Asst Prof. Dr. Songporn Hansanti Environment of Business Topic 7 Strategy Formulation Asst Prof. Dr. Songporn Hansanti

Making Diversification Work What businesses should a corporation compete in? How should these businesses be managed to jointly create more value than if they were freestanging unit?

Making Diversification Work Diversification initiatives must create value for shareholders Mergers and acquisitions Strategic alliances Joint ventures Internal development Diversification should create synergy Business 1 Business 2 + > 2

Synergy Related businesses (horizontal relationships) Sharing tangible resources Sharing intangible resources Unrelated businesses (hierarchical relationships) Value creation derives from corporate office Leveraging support activities

Related Diversification: Economies of Scope and Revenue Enhancement Environment of Business Related Diversification: Economies of Scope and Revenue Enhancement Economies of scope Cost savings from leveraging core competencies or sharing related activities among businesses in the corporation Leverage or reuse key resources Favorable reputation Expert staff Management skills Efficient purchasing operations Existing manufacturing facilities

Leveraging Core Competencies The glue that binds existing businesses together Engine that fuels new business growth Collective learning in a firm How to coordinate diverse production skills How to integrate multiple streams of technologies How to market diverse products and services

Three Criteria of Core Competencies Three criteria (of core competencies) that lead to the creation of value and synergy Different businesses in the firm must be similar in at least one important way related to the core competence Not essential that products or services themselves be similar Is essential that one or more elements in the value chain require similar essential skills Brand image is an example

Sharing Activities Corporations can also achieve synergy by sharing tangible and value-creating activities across their business units Common manufacturing facilities Distribution channels Sales forces Sharing activities provide two payoffs Cost savings Revenue enhancements

Related Diversification: Market Power Two principal means to achieve synergy through market power Pooled negotiating power Vertical integration Government regulations may restrict this power

Pooled Negotiating Power Similar businesses working together can have stronger bargaining position relative to Suppliers Customers Competitors Abuse of bargaining power may affect relationships with customers, suppliers and competitors

Vertical Integration In making decisions associated with vertical integration, six issues should be considered: Are we satisfied with the quality of the value that our present suppliers and distributors are providing? Are there activities in our industry value chain presently being outsourced or performed independently by others that are a viable source of future profits? Is there a high level of stability in the demand for the organization’s products? How high is the proportion of additional production capacity actually absorbed by existing products or by the prospects of new and similar products?

Vertical Integration (cont.) In making decisions associated with vertical integration, six issues should be considered: Do we have the necessary competencies to execute the vertical integration strategies? Will the vertical integration initiative have potential negative impacts on our stakeholders?

Unrelated Diversification: Financial Synergies and Parenting Most benefits from unrelated diversification are gained from vertical (hierarchical) relationships Parenting and restructuring of businesses Allocate resources to optimize Profitability Cash flow Growth Appropriate human resources practices Financial controls

Example General Electric’s products and services include: Appliances Aviation Consumer Electronics Electrical Distribution Energy Finance – Business; Consumer Healthcare Lighting Media & Entertainment Oil & Gas Plastics Rail Security Water Would you consider GE a diversified company? Related or unrelated diversification? Source: www.ge.com

Corporate Parenting & Restructuring Parenting—creating value within business units Experience of the corporate office Support of the corporate office Corporate Restructuring Find poorly performing firms With unrealized potential On threshold of significant positive change

Corporate Restructuring (Cont.) Corporate management must Have insight to detect undervalued companies or businesses with high potential for transformation Have requisite skills and resources to turn the businesses around Restructuring can involve changes in Assets Capital structure Management

Portfolio Management Key Each circle represents one of the firm’s business units Size of circle represents the relative size of the business unit in terms of revenue

Portfolio Management (Cont.) Creation of synergies and shareholder value by portfolio management and the corporate office Allocate resources (cash cows to stars and some question marks) Expertise of corporate office in locating attractive firms to acquire Provide financial resources to business units on favorable terms reflecting the corporation’s overall ability to raise funds Provide high quality review and coaching for units Provide a basis for developing strategic goals and reward/evaluation systems

Means to Achieve Diversification Acquisitions or mergers Pooling resources of other companies with a firm’s own resource base Joint venture Strategic alliance Internal development New products New markets New technology

Business Strategy Business Strategy Environment of Business Business Strategy Focuses on improving competitive position of company’s products or services within the specific industry or market segment

Competitive Strategy -- Porter’s Competitive Strategies Environment of Business Competitive Strategy -- Low cost Differentiation Direct competition Focus on niche

Generic Competitive Strategies -- Porter’s Competitive Strategies Environment of Business Generic Competitive Strategies -- Lower Cost strategy Greater efficiencies than competitors Differentiation strategy Unique/superior value, quality, features, service

