Corporate Strategy PDF

Corporate Strategy SDA Bocconi Asia Center  COURSE TOPICS 1. Corporate advantage 2. Mergers and Acquisitions 3. Vertical Integration 4. International Strategy SDA Bocc...

Corporate Strategy SDA Bocconi Asia Center  COURSE TOPICS 1. Corporate advantage 2. Mergers and Acquisitions 3. Vertical Integration 4. International Strategy SDA Bocconi Asia Center 2  Where to play? How to compete? SDA Bocconi Asia Center 3  Where to play? Corporate strategy = Corporate Advantage How to compete? Business strategy = Competitive Advantage SDA Bocconi Asia Center 4  The impact of Where to Play decisions SDA Bocconi Asia Center 5  THE ELEMENTS OF FIRM GROWTH TOTAL ? + ? + ? = GROWTH SDA Bocconi Asia Center 6  THE ELEMENTS OF FIRM GROWTH MARKET MARKET MERGERS & TOTAL AVERAGE + ACQUISITIONS + SHARE = GROWTH GROWTH GAINS SDA Bocconi Asia Center 7  HOW DO LARGE FIRMS GROW? Total Company growth “MARKET SHARE GAINS”: The growth due to relative changes in market share 21% “MERGERS & ACQUISITIONS”: The growth due to M&A activity 33% “MARKET MOMENTUM”: The average “industry” growth of the company segments 46% Source: Viguerie, Smith & Baghai (2009) SDA Bocconi Asia Center 8  GROWTH SOURCES BY INDUSTRY MARKET SHARE GAINS M&A MKT AVERAGE GROWTH High-tech Consumer goods Financial Telecom Retail Entertainment Source: Viguerie, Smith & Baghai (2009) SDA Bocconi Asia Center 9  PERFORMANCE DRIVERS From “Strategy beyond the hockey stick” ENDOWMENT MOVES Size in revenues M&As and divestments Debt capacity Resource re-allocation Past R&D investment Capital expenditure Productivity improvement TRENDS Differentiation improvement Industry trend Geographic trend Source: Bradley, Hirt & Smit (2018) SDA Bocconi Asia Center 10  A TALE OF TWO FIRMS In 1999-2000 both Procter & Gamble and Unilever announced very ambitious 5-year growth plans… SDA Bocconi Asia Center 11  P&G AND UNILEVER Revenue growth between 1999 and 2005 +$18.6b +$0.2b SDA Bocconi Asia Center 12  INVESTING IN GROWTH P&G assessed the growth potential in each segment U.S. EUROPE ASIA TOTAL Fabric and home care Baby and family care Beauty care Healthcare Snacks and beverages Total Great Good Poor SDA Bocconi Asia Center 13  CHANGING THE “WHERE TO PLAY” % of total revenues TOTAL 1999 2005 Fabric and home care 32 28 Sold Milton infant hygiene Baby and family care 30 18 Beauty care 19 34 Bought Gillette, Wella and Clairol Healthcare 7 14 Snacks and beverages 12 6 Sold Crisco and JIF butter 100 100 SDA Bocconi Asia Center 14  Larsen&Toubro‘s acquisition of Mindtree SDA Bocconi Asia Center 15  Larsen&Toubro ‘s acquisition of Mindtree SDA Bocconi Asia Center 16  LARSEN & TOUBRO ROCE TARGET 18% 17% 16% 15% 15% Larsen & Toubro has 14% 14% 14% 13% 12% 13% 13% an ambitious goal of 12% 11% 11% 11% 10% bringing ROCE above ROCE 8% 20% like in the old 6% 4% times. 2% What can they do? 