Session 4: Diversified Expansion PDF

Session 4: Diversified Expansion Prof. Dr. Artur Baldauf © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 1 Session 4: Diversified Expansion Learning Goals: Understand the meaning of diversification. Clarify the connection between diversification and success. VISION...

Session 4: Diversified Expansion Prof. Dr. Artur Baldauf © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 1 Session 4: Diversified Expansion Learning Goals: Understand the meaning of diversification. Clarify the connection between diversification and success. VISION GOALS STRUCTURE Learn about alternative expansions. © Artur Baldauf l Department of Management l University of Bern SYSTEM PROCESS Corporate Advantage Corporate Strategy 2 Session 4: Contents Introduction Why Do Firms Diversify? Guiding Growth Choice of Businesses Diversification and Firm Performance Practice: Expansion Modes Mergers und Acquisitions Internal Development Alliances © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 3 Introduction Corporate Strategy: Expansion Alternatives Vertical Integration Diversification in related businesses PostDiversification Strategic Alternatives New Acquisitions Single Business Concentration Expansion within the industry: - Increase of outputs - Vertical integration - Geographical expansion © Artur Baldauf l Department of Management l University of Bern Diversification in unrelated businesses Terminate Unprofitable Units Diversification in related & unrelated businesses Set Economic Measures Restructure the Portfolio Closure Corporate Strategy 4 Introduction What Do We Understand by Diversification? A strategic (Corporate Level) decision (present: to create value-generating growth) Markets „A company is diversified when it is in two or more lines of business that operate in diverse market environments“. © Artur Baldauf l Department of Management l University of Bern Existing Penetration Market development Product development Diversification Products Expansion of the corporation activities to new products and/or new markets (Ansoff 1958, 1965) New New Existing Corporate Strategy 5 Introduction Types of Diversification Types of Diversification (Rumelt 1982) related: a corporation opens new business fields that are closely related to the previously business segment (e.g., Apple) unrelated: a corporation opens new business fields that are either very distantly related or not at all to previously business segment (e.g., Mitsubishi) Strategic classification in horizontal, vertical, and lateral diversifications © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 6 Introduction Apple: Related Diversification Apple’s organizational structure is built on a concept of global businesses and is designed to allow Apple to succeed effectively in the ever-changing and challenging worldwide competition. Source URL: https://www.apple.com/store © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 7 Introduction Mitsubishi: Unrelated Diversification Air conditioning systems Car Navigation system Water Pumps Industry-Robots Vacuum Cleaners Motor Generator Display Walls Refrigerators Management Systems for trains Dehumidifiers Mobile mapping system (MMS) Satellite communication Printers Source URL: https://www.mitsubishielectric.com/en/index.html © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 8 Why (How) Do Firms Diversify? Pattern of Diversification: Concentric Circles Core Business Closely Related Businesses Increasingly Unrelated Businesses Source: Collis, Montgomery, Corporate Strategy, 2005, p. 88 © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 9 Why Do Firms Diversify? External Inducements Attractive Opportunities (e.g., technological development) Threats (e.g., downward shift in demand; e.g., Tobacco; Fossil Fuel; …) Internal Inducements Market Power Profit Stability (Portfolio balance: BCG) Reduce Risks Economies of Scope Excess Capacity Some resources grow in value and capacity (e.g. Brand Names) Resource availability only in discrete increments. However not all resources are simultaneously used to their full capacity Creation of new resources (resource immobility, idiosyncratic / embeddedness) © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 10 Why do Firms Diversify? External Inducements Diversification according to perception of more attractive opportunities (and to grow) High 22% Stars 20% Question Marks 18% 16% 14% Circle Size = share of the proceeds (success) that one SBU contributes to the total proceeds 12% 10% Cash Cows 8% 6% Dogs 4% 0.1X 1X 1.5X 0 2X 2% 10X Low High Low Relative Market Share Source: Perspectives, No. 66, “The Product Portfolio.” The Boston Consulting Group, Inc., 1970. © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 11 Why do Firms Diversify? External Inducements Diversification according to perception of more attractive opportunities (and to grow) Example: Migros © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 12 Why do Firms Diversify? Internal Inducements Market Power (change of the competition in relation to the cost structure) Multi-Market-Competition can reduce competition intensity, eases arrangements “collusion” Profit Stability Reduces the risk of insolvency, Reduces management risk and Raises the likelihood that the top manager will stay with the corporation. Diversified corporations can arrange for the “unsure” individuals to have the riskless projects and keep the talented individuals who would not invest in “dull” or “slow growth” businesses. © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 13 Why do Firms Diversify? Internal Inducements Economies of Scope and Synergy C(x+y) < C(x) + C(y); 2 + 2 = 5 Exploitation of core competencies How is “relatedness” defined? Are products or competence/resources the analysis object? How can one measure “relatedness”? SIC codes, patents Potential Agency (Stipulation) Problems Diversified