Competitive Advantage -- Porter’s Competitive Strategies Environment of Business Competitive Advantage -- Determined by Competitive Scope Breadth of the target market

Cost Leadership -- Low-cost competitive strategy Broad mass market Porter’s Competitive Strategies Environment of Business Cost Leadership -- Low-cost competitive strategy Broad mass market Efficient-scale facilities Cost reductions Cost minimization

Differentiation – Broad mass market Unique product/service Porter’s Competitive Strategies Environment of Business Differentiation – Broad mass market Unique product/service Premiums charged Less price sensitivity

Cost-Focus – Low-cost competitive strategy Focus on market segment Porter’s Competitive Strategies Environment of Business Cost-Focus – Low-cost competitive strategy Focus on market segment Niche focused Cost advantage in market segment

Dr. Songporn Hansanti Cooperative Strategies Environment of Business Cooperative Strategies

Benefits of Strategic Alliances Dr. Songporn Hansanti Environment of Business Benefits of Strategic Alliances Potential Benefits of Strategic Alliances Ease of Market Entry Shared Risk Shared Knowledge and Expertise Synergy and Competitive Advantage

Scope of Strategic Alliances Dr. Songporn Hansanti Environment of Business Scope of Strategic Alliances Significant variation Comprehensive alliance Narrowly defined alliance Degree of collaboration depends upon basic goals of each partner

Types of Alliances Comprehensive Functional Production Marketing Dr. Songporn Hansanti Environment of Business Types of Alliances Comprehensive Functional Production Marketing Financial Research and Development

Implementation of Strategic Alliances Dr. Songporn Hansanti Environment of Business Implementation of Strategic Alliances Selection of partners Compatibility Nature of potential partner’s products or services Relative safeness of the alliance Learning potential of the alliance

Joint Management Considerations Dr. Songporn Hansanti Environment of Business Joint Management Considerations Shared management agreements Assigned arrangements Delegated arrangements

Shared Management Agreement Dr. Songporn Hansanti Environment of Business Shared Management Agreement Partner 1 Partner 2 Both partners participate actively Alliance

primary responsibility Dr. Songporn Hansanti Environment of Business Assigned Arrangement Partner 1 Partner 2 One partner takes primary responsibility Alliance

Delegated Arrangement Dr. Songporn Hansanti Environment of Business Delegated Arrangement Partner 1 Partner 2 Both partners delegate management to the joint venture’s executives Joint Venture

Pitfalls of Strategic Alliances Dr. Songporn Hansanti Environment of Business Pitfalls of Strategic Alliances Pitfalls of Strategic Alliances Incompatibility of partners Access to Information Distribution of Earnings Loss of Autonomy Changing Circum- stances

Dr. Songporn Hansanti Environment of Business Beijing Jeep – A joint venture between American Motors Company (part of Daimler Chrysler) and Beijing Auto Works

Merger & Acquisition (M&A) Dr. Songporn Hansanti Environment of Business Merger & Acquisition (M&A) Technological change Efficiency of operations Globalization and freer trade Changes in industry organization New industries Deregulation and regulation

Dr. Songporn Hansanti Environment of Business Merger เป็นการรวมที่ไม่จำเป็นต้องตั้งบริษัทใหม่ ซึ่งการรวมกันจะเป็นตกลงกันว่าจะเลิกบริษัทใด แล้วแต่จะตกลงกัน เช่น บริษัท สปามหาวินาศ และ บริษัท สปาเทวาบรรลัย ต่างประกอบกิจการ ได้รวมกิจการเข้าด้วยกัน เหลือเพียง บริษัท สปามหาวินาศ เพียงบริษัทเดียว ซึ่งการรวมแบบนี้อาจจะเรียกได้ว่า Acquisition ซึ่งเป็นการซื้อกิจการของบริษัทอื่น อาจซื้อเพียงทรัพย์สิน หรือทั้งทรัพย์สินและหนี้สิน (โอนกิจการ) หรืออาจเป็นเข้าไปซื้อหุ้นเพื่อให้เพียงพอกับการเข้าไปได้บริหารกิจการ (Take Over)

Dr. Songporn Hansanti Environment of Business Merger เป็นการรวมที่ไม่จำเป็นต้องตั้งบริษัทใหม่ ซึ่งการรวมกันจะเป็นตกลงกันว่าจะเลิกบริษัทใด แล้วแต่จะตกลงกัน เช่น บริษัท สปามหาวินาศ และ บริษัท สปาเทวาบรรลัย ต่างประกอบกิจการ ได้รวมกิจการเข้าด้วยกัน เหลือเพียง บริษัท สปามหาวินาศ เพียงบริษัทเดียว ซึ่งการรวมแบบนี้อาจจะเรียกได้ว่า Acquisition ซึ่งเป็นการซื้อกิจการของบริษัทอื่น อาจซื้อเพียงทรัพย์สิน หรือทั้งทรัพย์สินและหนี้สิน (โอนกิจการ) หรืออาจเป็นเข้าไปซื้อหุ้นเพื่อให้เพียงพอกับการเข้าไปได้บริหารกิจการ (Take Over)

