Strat 390

corporate adv

increase competitive adv of each biz unit

how diversification can create value (3 ways)

portfolio management/resource allocation restructuring synergies

source of value: portfolio management/resource allocation (requires what?)

requires firm to have info advantage over the marekt/outside investors

source of value creation: restructuring (case: bain)

improve individual biz unit performances WITHOUT exploiting linkages between them

e.g. Bain capital bought burlington, improved it through better management- not from bains other holdings

source of value creation: synergies

exploit linkages between biz units, worth more than sum of its parts (e.g. meta shares users, data, engineering infra)

what tests must a corporation meet to create shareholder value? (4 in total, two comp two corp)

competitive strat tests: attractiveness test (is the industry attractive) cost of entry test (future profits > cost of entry)

corporate strat tests: better-off test (parent is better off with the new biz) ownership test (biz units perform better when owned by parent) (do we have to own it, or can we contract)

Amgen: better-off: manufacturing/regulatory skills transfer to new biz attractiveness: high regulatory bar (pestel) industry attractive

better off test: what factors make it better off (2)

economies of scope (lower costs of producing for multiple biz units/products)(Honda uses engine expertise to also make cars and lawn mowers)

revenue/cross selling: increase WTP of customers

2 bad rationales for unrelated diversification

risk reduction (shareholders can just buy index funds to diversify and dilute risk)

attractive industry (firm still needs comp. adv. in that industry)

costs of owning multiple businesses (4)

HQ: C-suite, overhead Cost of Coordination: takes time, effort, expertise Cost of distraction: manager attention is spread, spends resources on doomed ideas Cost of social comparison: employes working on diff functions get treated differently

related diversification

shared resources activate value drivers in acquired business unit/new business. diversification succeeds when EXCESS resources activate value drivers, creating economies of scope, cross selling, and corp. adv

value drivers in related diversification (7 powers)

scale economies, network economies, counter-positioning, switching costs, branding, cornered resource, process power

scale economies

Benefit: Unit costs fall as volume grows, so the leader has lower costs. Barrier: A smaller rival can't match the leader's costs without first getting to the same volume. Trying to grow quickly means spending heavily and taking losses.

network economies

Benefit: The product is worth more to each user as more people use it, so the leader can charge more or keep more customers. Barrier: A newcomer starts with no users, so its product is worth little, and customers don't switch unless others do too.

Counter-positioning

Benefit: A newcomer adopts a superior business model that is better than the incumbent's. Barrier: The incumbent doesn't copy it because doing so would hurt its existing business (cannibalizing sales, or admitting its old model was wrong). Copying looks irrational to the incumbent.

Switching costs

Benefit: The firm can charge more or keep customers without lowering price, because customers have already invested in the product. Barrier: A competitor would need to offer a big enough benefit to cover the customer's cost of switching (retraining, data migration, lost integrations), and that is expensive.

branding

Benefit: Customers will pay a higher price for the same product because they trust the brand and its emotional associations. Barrier: A brand is built over a long time and with consistent effort. A competitor can't copy it quickly, even with the same product.

Cornered Resource

Benefit: The firm has preferential access to a valuable asset, such as a patent, a key talent, or a unique input, that improves cost or product. Barrier: Competitors can't get the asset, or can only get it on worse terms. The resource must be both valuable and truly unavailable to others.

Process Expertise

org activities Benefit: The firm's internal operations are embedded in ways that give lower cost or a better product. Barrier: The process took a long time to develop and is hard to copy, because it's built into the organization and can't just be written down.

resources: 3 types

tangible resources (raw materials, infra)

intangible resources (IP, customer relationships)

organizational capabilities: ability to deploy/coordinate resources to achieve outcomes (e.g. supply chain management, routines)

Resources and capabilities are competitive when VRIO

valurable, rare, inimitable, organizationally relevant

Vertical integration (2 pressures, key question)

2 pressures: formalization, degree of committment

make or buy? make: high, high buy: low, low

efficient market hypothesis

market is more efficient than individual firms bc markets have all the info

factors: info aggregation from many participants efficiency price discovery (quick price adjustments) high powered incentives specialist scale: specialist can serve many customers in market than in-house

coase theorem

challenges efficient market hypothesis

mkt transactions efficient BUT costly to use

decision rule: VI if coordination costs < transaction costs

transaction costs

market cost, cost to negotiate/enforce contract

higher when:

1. asset specificity (value of asset shrinks outside this transaction) (hold-up once specific investment is sunk)
2. need for close coordination in value chain

sources of transaction costs:

Opportunism (asymmetric information): One side knows more and can exploit the other. A supplier might cut quality where you can't see it. Bounded rationality: People can't foresee and write down every possible situation. Uncertainty: The future is unpredictable, so some contingencies can't be covered.

coordination / admin costs

(define, 4 types)

not directly productive but required

1. low powered incentives
2. coordination costs
3. loss of flexibility (VI firms slower to respond to mkt changes/innovation)
4. compounding risk (e.g. delta and oil refinery)

advantages of international expansion (3)

1. access larger markets
2. cheaper inputs (e.g. labor, raw materials)
3. capabiliites (learning from abroad to gain new competencies)

key question of success abroad: can the firm replicate its home advantage?

