Microsoft/Intuit
Corporate strategy Corporate strategy
• A diversified company has two levels of gy strategy:
– Business unit (or competitive) strategy – Corporate (or companywide) strategy Corporate (or companywide) strategy
• Makes the corporate whole add up to more than the sum of its business unit parts. sum of its business unit parts
• H t How to enter a new industry t i d t
– Acquisitions, joint ventures and startups
A sober picture A sober picture
• The short‐term stock price reaction to merger g y g is neutral or slightly negative. • Over a long period of time,
–O On average, corporations divested more than half ti di t d th h lf of their acquisitions in new industries and more than 60% of their acquisitions in entirely new th 60% f th i i iti i ti l fields.
Premises of corporate strategy Premises of corporate strategy
• Competition occurs at the business unit level. • Diversification inevitably adds costs and Diversification inevitably adds costs and constraints to business units. • Sh h ld Shareholders can readily diversify themselves. dil di if h l
The essential tests The essential tests
• The attractiveness tests h i
– The industries chosen for diversification must be structurally attractive or capable of being made t t ll tt ti bl f b i d attractive.
• The cost of entr test The cost‐of‐entry test
– The cost of entry must not capitalize all the future profits. profits
• The better‐off test
– Either the new unit must gain competitive advantage ih h i i ii d from its link with the corporation or vice versa.
How attractive is the industry? How attractive is the industry?
• An attractive industry
– A high average return on investment g g – Suppliers and buyers have only modest bargaining power. power – Substitute products or services are few. – Rivalry among competitors is stable. i l i i bl – will be difficult to enter because entry barriers are high.
What is cost of entry? What is cost of entry?
• A A company can
• A diversified company has two levels of gy strategy:
– Business unit (or competitive) strategy – Corporate (or companywide) strategy Corporate (or companywide) strategy
• Makes the corporate whole add up to more than the sum of its business unit parts. sum of its business unit parts
• H t How to enter a new industry t i d t
– Acquisitions, joint ventures and startups
A sober picture A sober picture
• The short‐term stock price reaction to merger g y g is neutral or slightly negative. • Over a long period of time,
–O On average, corporations divested more than half ti di t d th h lf of their acquisitions in new industries and more than 60% of their acquisitions in entirely new th 60% f th i i iti i ti l fields.
Premises of corporate strategy Premises of corporate strategy
• Competition occurs at the business unit level. • Diversification inevitably adds costs and Diversification inevitably adds costs and constraints to business units. • Sh h ld Shareholders can readily diversify themselves. dil di if h l
The essential tests The essential tests
• The attractiveness tests h i
– The industries chosen for diversification must be structurally attractive or capable of being made t t ll tt ti bl f b i d attractive.
• The cost of entr test The cost‐of‐entry test
– The cost of entry must not capitalize all the future profits. profits
• The better‐off test
– Either the new unit must gain competitive advantage ih h i i ii d from its link with the corporation or vice versa.
How attractive is the industry? How attractive is the industry?
• An attractive industry
– A high average return on investment g g – Suppliers and buyers have only modest bargaining power. power – Substitute products or services are few. – Rivalry among competitors is stable. i l i i bl – will be difficult to enter because entry barriers are high.
What is cost of entry? What is cost of entry?
• A A company can