MOS 4410 - Chapter 6 Textbook Notes.docx

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Department
Management and Organizational Studies
Course
Management and Organizational Studies 4410A/B
Professor
Raymond Leduc
Semester
Winter

Description
Chapter 6 - Corporate-Level Strategy: Creating Value through Diversification Case Study – Bellndanada Enterprises (BCE) - 1988  2 largest corporation - 2006 declines revenues and net income, thousands of employees laid off - Michael Sabia came in… o Business realignments, job cuts, divestitures, downsizings - BCE, AOL-Time Warner, Daimler-Benz, and HP/Compaq fail to effectively integrate their acquisitions - 50% of mergers and acquisitions are divested with loss - Non-acquisition-based diversification moves are slightly better - IBM, Microsoft, Rogers Communications, Onex, The Keg, Exxon, Mobil and Couche-tard were all successful in diversification by acquisitions, strategic alliances and joint ventures, and internal development Making Diversification Work: An Overview - Diversification initiatives must be justified by the creation of value for shareholders - Companies diversify because of SYNERGY o Diversify into related businesses (sharing intangible resources)  sales force, brand names, technologies Sharing tangible resources  production facilities, distribution channels o Diversify into unrelated businesses (value created by corporate office) leveraging information systems, or human resource practices Related Diversification: Economies of Scope and Revenue Enhancement - Economies of scope are cost savings from leveraging core competencies, sharing resources or sharing related activities among businesses within the corporation - Firm can also enjoy higher revenues if two businesses, combined, attain higher levels of sales than either company could attain independently Leveraging Core Competencies - Imagine a tree  the trunk and major limbs represent core products; the smaller branches are business units; and the leaves, flowers and fruit are the end product - Core competencies are the roots which provide nourishment, sustenance and stability o It is the collective learning on organizations  How to coordinate diverse production skills  Integrate multiple streams of technologies  Market and merchandise diver products and services - Core competencies must meet three criteria for synergy 1. Must enhance competitive advantage(s) by creating superior customer value  men’s razors 2. Different businesses in the corporation must be similar in at least one important way related to the core competencies o i.e. Loblaw Companies Ltd (Provigo, No Frills, Fortinos, Zehrs) 3. The core competencies must be different for competitors to imitate or find substitutes for STRATEGY SPOTLIGHT 6.1 – Steve Jobs Discusses Apple’s Core Competence - “for almost all future consumer electronics, the primary technology was going to be software” o Operating systems software, applications on iTunes/MAC/PC, software in device (iPod, iPhone), back-end software that runs on iCloud - “we could write all these different kinds of software and we tweed it together and make it work seamlessly Sharing Activities - i.e. value creating activities like manufacturing facilities, distribution channels and sales force - Sharing activities can provide two payoffs 1. Cost Savings o Most common type of synergy and easiest to estimate o i.e. elimination of jobs, facilities and related expenses that are no longer requires when functions are consolidated o Cost savings are the highest when company acquires another from the same industry in the same country o There must be compromise in the design or performance of an activity 2. Revenue Enhancements and Differentiation o Achieving higher sales with an acquisition than you can independently o Gillette acquiring Duracell and selling batteries in personal care products o Chrysler and Daimler-Benz merge  customers could have lowered their perceptions of STRATEGY SPOTLIGHT 6.2 – American Idol: Far More Than Just a Television Show - FremantleMedia (FM) is a division of German media giant Bertlemann that owns American Idol, The Apprentice, The X Factor etc. - FM has become successful in creating global programming that is in part due to the creative minds there - Key to their success  leveraging their core product (TV shows) to create multiple revenue streams Mercedes’s quality and prestige  Mercedes eventually divested Chrysler Market Power - Working with similar businesses or affiliation to a strong parent can strengthen organizations bargaining position - Nestle  its units enjoy greater protection from substitutes and new entrants, greater visibility and improved image - PepsiCo acquired KFC, Taco Bell and Pizza Hut it benefited from its position over these units BUT McDonald’s refused since PepsiCo was a supplier of soft drinks in competitors restaurants - Government can restrict the ability of a business to gain very large shares of a particular market STRATEGY SPOTLIGHT 6.3 – How 3M’s Efforts to Increase Market