3 types of home advantage

success @ home rests on resources, customers, supplies, rules --> which might not exist abroad

Country advantage: open to any firm located there (for example, cheap labor or strong universities). It isn't specific to your firm, so it doesn't make you better than a local competitor. Competitive advantage: specific to your business, such as a brand or technology. Corporate advantage: comes from owning multiple businesses (the earlier corporate strategy material).

iability of foreignness:

he extra costs a foreign firm faces versus local firms, such as unfamiliarity with the market, the lack of local relationships, and discrimination or regulation. The same four tests apply (attractiveness, cost of entry, better-off, ownership), just in a foreign setting.

Where to enter: CAGE

Cultural, Administrative, Geographic, Economic CAGE measures the distance between home and host country. Distance matters for two reasons: It can lower industry attractiveness, because a distant market may be less profitable. It can raise the cost of entry, because it takes more investment to adapt and compete.

Cultural distance (CAGE)

most affected: high linguistic/cultural content diff language, religion, etc beyond taste to how people shop, store, and consume. A product may need to change because of habits, like how often people shop for groceries or how much fridge space they have.

Administrative Distance (CAGE)

differences in laws, politics, and institutions (tariffs, regulation, political ties)

Geographic Distance (CAGE)

Geographic: physical distance, time zones, and infrastructure.

Economic Distance (CAGE)

Income per person, resources, and knowledge and skills. A country with much lower income may not afford your product.

NFL case / going global

home advantage doesn't replicate abroad, loses competitive advantage higher cultural distance (less ppl play football)

PESTEL

Political, economic, social, technological, legal different from cage bc it focuses on only one country, while cage compares two

better off test abroad: are we better off having expanded to this country?

is the advantage firm-specific (adv travels with you) or country-specific (comes from your home country)?

use the AAA framework

AAA framework

Each "A" is a different way of responding to differences and similarities between countries. Adaptation, Aggregation, Arbitrage

AAA: Adaptation

Tailor your product or approach to each market. Tradeoff: more revenue (it fits local customers better), but more cost (you give up standardization).

AAA: Aggregation

Exploit similarities Standardize across countries to get economies of scale. Tradeoff: lower cost, but a less tailored fit.

Arbitrage

Exploit lower cost of inputs Locate activities where inputs are cheaper (manufacturing in a low-wage country, for example). Tradeoff: you save on costs, but you have to manage a more spread-out value chain.

AAA: KitKat in Japan

Aggregation: KitKat is one global brand, and it's made in one plant. Standardizing the product and production gets scale economies. Adaptation in marketing and product: Local celebrities in the advertising. The tie to kitto katsu, a phrase meaning "surely win." Japanese students buy KitKats as a good-luck charm before exams, because the name sounds like the phrase. 400+ flavors, far beyond what is sold in other markets.

what tests do Cage and AAA help assess?

attractiveness test, cost of entry test, better-off test

specialization boosts ____, but causes two problems: ____ & ____

Coordination: getting specialized people and units to fit their work together. Cooperation: people's goals don't always align with the firms.

Three jobs of good organizational design

1. influences behaviour (people do what the org wants them to do, goals are aligned)
2. routes information (deicison makers have the info they need)
3. allocate decision rights (decides who has authority)

how to solve the problems created by specialization?

org structure (solves the coordination/cooperation problem)

Types of Org Structure (list from less to more org complexity)

1. Simple
2. Functional
3. Divisional
4. Matrix

Functional Structure

Grouped by activity (e.g. finance, operations) operational excellence, efficiency, cost effectiveness bad: slow innovation, local adaptation

Divisional Structure

grouped by product or geography

good: mkt responsiveness, innovation speed bad: coordination, duplication of functions across divisions

Matrix Structure

Functional + Divisional good: get both econ of scale (from functional) + local responsiveness (divisional) bad: complex, two bosses, high admin cost to pull it off

true / false: org charts show power

false Who actually decides can be different, and decision rights can move without the chart changing. (e.g. Pernod Ricard case, decisions moved to HQ)

McKinsey 7S (name them)

Hard elements (tangible): Strategy, Structure, Systems

Soft elements (culture and people): Skils, Shared Values, Staff, Style

McKinsey 7S- fit

move one S, other 6 must follow fit beats any lever structure follows strategy with a lag

key tradeoffs inside the firm:

centralize v decentralize (org structure)

key tradeoffs globally/across borders:

local responsiveness v global standardization (AAA)

modes of global entry (4 items) (in order of less to more investment & control)

the investment control continuum

1. exporting
2. License/franchise
3. Equity alliance/joint venture
4. Acquisition/greenfield

how to organize for corporate advantage globally (whats the framework, what are the two pressures)

integration responsiveness framework

two pressures: need for cost reduction (standardize and scale), need for local responsiveness

Integration Responsiveness Framework: 4 types

International Multidomestic Global Transnational

Integration Responsiveness Framework: International

Export the home formula, product unchanged. e.g. Rolex

Low need for cost reduction and local responsiveness

Integration Responsiveness Framework: Multidomestic

Autonomous local units, reduced scale

High responsiveness, low cost reduction

e.g. Nestle, Pernod Ricard

Integration Responsiveness Framework: Global

Centralized network, lowest cost

High cost reduction, low local responsiveness

Integration Responsiveness Framework: Transnational

Global matrix, costly to run. e.g. P&G

High cost reduction, high local responsiveness

intregration responsiveness framework: mcdonalds v KFC

mcdonalds owns sites, standardized core menu, local additionals approved by HQ --> global

KFC local decision makers decide menu, marketing --> multidomestic

M&A: who captures the value?