Consolidation or Amalgamation Dr. Songporn Hansanti Environment of Business Consolidation or Amalgamation คือการรวมกิจการที่ตั้งบริษัทใหม่ และยกเลิกบริษัทเดิม บริษัทใหม่นี้ต้องเป็นชื่อใหม่ มีการออกหุ้นใหม่ ผู้ถือหุ้นของบริษัทเดิมจะได้รับหุ้นสามัญของบริษัทใหม่แทนของบริษัทเดิม เช่น บริษัท สูดดมอ๊อกซิไดซ์ และ บริษัท เป่าและดม ต่างประกอบกิจการผลิตยาดม ได้รวมกิจการเข้าด้วยกัน และจดทะเบียนใหม่ชื่อ บริษัท สูดเป่าและดม

M&A Terminology Merger Negotiated deals Mutuality of negotiations Dr. Songporn Hansanti Environment of Business M&A Terminology Merger Negotiated deals Mutuality of negotiations Mostly friendly Restructuring — changes to improve operations, policies, and strategies

Types of Mergers Horizontal mergers Dr. Songporn Hansanti Types of Mergers Environment of Business Horizontal mergers Between firms in same business activity Rationale Economies of scale and scope Synergies (ex. combining of best practices) Government regulation due to potential anticompetitive effects Vertical mergers Combinations between firms at different stages Goal is information and transaction efficiency

Dr. Songporn Hansanti Environment of Business M&A

Dr. Songporn Hansanti Environment of Business M&A Strategy Defines the long-term plans, policies and culture of an organization Strategic planning is a dynamic process that requires inputs from all segments of the organization Acquisition and restructuring policies and decisions should be part of the company's overall strategic plans and processes Ultimate responsibility for strategic planning resides in the top executive group

Alternative Strategy Methodologies Dr. Songporn Hansanti Environment of Business Alternative Strategy Methodologies SWOT or WOTS UP – inventory and analysis of organizational strengths, weaknesses, environmental opportunities and threats Top-down or Bottom-up – relate to company forecasts vs. aggregation segment forecasts Computer models – allow detail and complexity Logical incrementalism – well-supported moves from current bases Comparative histories – learn from the experiences of others

Alternative Analytical Frameworks Dr. Songporn Hansanti Environment of Business Alternative Analytical Frameworks Product life cycle – introduction, growth, maturity, decline stages with changing opportunities, threats Learning curve – costs decline with cumulative volume experience (first mover advantage) Competitive analysis – industry, suppliers, customers, complemetors, etc. Value chain analysis – seek to add product characteristics valued by customers Cost leadership – low-cost advantages

Strategy Formulation Approaches Dr. Songporn Hansanti Environment of Business Strategy Formulation Approaches Boston Consulting Group Approach Historical emphasis: experience curve, product life cycle, product portfolio balance Recent approaches Impact of the Internet and other innovations Performance measurements - cash flow return on investment (CFROI) Michael Porter Approach (1980, 1985, 1987) Select attractive industry using “Five Forces” Develop competitive advantage through cost leadership, product differentiation, or focus Develop attractive value chains

Formulating a Merger Strategy Dr. Songporn Hansanti Environment of Business Formulating a Merger Strategy Requires continuing reassessment Industry analysis Competitor analysis Supplier analysis Customer analysis Substitute products Complementors Technology changes Societal factors Firm's strengths/weaknesses relative to present/future industry conditions

Formulating a Merger Strategy Dr. Songporn Hansanti Environment of Business Formulating a Merger Strategy Grove (1996) Firm must adjust to six forces Existing competitors Potential competitors Complementors Customers Suppliers Industry transformation Eclectic adaptive processes approach to strategy

Formulating a Merger Strategy Dr. Songporn Hansanti Environment of Business Formulating a Merger Strategy Business goals - general or specific, but must be quantifiable to facilitate progress assessment Size objectives Large enough to use fixed factors effectively Critical mass necessary to attain cost levels for profitable operation at market prices Growth objectives - sales, assets, EPS, values To get favorable P/E multiple for shares To increase market to book value of shares

Formulating a Merger Strategy Dr. Songporn Hansanti Environment of Business Formulating a Merger Strategy Business goals Stability objectives - two kinds of instability Large erratic fluctuations in total size and abrupt program shifts (e.g., defense industry) Cyclical instability of durable goods industries Flexibility objectives - ability to operate in variety of product markets and responsive to consumers Breadth of capabilities, e.g., research, manufacturing, marketing Technological breadth Stay close to customers