corporations can operate like a labor or capital market if there is market failure or asymmetric information; informed markets exist when external markets are weak. Transaction costs © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 14 Why Do Firms Diversify? The “Value” of Diversification Business X + Business Y + Value Business Z With independence of the businesses: Investor/share holder can buy shares from every corporation Focal Firm Business X Economies of Scope Business Y Value Business Z Combination: Investor/share holder buy shares from ONE corporation © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 15 Choice of Businesses Dynamic Resource Management “Match”: Resources – Businesses Development: Resource Profile Resources Products Markets (Customers, Competitors) Chain – Dynamic Management The Resource-Product Matrix Sequential Entry Exploit and Develop Stepping-Stone Model © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 16 Choice of Businesses Yamaha Corporation Furniture TVs Keyboards Pianos Skis “Home Furnishings” Kitchen Sets VCRs Synthesizers Guitars Tennis Racquets Stereos “Home Entertainment” Chips “Musical Instruments” Drums “Acoustic Instruments” Golf Clubs “Sporting Goods” Hotels “Lifestyle” Golf Carts Golf Resorts © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 17 Choice of Businesses Resources – Strategy – „Match“ Resources Strategies Profitability - Suppliers - Buyers - Substitute products ResourceProduct matrix - Resource-position barrier (self-reproducing) Sequential Entry Attractive resources - Machine capacity, Customer loyalty Exploit & Develop M&A - Trade non-marketable resource - Resource bundle Stepping Stones General effects First-mover advantage Under which situations can firms achieve high returns/profits? © Artur Baldauf l Department of Management l University of Bern How can resources be managed dynamically? Corporate Strategy 18 Choice of Businesses Resource Product Matrix (BIC) Resource Market Disposable pens 1958 Disposable lighters 1973 Disposable razors 1974 Plastic injection molding expertise Mass marketing Brand name        Important: Valuable, rare, unimitable, nonsubstitutable resources are central for expansion  Observe entire resource portfolio  Possibility of resource overuse Pantyhose 1974 © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 19 Choice of Businesses Diversification of BIC BIC “Crystal” BIC “Banana” BIC “Twin” BIC “Butane” © Artur Baldauf l Department of Management l University of Bern BIC Boards BIC “Fannyhose” Corporate Strategy 20 Choice of Businesses Sequential Entry Resource Production skills Market Domestic X International X C D International contacts III IV Domestic contacts X X X X X X Source: Wernerfelt, 1984, p.177 © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 21 Choice of Businesses Exploit and Develop Resource Production skills International contacts III Project management Domestic contacts Market Domestic X International X Turn Key D X X X X X X Source: Wernerfelt, 1984, p. 179 © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 22 Choice of Businesses Stepping Stone Model Planned Development of the Japanese Electronic Industry Resource Mass assembly Market Semi-conductors Use of existing resources (exploitation) Building of new resources (exploration/development) Consumer electronics Consumer marketing X X Electronics technology X X X Computers Source (adapted): Wernerfelt, 1984, p. 179 © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 23 Diversification and Firm Performance The success of a diversification depends on whether or not a firm has specialized resources Diversification in related businesses (related products, related markets) leads to a higher success than in unrelated diversification An adequate multi-divisional structure is essential for the acquisition of critical resources Corporations that have invested in narrow markets were more successful than those that invested in broad markets (learning better from demand) © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 24 Choice of Businesses Diversification Distance and Marginal Rents Marginal rents More specific factors (e.g., skills in biotech) Less specific factors (e.g., general management skills) Source: Montgomery, Wernerfelt, 1988 © Artur Baldauf l Department of Management l University of Bern Diversification distance Corporate Strategy 25 Mergers & Acquisitions Source: imaa-institute.org © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 26 Diversification and Firm Performance Diversification and Tobin’s q Diversification and Tobin‘s q: Tobin’s q: the ratio of market value of a firm to the replacement costs of (tangible) assets Specialized firms have a higher Tobin‘s q than diversified firms; i.e.: diversified firms have inefficient assets Diversification and Shareholder Value (Porter Tests) Attractiveness Test: Diversification must be undertaken in actual and potential attractive industries. Cost of Entry Test: the entry costs should not consume all future gains (ex. UMTS). Better-Off Test: the new entity must contribute to a competitive advantage to the existing firms or viceversa (i.e. synergies must exist) © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 27 Mode of Expansions Mergers and Acquisitions Benefits Drawbacks Market power Cost of acquisition Entry barriers Integration problems Lower costs Essential commitments must be accepted Speed “Overleveraged” Lower risks Synergy has the potential to be overrated: Acquire management expertise Acquire complementary resources Over-diversification Removal of potential competitor Innovations can be „cannibalized“ Decrease dependency Managerial Focus … … © Artur Baldauf l Department of Management l University of Bern synergy will not be achieved Corporate Strategy 28 Mode of Expansions Forms of Mergers Horizontal: same businesses/same industry ex.: Daimler Benz acquired