Corporate and International Strategies: Diversification and Integration

1. Global Strategy Day 4Corporate and International StrategiesDecember 12th, 2014

2. Corporate Strategies • Vertical Integration • Diversification • Strategic Alliances and M&As • International Strategies

3. Diversification and Integration vertical Southern AirCargo Quick Tasty Catering Aero Business Comfort Sunny Holidays Air Snow Mountains Airways National State Air horizontal Sun & Fun Travel Agencies Coast Hotel Mgmt Explotaition

4. Diversification Directions Countries, refions Products, industries

5. Diversification • Rationale: Economies of Scope • EoS on activities in value chain • Cross fertilization of knowledgeexploiting core competences • Boundaryless Selling • Sharing of risksbecome too big to fail

6. Diversification and Portfolio Thinking • Which SBU should be started, kept, developed and abandoned?

7. BCG Matrix Market share Market growth

8. Strategische opties Market Share Market growth

9. Business X Business X Business Y Business Y Business Z Business Z Value of Diversification Value + + Independent: equity holder could buy shares of each firm Focal Firm Value Economies Of Scope Combined: equity holder buys shares in one firm

10. Economies Of Scope

11. Equity Holders and Economies of Scope Most economies of scope cannot be captured by equity holders • risk reduction can be captured by equity holders Managers should consider whether corporate diversification will generate economies of scope that equity holders can capture • if a corporate diversification move is unlikely to generate valuable economies of scope, managers should avoid it

12. Imitability of Diversification Duplication of Economies of Scope Less Costly-to-Duplicate Costly-to-Duplicate Core Competencies Employee Compensation Tax Advantages Internal Capital Allocation Multipoint Competition Risk Reduction Shared Activities* Exploiting Market Power (tacit/intangible) (codified/tangible) *may be costly depending on relationships

13. Summary Corporate Strategy: In what businesses should the firm operate? • an understanding of diversification helps managers answer that question Two Criteria: 1) economies of scope must exist 2) must create value that outside equity holders cannot create on their own

14. Strategic AlliancesBetween markets and hierarchy

15. Motives for alliances • Exploiting EoS • Learning from competitors and others • Managing Risks • Facilitating Tacit Collusion • Market Entry • Exit and Industry Consolidation

16. Improve Current Operations Value Creation Shaping the Competitive Environment Facilitating Entry and Exit How Strategic Alliances Create Value Economies of Scale, Learning, Risk Sharing Tacit Collusion, Standard Setting Low Cost Entry, Options

17. Remedies to Co-operation?

18. Once again opportunism

19. Opportunism Mitigation

20. Acquisitions Mergers Mergers & Acquisitions Defined • one firm buys another firm • two firms are combined on a relatively co-equal basis • the words are often used interchangeably even though they mean something very different • merger sounds more amicable, less threatening

21. Mergers motives • Cost reduction • Lower capital costs • Risk spreading and reduction • EPS growth • Synergies in resources and capabilities

22. Acquiring firm’s prices Overall market line 36 48 -24 -12 12 50 24 Time of merger announcement Acquired firm’s prices

23. Populair Theories

24. Search for Rare Economies Limit Information to Other Bidders Seek Thinly Traded Markets Bidding Firm’s Perspective Close the Deal Quickly Limit Information to the Target Avoid Bidding Wars Competitive Advantage Doing the Deal

25. Seek Information from Bidders Target Firm’s Perspective Invite Other Bidders to Join in Bidding Contest Delay, But Do Not Stop the Acquisition Competitive Advantage Doing the Deal

26. Conclusion • Mergers are not an individual choice but a collective phenomenon • Larger mergers do not create economic value but profits from a monopoly position • We do it because others do it • Mergers occur within a strategic positioning game between independent companies • Strategic games ionclude the risk that one looses independence and becomes the rabbit on the stock exchange

27. Levels of Internationalization

28. Potential Sources of Economies of Scope in International Markets • To gain access to new customers for current products or services • To gain access to low-cost factors of production • To develop new core competencies • To leverage current core competencies in new ways • To manage corporate risk

29. Determinants of the Ability to Learn in International Markets • The intent to learn • The transparency of business partners • Receptivity to learning

30. Managing Political Risks • Find a local partner • Political neutrality • Negotiation with governments • Foreign governments often have an interest in direct investment Example: Case International in Brazil

31. Business Models everything together

32. Customer • Massa vs. Niche • Segmentation • DiversificationAmazon offers Cloudservice • Multi-sided platform (netwerk effecten)wiixbox, credit card companies

33. Value propositon • Satisfying new need • Better performance • Customization • Doingit well • Design • Brand and Status • Price • Cost savings • Risc Reduction • Access • Convenience

34. Channels

35. Customer Relations

36. Earnings

37. Price mechanism differentation

38. Keys Activities Resources Partner Motives

39. Cost structure • Cost driven (cost reduction) • Value driven • % fixed costs • variable costc • Economies of scale • Economies of Scope