Formulating a Merger Strategy Dr. Songporn Hansanti Environment of Business Formulating a Merger Strategy Aligning firm to changing environments Gap between objectives and potential based on current capabilities Various approaches: Choose products related to needs of customer that provide large markets Focus on technological bottlenecks Be at frontier of technology and aim for attractive product fallout Emphasize economic criteria – ex. value

Formulating a Merger Strategy Dr. Songporn Hansanti Environment of Business Formulating a Merger Strategy Strategic planning and mergers Diversification strategy may be necessary if firm must alter product-market mix or capabilities to reduce or close strategic gap Both involve evaluation of current capabilities relative to those needed to reach objectives Related diversification involves lower risks

Trends of Strategic Alliances in US Dr. Songporn Hansanti Environment of Business Trends of Strategic Alliances in US ExxonMobil = Exxon + Mobil Oil Hewlett-Packard ; with Compaq Procter & Gamble buy Gillette Adidas-Salomon acquire Reebok Siemens; with Nokia The Walt Disney Company acquiring Pixar Google buys Youtube Warner Bros. Entertainment & CBS Corporation = The CW Television Network

EU DaimlerChrysler = Daimler Benz + Chrysler BP with Amoco Dr. Songporn Hansanti Environment of Business EU DaimlerChrysler = Daimler Benz + Chrysler BP with Amoco Alcatel + Lucent Technologies = Alcatel-Lucent Air France + KLM Royal Dutch Airlines = Air France-KLM Lufthansa and SWISS

Japan Mitsubishi UFJ Financial Group Konica Minolta = Konica + Minolta Dr. Songporn Hansanti Environment of Business Japan Mitsubishi UFJ Financial Group Konica Minolta = Konica + Minolta SoftBank acquiring Vodafone Japan Sumitomo Mitsui Banking Corporation = Sumitomo Bank + Sakura Bank

Thailand EGV + Major = EGV-Major Cineplex Bilsstel + TG Fone Dr. Songporn Hansanti Environment of Business Thailand EGV + Major = EGV-Major Cineplex Bilsstel + TG Fone LoxInfo + CS = CSLoxInfo GMM + True TMB + IFCT + DTDB

Functional Strategy Environment of Business Functional Strategy The approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity

Marketing Strategy – Pricing Selling Distribution Functional Strategy Environment of Business Marketing Strategy – Pricing Selling Distribution

Marketing Strategy – Product development Line extension Functional Strategy Environment of Business Marketing Strategy – Product development Line extension

Marketing Strategy – Advertising and promotion Push strategy Functional Strategy Environment of Business Marketing Strategy – Advertising and promotion Push strategy Pull strategy

Marketing Strategy – Pricing Skim pricing Penetration pricing Functional Strategy Environment of Business Marketing Strategy – Pricing Skim pricing Penetration pricing Dynamic pricing

Financial Strategy – Leveraged buyout Reversed stock split Functional Strategy Environment of Business Financial Strategy – Leveraged buyout Reversed stock split Tracking stock

R&D Strategy – Technological leader Technological follower Functional Strategy Environment of Business R&D Strategy – Technological leader Technological follower Open innovation

Operations Strategy – Job shop Connected line batch flow Functional Strategy Environment of Business Operations Strategy – Job shop Connected line batch flow Flexible manufacturing systems Dedicated transfer lines Mass production Continuous improvement system Modular manufacturing

Purchasing Strategy – Multiple sourcing Sole sourcing Functional Strategy Environment of Business Purchasing Strategy – Multiple sourcing Sole sourcing Just-in-time (JIT) Parallel sourcing

Logistics Strategy – Centralization Outsourcing Internet Functional Strategy Environment of Business Logistics Strategy – Centralization Outsourcing Internet

HRM Strategy – 360 degree appraisal Functional Strategy Environment of Business HRM Strategy – 360 degree appraisal

Outsourcing errors – Activities that should not be outsourced Functional Strategy Environment of Business Outsourcing errors – Activities that should not be outsourced Wrong vendor selection Writing poor contract Overlooking personnel issues Hidden costs of outsourcing Failing to plan exit strategy

Proposed Outsourcing Matrix Environment of Business

Strategies to Avoid – 3 Follow the leader Hit another home run Functional Strategy Environment of Business Strategies to Avoid – 3 Follow the leader Hit another home run Arms race Do everything Losing hand

Subjective Factors Affecting Decisions -- Functional Strategy Environment of Business Subjective Factors Affecting Decisions -- Management’s attitude toward risk Pressures from stakeholders Pressures from corporate culture Needs and desires of key managers

Avoiding the Consensus Trap -- Strategic Choice Environment of Business Avoiding the Consensus Trap -- Devil’s Advocate Dialectical Inquiry

Evaluation of Strategic Alternatives -- Strategic Choice Environment of Business Evaluation of Strategic Alternatives -- Mutual exclusivity Success Completeness Internal consistency