Todays News

Pepsis challenges
Spun-off restaurants
Acquired Tropicana
Pepsi Bottling IPO

Disney -- Retail stores

Baby merchandize
White goods
Paint

AT&T
Spin-off or sell Consumer
Long Distance unit
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
8 8 3
K

10 2
Q 7
4

7
3 4 J
3
 Why Diversify??
Division
Sales
($)

Q1 Q2 Q3 Q4
1994

Industry
Growth
(%)

1993 1994 1995 1996 1997 1998

Benefits of Diversification

Reduce earnings volatility

Minimize risk
Move firm into attractive
industries
Prolong life of firm
Improve long-term
performance
Capture synergies and strategic
fit between businesses
Steer corporate resources
Types of Diversification
Vertical
Horizontal
Related
Unrelated

Global
Evaluation of
Diversified Firms
Identify present corporate
strategy
extent and type of
diversification
geographic scope
new acquisitions
recent divestitures
mode of new business
entry
Evaluation of Diversified
Firms
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

H
Attractiveness

Str. Avg. Weak

Firms Competitive Position
Diversified Inc.

HQ

Bus. 1 Bus. 2 Bus. 3

Growth Growth Growth

Size Size Size
Remote Env. Remote Env. Remote Env.

$ $ $
Entering New Businesses
WHY?
Does business fit?
Financially

Strategically

Culturally

Ifnot in this business today,

would we want to get into it
now?
HOW?
Acquisition
Internalstart-up
Joint ventures
Why M&A Activity?
Intensifying competition
Global markets
Growth in new industries
NOTE:
20% of all-time corporate
mergers have occurred
within last 18 months
 Justifications
Attractiveness test
Industry factors
Core competencies
Strategic position

Cost of entry test

Buy outstanding shares
Cash
Contributions to merger or JV

Better off test

Synergies, econ. of scale/scope
Consolidation of resources,
activities
Competitive advantage?
Why MBCs Should
Outperform SBCs
Economies of Scope
Intangibleassets - brand
Consolidate operations

Efficient
Resource
Allocation
MBC as internal capital
market
Increased Size
Lower cost of capital
Increased market power
Why MBCs Actually
Underperform SBCs
Why does stock price of
acquirer always go down?
Diseconomies of Scope
Leadership - bureaucracy
Capital Allocation
Democratic process
Cross-subsidization (e.g.,
AT&T)
Misaligned Incentives
Too short-term
Underdeveloped Corporate
Strategy
International Diversification
WHY?
slow domestic growth
(earnings risk?)
intense domestic rivalry
no overseas competition
intense overseas competition

HOW?
Exporting
Franchising
Joint
ventures
Wholly-owned subsidiaries
Greenfield
(internal development)
Mergers & Acquisitions
Alternative Corporate
Strategies
Portfolio juggling ...

Evolutionary Approach
CorporateTransformation
Sudden Redefinition
Portfolio Managers
Turnaround
restorecompetitiveness to
poor performers
New advantages created
within portfolio
Retrenchment
narrow scope of portfolio
stick to your knitting

Restructuring
add new businesses / divest
poor performers
 Evolutionary Approach:
Leveraging Competence
Performance culture (3M, ABB)
Business system replicator
(Gillette)
Capability leverager (Nike)
Valuator (Berkshire Hathaway)
Inventor (H-P, J&J)
Synergy capturer (Kraft-Genl.
Foods)
Cost squeezer (Sunbeam)
 Disney: Capability
Bundling
Films
Toy Story
Videos
Network TV
Cable TV
Hotels
Cruise lines
Merchandise
Brand
licensing
NEW
Retail Stores
 Corp. Transformation
Choosing new businesses
Planned Surprises
Change business portfolio
(Monsanto)
Change global portfolio (CitiBank)
Capability bundling (Disney)
Industry consolidation (Chrysler)

Total
Return MTC
Biotech (38%)

S&P

1994
 Transformation
Nokia
1989: Diversified electrical
conglomerate
1993: 87% telecom focus
Total
Return Nokia

Motorola
S&P

Eriksson

1993
Sudden Redefinition
Competitive/performance
crisis
Massive immediate
corporate portfolio change
Deregulation
Patents
Foreign competition
M&A in same/related
industries