Chapter 10:
Building and Restructuring the Corporation
Overview of Chapter 10:
1. WHEN
do we choose among ?:
Acquisitions,
Internal New
Ventures,
Joint
Ventures
2. How
do we restructure the organization?
e.g., when
over-diversified
3. How
valuable are portfolio planning techniques?
How do you
build up the organization?
How do you
break down the organization?
How do you
EXIT from industries?
How do you implement diversification and/or vertical
integration?
That is, how
do you take planning from LAST CHAPTER, and begin to IMPLEMENT?
Acquisitions
New Ventures
Joint Ventures
Entering NEW businesses:
Internal Venturing versus Acquisitions
(5) influences:
Barriers to
entry
Relatedness
of new business to existing operations
Speed and
development costs of these entry modes
Risks of
these (2) different entry modes
Industry
life-cycle factors
Barriers to entry:
Difficult to
enter industry through internal venturing when costs of entry
are high.
Buying
already established enterprise can circumvent most entry barriers.
Relatedness of business:
More related
a business to existing operations, more likely it is that the company will
already have know-how to compete in business.
Favors internal
ventures.
Speed and development costs:
Internal
venturing can
take 8 to 12 years before presence established and profits generated.
If speed is
of the essence, acquisitions may represent a sounder option than
internal venturing,
i.e.,
engaging in "greenfield projects".
Risks of entry:
New venturing
tends
to be very uncertain, with low probability of success.
80
to 88 percent of new ventures fail.
Acquisitions
are a more certain process, tend to be favored when decision makers are
unwilling to bear high risks.
Industry life cycle factors:
Barriers to
entry in embryonic, growth industries lower than in mature industries.
still
going through a learning process
do
not have the same experience curve advantages as established companies.
Early in life
cycle Internal venturing carries:
lower
risks,
lower
development costs,
few
penalties
Bottom line:
Internal
venturing makes more sense when company needs more question
marks, or when it sees strong possibility of establishing emerging winner in
an embryonic or growth industry.
Acquisitions
make more sense when company needs to add established
winners or profit producers to its portfolio.
Pitfalls of acquisitions:
Why do >
1/2 of acquisitions fail?
1. Unanticipated
problems
Attempt
to integrate two divergent corporate cultures.
Leads
to management turnover, drives profits
2. Overestimate synergies between businesses.
Why do more than 1/2 of acquisitions fail?
3. Acquisitions
are expensive...
stock
price of target company is bid up by speculators; drives purchase price up.
4. Companies
make acquisition decisions on basis of little or no detailed analysis of
benefits and costs involved.
Example:
Phillip Morris' purchase of Miller Brewing Company, Seven-Up.
Why did the
Miller acquisition work?
Phillip
Morris could apply its marketing competencies to Miller
Brewing
Industry was described as "sleepy", with no strong marketing
companies
Brewing
industry was a "push over"
Why did the
Seven-Up acquisition NOT work?
-
The
company did not understand the industry that it had entered at all.
-
The
degree of rivalry was very high in the soft drink industry.
-
The
soft drink industry was NOT a pushover.
Guidelines for acquisition success:
a.
Good screening.
b.
Good bidding strategies.
Look
for sound businesses that are undervalued because of short-term problems.
c.
Take positive steps to
integrate acquired business
into company's organizational structure.
Integrate around source of
benefits
Eliminate duplication of assets
or functions.
Pitfalls of internal venturing:
a.
Entry on too small
a scale.
b.
Poor
commercialization -- companies blinded by technological possibilities ignore
market needs.
c.
Poor
implementation,
e.g.
failing to anticipate time, costs involved, killing it too early.
Guidelines for internal venturing:
a.
Support only ventures that demonstrate greatest probability of
commercial success.
b.
Take steps to commercialize new venture by integrating R&D
and marketing functions.
c.
Monitor success of new venture closely, focusing on
market share, rather than on profit goals for first few years.
Joint Ventures:
Joint venture
can springboard company into a new business area.
Enables
company to share risks and costs involved in new venture project.
Make sense
when company has some, not all, of skills and assets necessary to establish
successful new venture.
(3) drawbacks of Joint Ventures:
1.
Must share profits if venture is successful.
2.
Giving critical know-how away to partner.
3.
Sharing control with venture partner.
If
two companies have different philosophies, time horizons, or investment
preferences, can lead to serious conflicts that tear business apart.
Exit strategies:
Three
choices: Divest, harvest,
liquidate
1.
Divest
Involves
selling unwanted business to another company.
Can be difficult if business prospects are poor (e.g. with a
"dog").
2.
Harvest
Controlled
disinvestment in a business unit to optimize
cash flow.
To
increase flow, management:
Eliminates
or severely curtails new investment,
Cuts
maintenance of facilities,
Reduces
advertising and research,
While...
Reaping
benefits of past good will.
When
discovered, motivational problems
Why is Divestment preferred over harvest or liquidation?
Company can
best recoup investment in a business by divestment.
Harvest
involves HALTING investment in a unit to maximize SHORT to MEDIUM term cash
flow.
PRIOR
to liquidation
Liquidation:
Involves
closing an operation down.
Normally
last-resort option that is preferred only when neither divestment nor harvest
is possible.
Company takes
write-offs, must bear costs of exit.
Why is “exiting”/ restructuring an option that is
often taken today?
In 1970's,
1980's companies overdiversified
Caused
lowering of profits.
Many
companies found core business areas under attack from new competition.
In order to
"mind the farm" -- their core technologies -- they divested non-core
businesses.
Due to
innovations in management processes and strategy (e.g. long-term contracting,
other long term arrangements), advantages of vertical integration have
diminished.
Why did the
Sears/ Dean Witter Reynolds acquisition arrangement fail?
Diversification
diverted management from task of improving Sear's core merchandising business,
which was under attack from discounters and niche stores.
Sears
announced it would sell Dean Witter and Coldwell Banker in 1992, and would
spin off 20% of Allstate to independent investors.
Causes of decline:
Poor
management
Overexpansion
Inadequate
financial controls
High costs
New
competition
Unforseen
demand shifts
Turnaround steps:
Change
leadership
Redefine
strategic focus:
For
multibusiness company this means examining which businesses in portfolio have
best long-term profit and growth prospects.
Sell assets
Improve
profitability (quality, innovation, customer responsiveness).
Acquire firms
that strengthen position.
Portfolio analysis:
Process of
assessing if existing mixture of businesses has "imbalances".
"Scale
tipping"
Presence
of business that are all in the same stage of industry evolution
Looks for new
businesses that may serve to "even out" imbalance, bring more
opportunity for the creation of emerging businesses.
Balanced
portfolio
represents a strategic strength, an unbalanced one
a weakness.
Benefits of
portfolio analysis:
Enables
managers to analyze diverse activities of multibusiness company in a
systematic way,
Highlights
cash-flow implications and requirement of different business activities,
Prods
managers to make adjustments in composition of the company's portfolio for
long-term health of company.
BCG Matrix based on 2 dimensions :
1. Relative
Market share
(Firm’s
SBU share/share of biggest rival)
2. Industry
growth rate.
Main idea of BCG model:
Follow
directions on next page... and,
If no stars,
cash cows or question marks, should buy more companies, start more new
ventures.
Portfolio planning problems:
Models are
simplistic.
Connection
between relative market share and cost savings is not straight forward.
Low
market share companies using low share technologies can have lower production
costs than high market share companies. (Mini
mills)
High
market share in low growth industry doesn't necessarily result in large
positive cash flow, e.g. in cash cows.