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Product Geography

International Corporate Strategy – Session 1

Summarize corporate session in two main questions – what is strategy all about?
 Where to play? – extends in many directions like geographical coverage, industries
and diversification (should we focus on one or have multiple) how large segments (of
customers and products), integration - make or buy (one part of value chain or top to
bottom player)
 How to compete? – this aspect was covered in Competitive Strategy (last term)

Guess, in today’s world which question is more important – Where to play or how to play.
The answer is ‘Choice of areas’ i.e. where to play (but the performances of individual
companies in opportune areas show variance i.e. companies show negative performance
and positive performances so shouldn’t the key question should be how to compete?)

Dilemma - It is an empirical question (the question of ‘what is more important’) – why

should one question dominate the decision? For one part of economy, one might be the
driver, for other the other question might be the driver. In order to study them we need to
refer to studies and focus on growth of the company. What is better to obtain growth? We
need to understand how growth breaks down. Many take a very generic and blunt look at
how to grow – first level of sophistication: How a company grows? (10% this years and 15%
the next 3 years) Following three factors -
1. Increase in revenues / Market share gains & penetrations (where to play)
2. Growth of the industry as a whole (about how to compete)
3. Mergers and Acquisitions – some m&a are to reinforce what companies already
have; more than half are to enter into a new subsegment/ geography. (part of it is
also about where to play)

More than half is about where to play? – Companies are not focusing on it. They are thinking
about innovating, marketing and product development, the develop their portfolio. Rather,
they could be much more active about changing portfolio and shifting where growth lies. But
they are very RIGID. They are very rigid in putting money. If brand is 50% then marketing
gets 50% of the budget if it is 10% then 10% (this makes shifting of portfolio, very difficult).
In a company, there are 2 divisions – older one which doesn’t perform (people will spend 4-5
years to turn in around) most of the budget will go to that division rather than fostering
innovations in other divisions. This prevents them in focusing on where the growth lies
(where to play). They compete on market share, where the growth does not lie (price wars,

The elements of firm growth

1+2+3 = Total Growth

Market Average Growth is the biggest contributor, the other two factors M&A 33% and
Market Share Gains 21%.

Summary of pie –
1. take a hard look at where the growth lies and then attack it, then do m&a, do not focus
on gaining market share
2. illustrate with example – telecom and financial services, market share gains are very small

As a strategist, if you are given aggressive goals then the first thing you do – look at their
portfolio to understand their growth prospects. (graph in class) all the existing resources are
concentrated in Europe and North America, but they should be shifted to Africa, Middle east
and Latin America because majority of the growth potential lies there.
Italian execs class example – APAC had 10% growth In year starting and 4% in year end
because their company was not ready to move resources to that region. They observed
more growth in Europe from 2% to 5% in that same period.

During 1999 and 2005, P&G (18 +) and Unilever (.2+) –

Where to play decisions they made at the inception – p&g made a potential growth map of
all the segments and made its strategies concentrating on the opportune segments
(acquisitions, changes in portfolio – these were driven not by brands but by the company’s
decision of ‘where to be’) p&g made this decision in a much better way

Power of choosing well of where to compete – it’s okay to give your employees , but if you
are giving them bad portfolio then then you are tying their hands. Eg L&T – they have
mantra of ‘moving towards asset light businesses’ it corresponds with their portfolio, they
sold their electrical components business, acquired Mindtree. asset light businesses -
business does not required major fixed assets. ROCE of the company was driven down to
15% from 20%+ you want to have significantly highly profitability. And it helps you in
reaching only a certain goal.
They company decided to evaluate where to play question to work on its ROCE which is
dependent on
- Operating profits
- Fixed assets
- Net working capital
If you want to correct ROCE overnight, you go to a company which has low fixed assets like
Mindtree (services company)

Ashok Leyland aggressive goals (already set the target industry - medium heavy trucks and
buses) q1 – what is the average industry growth? – you need a growth rate of 100% in an
industry which grows at 4% (to double its market share). It will concentrate on geographies
which are growing very well (q2). After that, evaluate how much growth you need in that
particular geography to achieve the target (q3). How likely is it to take hat market share –
(q4) could buy the next biggest player in market, but that’s difficult as competitors may not
want to sell and everybody else will come to India and china to capitalize on the lucrative
market potential. However, as a quick fix companies undergo m&a as they are able to reach
targets overnight, rather than investing in organic growth over a long period. Ashok Leyland
reached the goal 10 years after setting this goal as they didn’t have deep pockets. They had
planned on reaching it in 5 years, better not to do it, sends confusing message to

