Todays News

s Pepsis challenges
x Spun-off restaurants x Acquired Tropicana x Pepsi Bottling IPO

s Disney -- Retail stores

x Baby merchandize x White goods x Paint

s AT&T
x Spin-off or sell Consumer Long Distance

unit
s Maxtor acquires Quantum HDD unit

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

Diversification and Poker J 3 8 8 K

10

Why Diversify??
Division Sales ($)

Q1

Q2 1994

Q3

Q4

Industry Growth (%)

1993

1994

1995

1996

1997

1998

Benefits of Diversification
s Reduce earnings volatility s Minimize risk s Move firm into attractive industries s Prolong life of firm s Improve long-term performance s Capture synergies and strategic fit

between businesses s Steer corporate resources

Types of Diversification
s Vertical s Horizontal
x Related x Unrelated

s Global

Evaluation of Diversified Firms

s Identify present corporate

strategy
x extent and type of

diversification x geographic scope x new acquisitions x recent divestitures x mode of new business entry

Evaluation of Diversified Firms

s

Reveal contextual position of corporate portfolio

BCG Growth-share Matrix

Industry Growth Rate

Hi

Lo

< 1.0

1.0

> 1.0

Relative Market Share

Evaluation of Diversified Firms

Reveal competitive position of corporate portfolio - G.E. Industry attractiveness/business strength matrix

Industry Long Term Attractiveness

L Str. Avg. Weak

Firms Competitive Position

Diversified Inc.
HQ

Bus. 1
Growth Size Remote Env.

Bus. 2
Growth Size Remote Env.

Bus. 3
Growth Size Remote Env.

Entering New Businesses

s WHY?
x Does business fit?
3 Financially 3 Strategically 3 Culturally

x If

not in this business today, would we want to get into it now?

s HOW?
x Acquisition x Internal start-up x Joint ventures

Why M&A Activity?

s Intensifying competition s Global markets s Growth in new industries s NOTE: x 20% of all-time corporate

mergers have occurred within last 18 months

Justifications
s Attractiveness test
x Industry factors x Core competencies x Strategic position

s Cost of entry test

x Buy outstanding shares x Cash x Contributions to merger or JV

s Better off test

x Synergies, econ. of scale/scope x Consolidation of resources, activities x Competitive advantage?

Why MBCs Should Outperform SBCs

s Economies of Scope
x Intangible assets - brand x Consolidate operations

s Efficient Resource Allocation

x MBC as internal capital

market
s Increased Size
x Lower cost of capital x Increased market power

Why MBCs Actually Underperform SBCs

s Why does stock price of acquirer

always go down? s Diseconomies of Scope

x Leadership - bureaucracy

s Capital Allocation
x Democratic process x Cross-subsidization (e.g., AT&T)

s Misaligned Incentives
x Too short-term

s Underdeveloped Corporate Strategy

International Diversification
s WHY?
x slow domestic growth (earnings risk?) x intense domestic rivalry x no overseas competition x intense overseas competition

s HOW?
x Exporting x Franchising x Joint ventures x Wholly-owned subsidiaries

Greenfield (internal development) 3 Mergers & Acquisitions

3

Alternative Corporate Strategies

s Portfolio juggling ... s Evolutionary Approach s Corporate Transformation s Sudden Redefinition

Portfolio Managers
s Turnaround
x restore

competitiveness to poor performers x New advantages created within portfolio

s Retrenchment
x narrow

scope of portfolio x stick to your knitting

s Restructuring
x add

new businesses / divest poor performers

Evolutionary Approach: Leveraging Competence

s Performance culture (3M, ABB) s Business system replicator

(Gillette) s Capability leverager (Nike) s Valuator (Berkshire Hathaway) s Inventor (H-P, J&J) s Synergy capturer (Kraft-Genl. Foods) s Cost squeezer (Sunbeam)

Disney: Capability Bundling

Films Toy Story s Videos s Network TV s Cable TV s Hotels s Cruise lines ark s Merchandise eP em s Brand licensing Th s NEW Retail Stores
s

TV Sh ow

o Fo

ch er M

i se nd a

dI s tem

Corp. Transformation
s Choosing new businesses s Planned Surprises
x Change business portfolio (Monsanto) x Change global portfolio (CitiBank) x Capability bundling (Disney) x Industry consolidation (Chrysler)

Total Return Biotech (38%)

MTC

S&P

Chemicals (18%)

1994

Transformation
s Nokia
x 1989: Diversified electrical

conglomerate x 1993: 87% telecom focus

Total Return Nokia Motorola S&P Eriksson

1993

Sudden Redefinition
s Competitive/performance

crisis s Massive immediate corporate portfolio change

x Deregulation x Patents x Foreign competition x M&A in same/related

industries