Power Backfired - Suits alleged that 3M had unlawfully bullied its way into a monopoly position in the adhesive tape market and that as a result consumers had been deprived of their rightful amount of choice and often paid 40% more for tape - LePage’s argued that 3M’s practice of “bundled rebated” violated legislation that limited monopoly power Vertical Integration - An expansion or extension of the firm by integrating preceding or successive productive processes o Firm incorporated more processes toward the original source of raw materials (backward integration) or toward the ultimate consumer (forward integration) - Benefits Vertical Integration o Secure source of raw material or distribution channels that cannot be “held hostage” to external markets where costs can fluctuate over time o Protection & control over assets & services required to produce & deliver valuable products and services o Access to new business opportunities and new forms of technologies o Improved coordination of activities across the value chain - Risks o Costs associated with increased overhead and capital expenditures to provide facilities, raw material inputs and distribution channels inside the organization o Loss of flexibility resulting from inability to respond quickly to changes in external environment o Problems associated with unbalances capacities or unfilled demand among value chain o Additional administrative costs associated with managing a more complex set of activities - Four questions in making decisions about vertical integration 1. Is the value provided by present suppliers and distributors satisfactory?  DON’T integrate o i.e. Nike outsources manufacturing of shoes, their focus is on marketing and design 2. Are there activities in the industry value chain presently being outsources or performed independently by others that are a viable source of future profits? o More profit in downstream activities (leasing, warranty, insurance) than in manufacturing cars so Ford and GM and undertaken FORWARD integration to become the biggest players 3. Is there relative stability in the demand for the organization’s products? 4. Is there a source of core competencies in the activity that is considered for outsourcing or vertical integration? STRATEGY SPOTLIGHT 6.4 – Vertical Integration at Canfor - World’s largest lumber producer and global leader in the forest products industry - It diversified into most aspects of the industry and expanded both across stages of value chain and across markets Analyzing Vertical Integration: The Transaction Cost Perspective - Every market transaction involved some transaction costs o Search costs  where is it available, level of quality, etc o Negotiation costs o Contract costs  needs to be written, spelling out future possible contingencies o Monitor costs  monitoring each other o Enforcement costs  if a party does not comply with terms in contract - These can be avoided by internalizing the activity  producing the input in-house - Transaction-specific investments - Administrative Costs - If transaction costs are lower than administrative costs  best to resort to market transaction and avoid vertical integration  OPPOSITE IS TRUE Unrelated Diversification: Financial Synergies and Parenting - Two main sources of synergies 1. Parenting and restructuring of businesses (often acquiring) 2. Add value by viewing the entire corporation as a family or portfolio of businesses Corporate Parenting and Restructuring (within business units) - Parenting o Improve plans and budgets and provide especially competent central functions such as legal, financial, human resource management, procurement - Restructuring o Find firms with unrealized potential or firms in industries on the threshold or significant, positive changes o Parent intervenes, selling off parts of business, changing management, reducing payroll and unnecessary expenses, changing strategies and infusing the company with new technologies, processes, reward systems, etc. o When restructuring is done, firms can be either sold to monetize and added value or kept so that the corporate family can enjoy the financial and competitive benefits of enhances performance o Restructuring can involve…  Asset restructuring  sale of unproductive assets or whole lines of business  Capital restructuring  changing debt-equity mix  Management restructuring  changes in composition of top management team, organizational structure and reporting relationship • Tight financial control, rewards based on short term or medium term goals, reduction in number of middle level managers Portfolio Management - Stars o High-growing industries with high market shares. Have long-term growth potential and should continue to receive substantial investment funding - Question Marks o High-growth industry and weak market share. Resources should be invested in them to enhance their competitive position and help them increase their relative market share to become stars otherwise the
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