Where to play tasks -

1. Portfolio - What needs to be cut down, invested it
2. What kind of synergies you want to build across the portfolio – sharing things
increases performances of all the business units. Like distribution channels. (If
possible) – Would you prefer to have a portfolio of industries which are depended
and related to each other or a company having portfolio of companies which are
operating independently. Depends on the risk appetite Corporate portfolio
diversifying risk if one industry goes then the other might go down with it. Would
you like to be Warren Buffet or Apple – neither is better, they are very good
examples of different corporate strategies which are very well executed. Warren
Buffet operates like a conglomerate; he looks for value for money in different
avenues. Tim Cook – how can we exploit our strengths in technology to other areas,
maybe what they are evaluating is very lucrative, but they will not take it forward if
they can’t leverage it optimally.
3. Enable point 1 and 2 by executing and redesigning the practices in the organization.
Unilever’s mistake was also in trying to build a global brand in an organization which
was a collection of local companies (there was a CEO who was head of all the
departments, marketing, operations, finance) CEOs adapt a brand to local reality, I
will take this local brand to match it with my area. The goal was to exploit the scale
and efficiency of a global powerful brand. If you don’t have the organization to carry
out the goals, then whole process will become futile. Company has to adapt all the
processes (hiring, knowledge building, budgeting, etc.)


Corporate Strategy at the beginning (market was attractive)

B#1 – Portfolio Strategy: consistent with the market

- Focus on dairy
- East coast focus
- Regional brands
- Targets with good management and strong brand (portfolio logic)
- Multi brand to some aggregation
- less urban

Synergies: consistent with the portfolio strategy

- Pasteurization technology (corporate r&d) – one company
- Aggregation at regional level for manufacturing, distribution and procurement:
integration is required at each level
- “Meadow Gold” national brand (corporate marketing)

- Decentralized – district level / plant level managers who reported directly to the CEO

Beatrice started changing its corporate strategy as it started showing signs of decay and
maturity. As the industry was being saturated, new regulations were passed that were
putting blocks on oligopolies. (Eg. Now, Zara is entering into new product lines, it cant keep
opening new stores and main 10% growth rate).

Corporate Strategy at the second stage (agricultural products, food service equipment, polymers,
specialty chemicals, bakery, recreational vehicles, graphic arts) – became a CONGLOMERATE

B#2 – Portfolio Strategy (Non-dairy) consistent

- Growing faster than dairy
- Branded products
- Small companies
- Good staying management
- Family run (privately held) companies
- Unusual circumstances (death of a CEO)
- No direct competition with large brand
Little divestment

Synergies: Zero consistent with the portfolio

Organization: consistent with synergies
- Extremely decentralized
- Only capital provided by group

At this stage, Beatrice had become a less risky bank. It provided easy access to capital for
these companies as other money lending actors such as Banks and Stock exchange were not
evolved enough. And small companies were obligated to seek help from a big conglomerate
like Beatrice because of the absence of money lenders, at that time as Beatrice was the only
actor that had evolved to substitute these institutions. This is known as Institutional Voids
Theory – labor market is not very efficient; conglomerate acquires talent and distributes it
amongst its companies. For it, there was no value in acquiring publicly traded companies. It
identified companies in need to provide financial stability to them. The expiration date of
this strategy arrives with the evolution of external markets.