Target value increases Acquirer's value decreases

overall creates value, captured by target

why do acquirer values get reduced in M&A?

Premium: acquirer pays more than the target's market price, so to break even the target must perform better than the market had already priced into its shares - difficult

Faulty assumptions: 3 beliefs that make aquirers overpay

1. Integration is costless
2. Synergies better than they actually are
3. Target will fix weaknesses in the acquirer

Reasons that M&A deals happen: (4 invalid reasons, 1 valid reason)

invalid reasons:

1. to ensure survival (banks)
2. Excess cash, managers want to spend on acq.
3. Agency problems (managers pursue own interests over shareholders) (want the prestige/pay of running a larger company)
4. Managerial hubris (overconfidence that they can manage the target's assets better)

valid reason:

1. potential for above normal profits (create value) --> see determinants of merger success

social proof

do what we think others think is correct when we feel uncertain M&A deals are filled with uncertainty!

Determinants of Merger Success (name all four)

Strategic Vision & Fit Due Diligence Pre-Merger Planning Post-Merger Integration

Determinants of Merger Success: Strategic Vision and Fit

needs 2 things:

1. clear strategic investment thesis
2. synergies

Strategic Vision and Fit: Clear, Strategic Investment Thesis 4 good reasons for a deal (define each)

1. Overcapacity: eliminate overcapacity, consolidate, gain mkt share
2. Geographic Roll Up: buy many small, local units to expand
3. Mkt Extension: Product line or global expansion (Microsoft Activision)
4. M&A as R&D: buy innovation instead of building it

Strategic Vision and Fit: Synergies

Cost Synergies Revenue Synergies Other Subtract Dis-synergies

Cost synergies:

operational savings, financial benefits, economies of scale, and eliminating redundancies (share overhead like IT and HR). These are often realized sooner, because you control them.

Revenue synergies:

cross-selling, new markets, product and technology (create new offerings/improve existing ones) pricing power, and distribution. These depend on customers and competitors, so they're less certain.

Other Synergies

human capital and R&D.

dis-synergies

the negative effects of combining, such as lost customers or key employees leaving, integration costs, conflict from culture clash

Determinants of Merger Success: Due Diligence 3 parts

key question: does the strategic investment thesis hold? check 3 things:

1. stand alone value of target
2. true value of synergies
3. walk away price

walk-away price

max acquirer is willing to pay; should be checked in DD.

walk away price = standalone value + synergies that can be realistically captured

Pfizer-Metsera: bidding war pushed price up, should have set walk-away price!

Determinants of Merger Success: Pre-Merger Planning Decide 3 things:

1. leadership
2. structure
3. timeline

DaimlerChrysler: failed bc unclear leadership

Determinants of Merger Success: Post-Merger Integration

• 2 pressures
• 4 approaches to integration (3 strategic, 1 non strategic)

Pressures:

1. need for autonomy (does the value come from leaving it alone?)
2. need for strategic interdependence (value comes from combining with parent) (low = value is contained in target)

Preservation Symbiosis Absorption Holding (non-strat)

Post-Merger Integration: Absorption

interdependence: low autonomy: high

fully merge target (eventual end for Uber-Cornershop)

Post-Merger Integration: Preservation

interdependence: low autonomy: high

don't change the target, keep it independent (e.g. Disney acq. of Pixar)

Post-Merger Integration: Symbiosis

interdependence: HIgh autonomy: High

gradual integration, learn from EACH OTHER

Post-Merger Integration: Holding

interdependence: Low autonomy: Low

non-strategic reason, basically just a portfolio add.

how does the investment thesis and post-merger integration work together?

thesis drives integration

overcapacity --> absorption geo roll-up or mkt extension --> absorption or symbiosis M&A as R&D --> preservation or symbiosis

The thesis drives the approach: overcapacity

Overcapacity → absorption (fold the target in and cut redundancy)

The thesis drives the approach: Geographic roll-up and market extension

Geo roll-up and market extension → absorption or symbiosis.

The thesis drives the approach: M&A as R&D

M&A as R&D → preservation or symbiosis (you bought the innovation, so don't crush it).

Where is value created in M&A? 4 requirements

Better off test:

1. biz worth more together than independently
2. can't replicate value from portfolio investing

cost of entry test:

3. attention to deal price: total valuation = synergy value+ value of control (value from running the target differently) + standalone value

ownership test:

4. Is the integration consistent with strategy?