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Corporate-Level Strategy

Chapter 8. Corporate-Level Strategy. Robert E. Hoskisson Michael A. Hitt R. Duane Ireland. Diversification and Corporate Performance: A Disappointing History.

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Corporate-Level Strategy

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  1. Chapter 8 Corporate-Level Strategy Robert E. Hoskisson Michael A. Hitt R. Duane Ireland

  2. Diversification and Corporate Performance: A Disappointing History • A study conducted by Business Week and Mercer Management Consulting, Inc., analyzed 150 acquisitions that took place between July 2000 and July 2005. Based on total stock returns from three months before, and up to three years after, the announcement: • 30 percent substantially eroded shareholder returns. • 20 percent eroded some returns. • 33 percent created only marginal returns. • 17 percent created substantial returns. • A study by Salomon Smith Barney of U.S. companies acquired since 2005 in deals for $15 billion or more, the stocks of the acquiring firms have, on average, under-performed the S&P stock index by 14 percentage points and under-performed their peer group by four percentage points after the deals were announced. Sources: Lipin, S. & Deogun, N. 2000. Big merges of the 90’s prove disappointing to shareholders. Wall Street Journal, October 30: C1; A study by Dr. G. William Schwert, University of Rochester, cited in Pare, T. P. 1994. The new merger boom. Fortune, November 28:96; and Porter, M.E. 1987. From competitive advantage to corporate strategy. Harvard Business Review, 65(3):43.

  3. Reviewing the Corporate Portfolio • Portfolio Planning under the Boston Consulting Group (BCG) matrix: • Identifying the Strategic Business Units (SBUs) by business area or product market • Assessing each SBU’s prospects (using relative market share and industry growth rate) relative to other SBUs in the portfolio. • Developing strategic objectives for each SBU.

  4. The BCG Matrix Source: Perspectives, No. 66, “The Product Portfolio.” Adapted by permission from The Boston Consulting Group, Inc., 1970.

  5. The BCG Matrix • Stars • High relative market shares in fast growing industries. • Question marks • Low relative market shares in fast growing industries. • Cash cows • High relative market shares in low-growth industries. • Dogs • Low relative market shares in low-growth industries.

  6. The Strategic Implications of the BCG Matrix • Stars • Aggressive investments to support continued growth and consolidate competitive position of firms. • Question marks • Selective investments; divestiture for weak firms or those with uncertain prospects and lack of strategic fit. • Cash cows • Investments sufficient to maintain competitive position. Cash surpluses used in developing and nurturing stars and selected question mark firms. • Dogs • Divestiture, harvesting, or liquidation and industry exit.

  7. Limitations on Portfolio Planning • Flaws in portfolio planning: • The BCG model is simplistic; considers only two competitive environment factors– relative market share and industry growth rate. • High relative market share is no guarantee of a cost savings or competitive advantage. • Low relative market share is not always an indicator of competitive failure or lack of profitability. • Multifactor models (e.g., the McKinsey matrix) are better though imperfect.

  8. The McKinsey Matrix

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