Value Added By Conglomerates –

1. Access to capital
Hedging of risk (this is not applicable, even though diversified companies create
value by balancing risk like warren buffet, as an investor you will not pick a company
which hedges risk. This is because, you need not substitute your financial adviser
with the CEO of that conglomerate, you can do it on your own with the help of your
financial advisor. Hedging risk is very tricky as an investor can do it on his own. A
conglomerate’s CEO is supposed to leverage assets, geographies and synergies. The
key reason for risk hedging is not getting fired. If one of the companies in the
conglomerate isn’t doing well then, he can point to others which are doing well.)
2. Marketing, r&d, operations, purchasing synergies

Corporate Strategy at the third stage

B#3 Portfolio Strategy –
- Divestment of:
o <20% ROA Refocusing
o Outside 10 key areas
- Invest in:
o inside 10 key areas
o Publicly traded – paying more than the book value (all the hidden value of the
company is already recorded and it is present in the pubic domain. The
acquirer has to overpay to acquire this company eg. It acquired Tropicana,
where it had to give a bid value which was way outside the actual value)
o Large
o With national competitors
o International

- Marketing
o Number of ad agencies
o Corporate brand $100 m Beatrice
- Distribution
o 400 centers -> 27 divisions
- Some r&d efforts

- Centralization increases
- Too much too soon (the company changes its organizational structure changes 4
times in 5 years, the employees don’t do anything and waits for everything to settle
down. These disruptions evaporate the opportunities in conglomerate of exploiting
the potential of synergies. Beatrice spent a lot of money but not enough to be able
to leverage the value of it).

As long as the models are internally consistent and market consistent, the company is able
to create value, if there are discrepancies, the value is destroyed. Corporate strategy is
about choosing the right places, strategy in itself is about choosing the right places.
In this course, we will understand how to map portfolios, leverage synergies, organize the
company initiatives and main levers to align the company according to it.

International Corporate Strategy – Session 2

Shades of the question – is it a good idea to have a conglomerate?

Headquarter (conglomerate)

Conglomerates with very impressive portfolios always stand out but generally
conglomerates don’t do well. If we look at the 2003-2012, average shareholder returns were
32% for conglomerates in India and south east Asia. This means value is added, value is
more for companies in this structure as compared to the stand-alone pure play structure
where the average shareholder return is 28% in India and South East Asia. This is due to
following reasons -
- Access to capital (institutional voids)
- Awareness to regulations
- They attract good quality human capital which can be distributed amongst various
companies within the group
- Brand reliability i.e. trust for customers
- Conglomerate discount (30+20+10+20+20=100) / Diversification the idea that the
five businesses are part of the group having value 100 then its actual value to an
investor is 8 points less i.e. 92 (estimated by scholars). Investors punish
conglomerates in doing their valuation this way because they feel conglomerates
destroy value. Conglomerates got this reputation in 1980s and it still exists, that’s
why the share price doesn’t go up. ‘Difficult to justify value in a conglomerate’. In
today’s world it is important to justify that you are not following a conglomerate
strategy (GE’s CEO keeps telling the press that the company isn’t a conglomerate,
whenever the company does an acquisition it takes great pains to link it to the
company’s core business even if the acquisition is completely unrelated).
Now these factors are no longer present in the economy and conglomerates in India and
southeast Asia have started providing lesser shareholder value.

Portfolio Moves in news nowadays, L&T – becoming asset light; Tata Group – 7 verticals to
be created and every business to be reorganized into these 7 verticals which were to be
headed by independent directors. Firms should consider the fundamental question – Cost
versus implementation benefits before making their strategies.

Food for thought - Private Equity Firms vs Conglomerate

- Similarity: Private Equity Firms are perceived to be efficient conglomerates
- Difference: Conglomerates will buy a company forever, but a private equity firm
buys companies with a goal to maximize shareholder value and disposing them.
(Wallstreet movie – conglomerates started destroying value, they were broken up and then
sold off)

Three frameworks in corporate strategy to map portfolio, measure it and make decisions
regarding it.
1. Portfolio Matrix
BCG matrix (oldest ones): Where to play? Making a graph to map our business with (X axis
Internal Analysis and Y axis External Analysis)
 External Analysis - industry vital signs, industry structure (porter’s, value chain,
micro-economic features), global environment (PESTEL)
 Internal Analysis – what are the company strengths and weaknesses (have necessary
resources to succeed in this industry, am I a leader or a marginal player, various
companies in my portfolio
In these tools we are always trading off simplicity and accuracy. At the time this matrix was
conceived, BCG was telling its clients that scale is important, and economies of learning will
give you an extra advantage. So they made this matrix based on scale. Best businesses were
the ones which were able to reach a higher scale. But nowadays, many times, Internal
Analysis is substituted by other parameters such as profitability, ROC and operating capital.
After a while McKinsey came up with its own matrix, they used an index rather than using
the market growth directly. They rated parameters on a scale of 0 to 10 and then took their
average, these parameters were – market growth, number of competitors, barriers of entry,
technological change, market share, synergies, etc. This was done for every company in the
business and then these companies were plotted on a graph where (X axis firm strengths
and Y axis market attractiveness).




