Today’s News
 Pepsi’s
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
3
8 8
K
Q
3
10
2
4
7
7
J
4
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
Industry Long Term
Attractiveness
• Reveal competitive position of
corporate portfolio - G.E. Industry
attractiveness/business strength matrix
H
M
L
Str.
Avg.
Weak
Firm’s Competitive Position
Diversified Inc.
HQ
Bus. 1
Bus. 2
Bus. 3
Growth
Size
Remote Env.
Growth
Size
Remote Env.
Growth
Size
Remote Env.
$
$
$
Entering New Businesses
 WHY?
Does
business fit?
 Financially
 Strategically
 Culturally
If
not in this business today,
would we want to get into it
now?
 HOW?
Acquisition
Internal
start-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 MBC’s “Should”
Outperform SBC’s
 Economies
of Scope
Intangible
assets - brand
Consolidate operations
 Efficient
Resource
Allocation
MBC
as “internal” capital
market
 Increased
Lower
Size
cost of capital
Increased market power
Why MBC’s 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
Too
Incentives
short-term
 Underdeveloped
Strategy
Corporate
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
 Corporate
Transformation
 Sudden Redefinition
Portfolio Managers
 Turnaround
restore
competitiveness 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
 Videos
 Network TV
 Cable TV
 Hotels
 Cruise lines
 Merchandise
 Brand
licensing
 NEW …
Retail Stores

Toy Story
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