Corporate Strategies Quiz

Firm Selection for Team Project

• Choose a firm. No duplicates allowed.
• Go to the website: https://go.uvt.nl/escp2025
• Check course syllabus for guidelines.
• Deadline for firm selection is Saturday, January 18th, noon.
• Select a diversified firm.
• Do not choose a firm studied in the course: Ahold, Apple, Danone, Heineken, Honda, LuxotticaEssilor, Microsoft, Newell Rubbermaid, Nestle, PepsiCo, Safran, Stellantis (incl. PSA & Fiat).

Corporate Strategy

• Corporate strategy is about creating added value across different businesses (products and markets).
• It involves deciding how to maximize the value creation within a company.
• There is a question about the potential limit to value creation.

What is Corporate Strategy About?

• It focuses on creating added value across various businesses.
• How to best develop and organize businesses to maximize value creation.
• Is there a limit to achievable value creation?

Sources of Profitability

• Corporate level: 20%
• Business level: 40%
• Industry: 10%
• Other: 27% (Source: Vanneste 2017) (Study of 16 studies, 225,183 business observations, 1974-2013)

Corporate Strategy Questions

• Which expansion moves? (Where?)
• Which activities or assets?
• How to get those corporate benefits?
• Why? (reasons behind choosing expansion)

Expansion Matrix

• Business Development (BD): More of existing activities (e.g., VW: Audi, Skoda, Seat, Porsche)
• Horizontal Expansion (HE): Combining existing and new activities; varying levels of relatedness (e.g., Mercedes: cars to trucks & buses)
• Vertical Expansion (VE): Internal production of activities previously outsourced (e.g., Zara: raw materials to stores; Total: oil distribution to oil exploration).

ABC Types of Synergies

• A: Luxottica (Italy) and Essilor (France) agreed to create a world eyewear powerhouse. €46bn deal. Leading manufacturer of ophthalmic lenses.
• B: British American Tobacco and Reynolds American agreed on a $50bn deal to create the world's largest listed tobacco company.
• C: Safran (France) launched a €10bn bid for Zodiac Aerospace to create the world's third-largest aerospace supplier.

Expansion Methods

• Build: Greenfields, corporate venturing, internal development, internal growth, organic growth.
• Blend: Alliances and JV's, equity sharing, technology partnerships.
• Buy: Mergers, acquisitions, takeovers.

Synergies (Why?)

• Cost Synergies: Costs (A+B) are less than Costs(A) + Costs (B).
• Lower input (supply) costs
• Lower production (operational) costs
• Revenue Synergies: Revenue(A+B) > Revenues (A) + Revenues(B).
• Price Premium
• Sales Premium

The "Corporate Expansion Matrix"

• A table showing various expansion modes, relating same business or different businesses to upstream/downstream activity.

Firm Examples in Expansion Matrix

• Build: Toyota: Lexus
• Blend: Toyota Aygo → Toys 'R Us + Amazon; Peugeot 107 → Citroen C1
• Buy: Daihatsu by Toyota → Pixar by Disney; Gillette by P&G

Market Failures (Why M&As Fail)

• Monopolistic Risk: The market counterpart possesses excessive market power.
• Market Risk: The market cannot effectively monitor the quality/quantity of the assets exchanged.
• Renegotiation Risk: The market contract is susceptible to costly renegotiation.

Potential M&A Pitfalls

• Process Structure
• Wrong Candidate
• Overpaid
• Integration
• Market Timing
• Cultural fit
• Low Syneergies
• Complexity
• Unclear strategic fit

M&A Timeline

• Pre-acquisition negotiation (4-6 months)
• Find a specific acquirer/target
• Sign confidentiality agreements
• Sign acquisition agreements
• Due diligence (Private information)
• Complete a deal (~2 months)

Reasons for M&A Failure

• Poor Strategy (pre-closing): Bad strategy & management fads, financial pressures, managerial hubris.
• Poor Execution: Overestimation of synergies, poor due diligence, excessive premium payments, valuation issues, winner's curse, emotion & ego.
• Poor Implementation (post-closing): Chaotic post-merger integration, focusing on wedding not marriage, cultural clashes, conflicts with customers and suppliers, cultural misfit.

Types of Divestitures

• Horizontal Divestitures: Refocusing strategy; Eliminating activities with few synergies. Examples: Mondelez, sweets, chocolate and snacks by Kraft (cheese and meat); Ferrari by Fiat.
• Vertical Divestitures:
  • Backward: When acquiring inputs is less costly than producing them internally. Example: Sony, Toshiba, Hitachi combine LCD panel ops into Japan Display, Inc.
  • Forward: When internal distribution limits sales. Example: PepsiCo divestiture of its fast food chains; Michelin divesting of Citroen.

Nestle Corporate Strategy

• Nestle sold its US ice cream business to Froneri (2nd largest ice cream firm).
• Nestle sold a majority stake in its meat division Herta to a Spanish company (Casa Tarradellas).

Nestlé Divestitures Examples

• Divested US water business (February 17, 2021) to One Rock Capital Partners for $4.3B.

M&A Implementation (Post Merger Integration)

• Operational Interdependence: Potential for synergies, resource sharing, capabilities transfer.
• Decision-Making Autonomy: Protect boundaries, maintain target's capabilities, critical when firm culture has value-creating capabilities.

Post-Merger Integration (PMI)

• Preservation: Maintaining target's identity with low operational interdependence.
• Symbiosis: High operational interdependence with maintained target identity.
• Holding: Low operational interdependence; low decision-making autonomy.
• Absorption: High operational interdependence; low decision-making autonomy.

Expansion Trajectories

• Experiential Learning (Learning by Doing):
• Causal Ambiguity: Difficulty in establishing clear cause-effect linkages in actions. This can harm future performance.
• Clarity of cause-effect linkages: Crucial for effective improvement.
• The Experiential Learning Matrix: Demonstrates how experience can be positive, neutral, or negative, depending on the clarity of cause-effect linkages and activities' similarities.

Impact of Experience in M&As

• M&As involve high levels of causal ambiguity (CA) due to high complexity, interdependence, short/long term outcomes.
• M&As involve high levels of dissimilarities (differences in countries, products, etc.).

Philip Morris Expansion Steps

• Step 1 (1960s): Heavily invested in Marlboro; aggressive marketing; scale increase.
• Step 2 (1969): Expanded into beer market (Miller); advanced marketing and scale increase.
• Step 3 (1978): Entered soft drinks (7-Up); high marketing and scale increase; market stagnated.

Philip Morris: What Happened?

• Tobacco/Beer: Success was not well understood, thus causal ambiguity; overestimated marketing's importance.
• Soft Drinks: Market was different (complexity); misleading experience, overestimate of replication.

What Does PM Case Tell Us?

• Precisely assess potential synergies.
• Avoid overemphasizing surface similarities.
• Recognize that different experiences may lead to different results.

Divestitures

• Divestitures are the opposite of acquisition.

Divesture Types

• Horizontal: Refocusing, eliminating activities with few synergies.
• Vertical: Removing parts of the value chain.

Combining Corporate Development Activities

• Internal Growth
• External Growth (Acquisitions & Alliances)
• Divestitures

"The Transformation Path"

• Doing better things: acquiring novel competencies.
• Internal Redeployment: Using acquired capabilities.

Optimal Growth Trajectory

• Focusing on both internal growth and external expansion via acquisitions along with divestitures.