- Measures choice
- Threshold
- Investment Rules (what to do with the businesses which lie in each quadrant)
o ??? – seed or a weed – is it a good business and you don’t know how to
manage it or is it a bad business which cant be groomed
o Stars – pump in more money
o Dogs – divest
o Cash cows – maintain
Problems with the BCG matrix
- Noise in measurement
- Don’t see synergies
- Granularity = Detail
It is too simplistic e.g. If ‘Food’ business unit/division is plotted in a particular
quadrant for an entity like Unilever Group, then it isn’t entirely correct. The ‘Food’
business unit is composed of various companies, some of them would be extremely
profitable and lie in a different quadrant and some would be lesser profitable and lie
in another quadrant. To do actual business, investment decisions have to be price
and driven by sophisticated maps and graphs (granular view graph versus green area
graph) start with the first one and then go to the next one for getting the actual
picture and making strategies.
- Execution of reallocation
How will you sell the ‘dog’, it is a $5 Billion business the execution of moves is very
complicated, and it is not visible on that map. However, on the other map, it is easy
to identify the unprofitable firms due to high level of detail.
- Time Horizon - Short term picture of the company

2. The Growth Map

A more sophisticated approach to understand where the growth is/ profitability is/ …
But you have to know where the growth lies (the three sources of growth are m&a, market
share or where to play). Then you take actions in each market.
- m&a: ask you team to evaluate different companies
- market share: price wars, innovation, change value proposition
- where to play: if the category is worth pursuing or not
The CEO makes decision with little information as he isn’t aware about the specifics of each

3. The Three Horizon (Mckinsey) - Allows companies to see, care and put resources in
the long term.
Each business has to be managed differently depending upon its Horizon. For each horizon,
managers has different incentives
- CORE/Horizon 1: The key goal is efficiency by implementing cost reduction; planning
and measuring costs very accurately. Investments (88% - current; 70% - target)
- ADJACENT/Horizon 2: The key goal is to position and build. Investments (10% -
current; 20% - target)
- TRANSFORMATIONAL/Horizon 3: The key goal is to innovate (R&D spends).
Investments (2% - current; 10% - target)

For example, Facebook (slide on 10-year roadmap) and Unilever’s case study.
Path to growth plan of Unilever –

The growth declines from 1999 to 2004, a lot of targets were achieved other than growth.
Consequently, the plan was a failure.

Portfolio Strategy
1. Focus on FMCG, Divestment of non-FMCG
2. Focus on ‘foods’ – acquisition of BIG Brands like BESTFOODS, B&Jerry’s, etc.
3. Fewer Number of Brands – more focus on power brands and local jewels
Increase marketing budget

From 11% to 13% Share
P&G’s = 15% (higher)
Generating $ Market


Why did Unilever’s strategy fail – They overinvested in marketing budget to gain more
market share.
- They were essentially selling soups and ice-creams in developed economies and
everyone knew about the existent of them already.
- Consumers are extremely brand loyal in the FMCG category.
- They had a market share of 30% to 40%, so gaining 4-5 points more should not have
been a priority. Plus, they had reduced their existing number of brands. This put a lot
of pressure of their exiting brands, like consumers of knorr can potentially get
confused because of ‘stretched’ brand positioning (is the brand Premium, middle,
value for money or cheap). In that process, market share is lost and not gained.

