Chapter 9 Corporate Strategy and Diversification.ppt
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1、Chapter 9Chapter 9Corporate Strategy and Corporate Strategy and DiversificationDiversificationCopyright 1999 by Harcourt Brace&CompanyAll rights reserved.Requests for permission to make copies of any part of the work should be mailed to the following address:Permissions Department,Harcourt Brace&Com
2、pany,6277 Sea Harbor Drive,Orlando,Florida 32887-6777.Bourgeois,Duhaime,&Stimpert1Copyright 1999 by Harcourt Brace&CompanyAll rights reservedChapter ObjectivestDefine corporate strategy,describe some of the reasons why firms diversify,identify and describe different types of corporate diversificatio
3、n,and assess the advantages and disadvantages associated with each.tIdentify sources of synergy in diversified firms while also describing why synergies are so difficult to achieve.Copyright 1999 by Harcourt Brace&CompanyAll rights reservedChapter Objectives(cont.)(cont.)tExplore the complex relatio
4、nship between diversification and firm performance.tIn particular,explore the influence of managers and managerial thinking on the relationship between diversification and performance.See Exhibit 9.1 on following slide.Copyright 1999 by Harcourt Brace&CompanyAll rights reservedExhibit 9.1:Model of S
5、trategic ManagementCopyright 1999 by Harcourt Brace&CompanyAll rights reservedIntroductiontDefinition of Corporate StrategyAddress the question:“What is the appropriate scale and scope of the enterprise?”Influences how large and how diversified firms will be.Successful corporate strategies are not o
6、nly the product of successful definitionAlso the result of organizational capabilities or competencies that allow firms to exploit potential economies/synergies that large size or diversity can offer.Copyright 1999 by Harcourt Brace&CompanyAll rights reservedIntroduction(cont.)(cont.)tWhy Firms Dive
7、rsifyTo growTo more fully utilize existing resources and capabilitiesTo escape from undesirable or unattractive industry environmentsTo make use of surplus cash flowsCopyright 1999 by Harcourt Brace&CompanyAll rights reservedIntroduction(cont.)(cont.)tTypes of DiversificationVertical IntegrationStra
8、tegy of acquiring control over additional links in value chain of producing and delivering products/services.Backward IntegrationMoving closer to sources of raw materials by acquiring resource suppliers or manufacturing the components needed for production of final product.Forward IntegrationJust th
9、e opposite:moving closer to end-user(acquire retail outlets for distribution,etc.).Copyright 1999 by Harcourt Brace&CompanyAll rights reservedBackward IntegrationForward IntegrationExhibit 9.2:Vertical IntegrationCopyright 1999 by Harcourt Brace&CompanyAll rights reservedIntroduction(cont.)tAdvantag
10、es of vertical integration(shown in Exhibit 9.3)Greater control over costs and supply of components.Avoids the transaction costs associated with dealing with vendors or retailers.Ability to protect proprietary technology.Ability to maintain or cultivate a companys reputation for outstanding quality
11、or service.Copyright 1999 by Harcourt Brace&CompanyAll rights reservedIntroduction(cont.)tDisadvantages of vertical integrationHigher fixed overhead costs.Integrated firms must deal with transfer price dilemma which can create serious morale and other internal problems.Demand uncertainty creates pro
12、blems.Low demand can lead to underutilization of plant capacity.High demand can result in dependence on outside suppliers.Technological change can leave these firms stuck with old technology.Copyright 1999 by Harcourt Brace&CompanyAll rights reservedIntroduction(cont.)tHorizontal or related diversif
13、icationStrategy of adding related or similar product/service lines to existing core business,either through acquisition of competitors or through internal development of new products/services.Advantages(from Exhibit 9.4)Opportunities to achieve economies of scale and scope.Opportunities to expand pr
14、oduct offerings or expand into new geographical areas.Copyright 1999 by Harcourt Brace&CompanyAll rights reservedIntroduction(cont.)Disadvantages of related diversificationComplexity and difficulty of coordinating different but related businesses.tConglomerate or unrelated diversificationForms pursu
15、e this strategy for several reasons:Continue to grow after a core business has matured or started to decline.To reduce cyclical fluctuations in sales revenues and cash flows.Copyright 1999 by Harcourt Brace&CompanyAll rights reservedIntroduction(cont.)Problems with conglomerate or unrelated diversif
16、ication:Managers often lack expertise or knowledge about their firms businesses.tGlobal diversificationUsually motivated by desire to grow(Boeing,Kelloggs,Caterpillar).Simplest route is exporting.Others include licensing or franchising.Most complex route is to establish wholly-owned subsidiaries.Cop
17、yright 1999 by Harcourt Brace&CompanyAll rights reservedIntroduction(cont.)Challenges in global diversification:Most difficult challenge is to appreciate the unique cultures and customs of foreign markets.Need for products to be adapted to accommodate these markets.Copyright 1999 by Harcourt Brace&C
18、ompanyAll rights reservedAim of Corporate Strategy:SynergytAim of diversification should be to create value or wealth in excess of what firms would enjoy without diversification.tSynergy:the value of the combined firm after acquisition should be greater than the value of the two firms prior to acqui
19、sition.Obtained in three ways:Exploiting economies of scale.Exist when unit costs decline with increases in production.Copyright 1999 by Harcourt Brace&CompanyAll rights reservedAim of Corporate Strategy:Synergy(cont.)(cont.)Exploiting economies of scope.Using the same resource to do different thing
20、s.Efficient allocation of capital.Many assets in acquired firms are undervalued-managers seek to exploit these opportunities and improve their operations and add value to their businesses.Copyright 1999 by Harcourt Brace&CompanyAll rights reservedProblems in Exploring Potential SynergiestPoor unders
21、tanding of how diversification activities will“fit”or be coordinated with existing businesses.tAcquisition process is fraught with risks.Managers might fail to conduct an adequate strategic analysis of acquisition candidate.Will often try to complete the deal too quickly before other potential buyer
22、s begin a bidding war.Managers will often focus on the attractive features of a candidate,while giving less attention to the negative features.Copyright 1999 by Harcourt Brace&CompanyAll rights reservedProblems in Exploring Potential Synergies(cont.)(cont.)Even after making an acquisition,managers m
23、ust still integrate the new business into their companys existing portfolio of businesses.Differences in organizational cultures.Should new business be standalone operation or should it be merged into one of the existing businesses?Copyright 1999 by Harcourt Brace&CompanyAll rights reservedProblems
24、in Exploring Potential Synergies(cont.)(cont.)tProblems associated with internal development of new businesses.Most problems due to considerable time and investment required to launch new business.On average,most new product lines require 10 years before generating positive cash flows and net income
25、.Difficult to assess the risks associated with new investment opportunity.Copyright 1999 by Harcourt Brace&CompanyAll rights reservedDiversification and Performance:The ScoretWhat is relationship between diversification and firm performance?Academics,consultants,and financial community have dim view
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