: Product line matures. Product line is threatened. Firm is small and is in mature or maturing industry.

29 Internal Incentives to Diversify Low Performance Uncertain Future Cash Flows Synergy & Risk Reduction Synergy exists when the value created by businesses working together exceeds the value created by them working independently but synergy creates joint interdependence between business units. A firm may become risk averse and constrain its level of activity sharing. A firm may reduce level of technological change by operating in more certain environments.

30 Keywords Portfolio Synergy Acquisition Scope Incentives Horizontal Incentive Internal Diversification Merger Relatedness Motives Integrated Vertical Performance External 34

31 Core Reference: Dess, Gregory G. et al. (2008). Strategic Management: Text and Cases. (4 th Edition), McGraw-Hill Irwin, N.Y., U.S. 35

32 End of Session Six Take Care..! 36