Session 3

Goals Strategic Plan

Improving food profitability  Rationalize supply chain
 Modern foods acquisition
 Sold some unprofitable business (Loose

Maximizing value for  Divest Non-FMCG

Shareholder from Non-FMCG  Give that money back to shareholders
(distribute it as debenture and dividends)

Achieve profitable growth in  30 Power Brands + 10 Local Jewels

FMCG (Power brands – 75% contribution to
growth and 100% to profit)
 Stretch throughout over segments and
price points
 Increase Support for innovation, packaging
and pricing

Plan Strengths/ Positives/ Good points about the plan

 Cost Savings
 Acquisition of Distribution platform in Modern Foods
 Size advantages to exploit by Power Brands
 Shareholder Windfall
 Focus on core business and strengths
 Cover same (or some markets)
 More innovation (linked to point 3)
 Disinvest bad assets
 Power brands get more resources

Plan Weakness/ Risks/ Problems of the plan

 Fewer Brands =Fewer Market Coverage
(linked to strengths size and core same)
 Power Brands already have high market share
 Gaining market share is very difficult
 Why not to reinvest money from disinvestment? / Why give the dollars to shareholders
instead of disinvesting?
(excess cash is given as dividends instead of internal growth)
 Too broad approach to markets
Why foods? Is it the wrong thing to focus on?
 Power brands might be too stretched out
 Relying on FMCG market growth and foods growth in particular
 Focus on wrong business
 Did we overpay for assets?

Spread of power brands – creates confusion

Knoor  power brand, has equity, positioning cannot cover the whole market

If Market Equilibrium is distributed by external change or from one of the companies within,
leads to increased competition and an issue in the market

A market leader should not initiate price war. The more fragmented the market, more
aggressive will be the price war.

HUL focused on food and P&G focused on personal growth by acquisition.

HUL made it difficult for themselves than P&G.

As compared to P&G, HUL did not get into a price war

Nothing in the above plan screams High Growth or serious growth possibility. Every goal
focuses on profitability.

Regional plan was in line with Global plan of HUL

Rationalization Strategy
Focused on foods
Fewer Brands

Culturally same and same language  Belgium and Netherlands were very similar

When P&G bought Gillette, they organized by product – adopted Matrix Org structure

Food Personal Home

Care Care

Region 1 Region 1 Region 1

Region 2 Region 2 Region 2

P&G was able to leverage the portfolio and get results, than HUL which still used local units.

If an organization has a portfolio of products which are a mix of global and local  Matrix
Org structure.

If an org has portfolio of products which are more global then local

HUL should reduce portfolio and focus on power brands  leading to Org centralization

An org should know  What level of decentralization does the portfolio strategy require?

How do conglomerates destroy value?

1. Cross-Subsidization


BU 1 BU 2 BU 3

Good Bad Bad

CAPEX 33% 33% 33%
Anchor 1/3 1/3 1/3

Bad unit is getting more money than it deserves and good one is getting less money than it
should get.
Though there is difference in their future prospects, the conglomerate is diverting money
from the good one to bad one.

The conglomerate gives resources to the company that are bad, which are taken from the
good one  Cross-subsidization

Internal capital market is worse than external capital market.

Reasons for Cross-Subsidization

a. Cognitive
Examples of cognitive reason: A new paper got popularity among scientific
community because it identified the bias called Naïve Diversification Bias. They
found out of the bias by studying the pension decisions of professors. They realized
the decisions depend on the number of options given.

First had 4 options and then put a bad 5th option (more risk, low return)  Then
people started putting money in all 5 options.

When it comes to investments, we tend to diversify more.

The conglomerate heads also have the bias, thus diversify the resources among
different businesses.

If they have 3 businesses  divide as 1/3rd

Bias  tendency to diversify in all options

If structure changes

BU1 + BU2 BU3

BU 1 BU2

The naïve decision is to give half-half to BU 1 and BU 3

1/4th to BU 1 and BU 2

Rationally this should not affect the allocation of resources.

b. Political
Size of Unit or Age of Unit or Power of Unit  these units will benefit beyond than
they deserve. Managers will lobey the headquarters and they ensure to get the
resources and not get their resources cut.

Reason why Microsoft started so many growing businesses but dint become leader
at any time. There is one largest unit  operating system  this unit as higher
power and gets more resources. The large unit also decides the people and
resource’s which will be allocated to the other units.