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Year SDA Bocconi Asia Center 17  Suppose your company announces a big growth goal and now you look at the company’s business portfolio (a.k.a, “where the company is playing”) SDA Bocconi Asia Center 18  INVESTING IN GROWTH P&G assessed the growth potential in each segment SOURCE: Baghai, Smit & Viguerie, 2007 SDA Bocconi Asia Center 19  Corporate strategy = Corporate Advantage >50% of firm performance? Business strategy = Competitive Advantage V(B1)+V(B2) 1. First, V(B1B2) depends on how high V(B1) and V(B2) are… so portfolio selection is one of the keys SDA Bocconi Asia Center 47  CORPORATE ADVANTAGE’S “FORMULA” V(B1B2) > V(B1)+V(B2) 1. First, V(B1B2) depends on how high V(B1) and V(B2) are… so portfolio selection is one of the keys 2. Then, V(B1B2) bigger than the sum depends on: SDA Bocconi Asia Center 48  CORPORATE ADVANTAGE’S “FORMULA” V(B1B2) > V(B1)+V(B2) 1. First, V(B1B2) depends on how high V(B1) and V(B2) are… so portfolio selection is one of the keys 2. Then, V(B1B2) bigger than the sum depends on: Advantage from joint ownership of B1 and B2? Advantage from joint operations between B1 and B2? SDA Bocconi Asia Center 49  SO CORPORATE STRATEGY KEY TASKS ARE… 1. Select the corporate portfolio 2. Identify and build corporate advantages & synergies across the portfolio: From joint ownership? From joint operations? 3. Organize and manage the company to achieve 1 and 2. SDA Bocconi Asia Center 50  CORPORATE ADVANTAGE: V(B1B2) > V(B1)+V(B2)? (Puranam & Vanneste) YES B1 B2 B1 B2 Jointly Owned Businesses NO B1 B2 B1 B2 NO YES Jointly Operated Businesses SDA Bocconi Asia Center 51  CORPORATE STRATEGY MODELS CONGLOMERATE MULTI-DIVISIONAL YES B1 B2 B1 B2 Jointly Owned Businesses PURE PLAY PARTNERSHIP NO B1 B2 B1 B2 NO YES Jointly Operated Businesses SDA Bocconi Asia Center 52  CONGLOMERATE MODEL Berkshire Hathaway Virgin Group Danaher General Electric Moet Hennessy Louis Vuitton (LVMH) Reliance Industries Tata Group … SDA Bocconi Asia Center 53  Do conglomerates add value? SDA Bocconi Asia Center 54  «Owning a group of good businesses is not a terrible business plan» Warren Buffett SDA Bocconi Asia Center 55 SDA Bocconi Asia Center  WHY THESE DIFFERENCES? SDA Bocconi Asia Center  WHY THESE DIFFERENCES? SDA Bocconi Asia Center  Tata Group through time SDA Bocconi Asia Center  What is the corporate strategy of Indian conglomerates/groups? SDA Bocconi Asia Center SDA Bocconi Asia Center  When do conglomerates add value? SDA Bocconi Asia Center  CONGLOMERATES ADD VALUE WHEN… 1. … the common ownership is a “substitute” for less efficient external resource markets (capital, labor, regulatory lobbying, etc.) 2. … they operate as above-average “stock-pickers” and are designed to avoid the inefficiencies of internal capital markets SDA Bocconi Asia Center  CONGLOMERATE INEFFICIENCIES 1. Cross-subsidization 2. Cognitive (1/n!) and emotional biases 3. Managers’ lack of “skin in the game” 4. Governance failures SDA Bocconi Asia Center  How does the private equity model create value? SDA Bocconi Asia Center  CONGLOMERATES PRIVATE EQUITY Managerial Incentives Stock options Medium High Required co-investment Low High Governance Board of Directors One for the group One per company Business performance measures Low High Capital allocation Divestitures Low High Cross-subsidization Yes No Debt Low High SDA Bocconi Asia Center  “WHERE TO PLAY” TASKS 1. Select the corporate business portfolio 2. Build synergies across the portfolio (if possible) 3. Organize the company to achieve 1 and 2. SDA Bocconi Asia Center 67