Chrysler Vertical: in related industry vertical forward integration: acquisition of customers ex.: automobile corporations buy car dealers vertical backward integration: acquisition of suppliers ex.: automobile corporations buy headlight producers Concentric: firms with similar production or sales processes ex.: soft drink producers buy a fast-food restaurant chain Conglomerate: different businesses without any connection to each other ex.: automobile producers buy a football club (Magna) © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 29 Mode of Expansions Characteristics of Successful Acquisitions Target firm has complementary resources “Friendly” acquisition Careful choice and negotiation Financial slack Experience in change management flexible and adaptive © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 30 Mode of Expansions Internal Development Benefits Incremental “commitment” Compatible with culture Encourages Intrapreneurship Internalizes learning … © Artur Baldauf l Department of Management l University of Bern Drawbacks Process is slow Need to build new resources Industry capacity increases (capacity utilization – overcapacity) Unsuccessful efforts are difficult to recoup … Corporate Strategy 31 Mode of Expansions Strategic Alliances Strategic Alliance – an agreement where two or more businesses contribute their resources outside of their respective markets in order to manage certain tasks or activities. Characteristics Predetermined time horizon Well defined tasks “Neither market nor hierarchy“ Includes also: joint ventures, franchises, equity participation and long-term contractual agreements Uses of Alliances Fast and flexible Easier to start and/or determine (ex. Qualiflyer Austrian Airlines) © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 32 Mode of Expansions Strategic Alliances Benefits Access to complementary assets Speed © Artur Baldauf l Department of Management l University of Bern Drawbacks Lack of control Assisting potential competitor “Durability” Difficult to integrate learning Who leads alliance resp. determines strategy? Corporate Strategy 33 SUMMING UP Diversification is a viable growth decision There are different diversification types (related – unrelated) Different choices of business need to be made The relationship between diversification and performance is ambiguous © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 34 Excurse © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 35 Excurse: How Firms Achieve Growth Build-Borrow-Buy Framework (Capron, Mitchell 2012) Provides guidances in determining whether firms should pursue: Internal development (build) Enter a contract / strategic alliance (borrow) Acquire new resources, capabilities, and competencies (buy) © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 36 Guiding Corporate Strategy: The Build-Borrow-or-Buy Framework © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 37 Build-Borrow-or-Buy Framework Relevancy: How relevant are existing internal resources to solving the resource gap? Are the firm’s internal resources high or low in relevance? In relation to solving the resource gap If high, the firm should develop internally. Internal resources are relevant if: They are similar to those the firm needs to develop. They are superior to those of competitors in the targeted area. Resources are relevant if they pass the VRIO Framework. Tradability: How tradable are the targeted resources that may be available externally? The firm creates a contract. Allows for the transfer of ownership Allows for use of the resource Short-term and long-term contracts are a way to borrow resources from another company. Ex. Licensing and franchising Example: biotech-pharma industry: Producers use licensing agreements to transfer knowledge and technology. © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 38 Build-Borrow-or-Buy Framework Closeness How close do you need to be to your external resource partner? Can be achieved through integrated alliances Equity alliances Joint ventures Also enables the borrowing of resources Integration How well can you integrate the targeted firm should you determine you need to acquire the resource partner? Mergers and acquisitions are:... most costly... most complex... most difficult to reverse strategic option Examples of post-integration failure: Daimler-Chrysler AOL and Time Warner HP and Autonomy Bank of America and Merrill Lynch © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 39 Excurse: Identifying the potential for cross-business value chain activities Opportunity to combine purchasing activities and gain more leverage with suppliers and realize supply chain economics. Opportunity to share technology, transfer technical skills or combine R&D. © Artur Baldauf l Department of Management l University of Bern Collaboration to create new competitive advantage. Opportunity to combine sales & marketing activities, use common distribution channels, leverage use of brand name. No strategic-fit opportunities. Corporate Strategy 40 Example: Volkswagen (VW) Group Background Information Founded in 1937 Consists of two divisions Automotive: Passenger Cars, Commercial Vehicles, Power Engineering Financial Services Organizational Structure Geographic scope Worldwide, in 117 countries Headquarter in Wolfsburg, Germany Key Figures (2021) Annual Revenue: 296 billion EUR Annua Profit: 19’275 billion EUR # of Employees: 662’575 Source: Volkswagen Group Annual Report 2021 © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 41 VW Group: Operationalization of cross-business value chain-activities through its product architecture Platform Strategy Module Strategy Modular Production Strategy Phase development of product architectures in the automotive industry from the module strategy to modular strategy. © Artur Baldauf l Department of Management l University of Bern Corporate Strategy 42