Sum of the large unit will be bigger than the other units.
2. Escalation of Commitment  No investment
Inability to divest at the right time
Diversified corporations are not good at selling or cutting investments.
Reason why?
 Commitment to business to continue and invest more and try to turn around. Like
you don’t want to sell the stocks when they are low, and not selling lead to higher
loss in the future. Like in a casino, when someone losses, they still continue to play
and loose even more.
Cannot sell because we bought it, pet project, been with the company for very long
 Sunk Cost bias amount of resources put into the project.
It is the project decision criteria
Example: you have already booked movie tickets for Saturday, a week prior and on
Friday you get to know of a party. If you go for the party, the ticket cost will be the
sunk cost

Managers hire consultants and go for Zero based budgeting  instead of making
budget based on last year numbers, companies start making the budget from scratch

3. Personal Attachments
Samsung started a car business because the CEO loved cars.
Spencer bought Brooks brothers
Disney bought a TV network

Managers are borne to the bias of personal attachments but the plans have to get
approved by BOD.

Because of the 3 reasons, there is always a skeptical view of the markets at the
decision of conglomerates.

How a Private Equity company is different from Conglomerate?

Private equity company – invest in firms

Conglomerates add value when:

1. The environment does not work properly
(Beatrice in the 60s, business groups in emerging countries, etc.)

2. The particular corporate structure, processes and ownership add value

(Private equity firms, General Electric, Danaher, Leucadia, Nordson, 3M, etc.)

How does the private equity model create value?  Private Equity Parenting
1. High powered incentives
2. Improved monitoring through separate boards
3. No cross-subsidization
4. Private ownership
5. Forced divestitures
Avoid Destroying value through governance
Add vertical synergy from HQ to the rest of the company
Managers in a PE are forced to put in their own money but the CEO of a diversified firm
does not have his wealth tied. In a PE, managers are playing with their own money and in a
conglomerate, managers are playing with SH’s money.

In a conglomerate  1 BOD for their business  they have cross-subsidization

In a PE  1 BOD per company  no cross subsidization is allowed

Level of performance measurement is higher in PE and make decisions using numbers

Divestitures are higher in a PE  buy and sell within few years, PE puts a horizon to the
company. Max keep the company for 5-6 years.

Equity in a PE is temporary and in a conglomerate it is permanent. If money is put in

conglomerate, the equity keeps mobbing. In a PE

PE  high debt compared to Conglomerate. PE takes loan and finance the growth plan
through debt, so the company needs to generate cash flow soon as it has to repay the debt
and interest, so these companies have the pressure of performing and generating cash

PE is a conglomerate which has eliminated the issues of a conglomerate and takes

governance into practice.

What can a conglomerate do to perform like a PE?  decisions based on numbers and
independent BOD for each business unit.

PE firms are seen as mechanism of the economy for achieving short term gains.

Companies which where under PE and then left are seen to be more profitable in the future,
they become more agile.

Can corporate HQ make the business units better?

1. Vertical Added Value  HQ shares value to the business units

2. Horizontal Added Value  sharing synergies between business units

Vertical Parenting Value

1. Strategies: improving strategies and strategy processes
2. Performance Management: introducing a powerful performance management
3. Policies and standards: in areas other than performance (Eg: capital expenditure)
4. Relationships: with influential stakeholders (Eg: investors, government)
5. Technology or products: providing technology that is core to businesses success
6. Brand: developing and providing a brand that helps businesses succeed
7. Financial Engineering: leveraging HQ size and knowledge of improving debt

Horizontal Parenting Value

1. Cross selling: encouraging or forcing businesses to sell each other’s products
2. Economies of scale: providing the scale and advantages (Eg: coordinating purchases)
3. Shared resources: helping businesses share important scare resources (Eg: technical
capabilities, locations, brands, distribution channels)
Eg: Apple leverages its PC technology to iPhone
4. Multipoint Competition: coordinate strategies across multiple divisions in order to
gain advantage over a major competitor (attacking a competitor from multiple fonts)
If one division of the company is attacked in Market 1, then another division attacks
the competitor Market 2
5. Sharing knowledge and good practices developed by individual businesses (even if
the business is not similar)
Eg: GE
6. Risk management: assembling a portfolio of businesses that together reduce the
overall risks and the related costs (e.g., geographies)

More the company has vertical and horizontal synergies  more is the added value
of the company

Value of the company = Value of each business unit + Parenting Value

This gives the maximum price you should pay for the company

How to decide whether a company should be in the portfolio or not? Attractiveness

and Synergy

Low risk and high value adding are the best business / heartland businesses

Pirelli and the ways to “divest” a business for which you are not the best owner