fill this out for AMAZON company. I can provide the teachers power point lesson for corporate, as well as my personal notes for that chapter to make it easier to answer.
Corporate strategy: AMAZON
In 2-3 sentences, describe how (if at all)
diversified
your company is, and identify any potential sources of
synergy
.
List
methods
/
how
(if at all) your company engages in diversification efforts (such as M&A, joint ventures/alliances, internal development, etc.).
You may wish to list names/events/dates/details for your final paper.
Have any of the efforts you list in (b) been
successful
? If so, provide a sentence as to why for each.
Have any of the efforts you list in (b)
failed
? If so, provide a sentence as to why for each.
Corporate Level Strategy Corporate Level Strategy Diversification Motivations for Diversification Mergers & Acquisitions 1 1 A Diversified Company Has Two Levels of Strategy 1. Business-Level Strategy (Competitive Strategy) How to position the company within each industry in which the company competes to create competitive advantage low cost differentiation integrated low cost/differentiation focused low cost focused differentiation 2. Corporate-Level Strategy (Company-wide Strategy) How to coordinate diverse businesses to create value for the corporation as a whole 2 2 3 Strategy and Organizational Structure Corporate Head Office Division C Division A Division B Finance Marketing R&D HR Corporate Strategy Business Strategy Functional Strategy 3 Competitive Landscape 4 Business Model: Core Focused on becoming a total beverage company Portfolio includes more than 500 brands Geographic Diversification Business Model: Diversified Moved into the Food Industry: Lays, Doritos, Quaker 53% of Revenue is generated from food sales Product Diversification Coca-Cola: Expanding portfolio in the beverage industry only 4 Corporate Boundaries Corporate boundaries concern the set of distinct industries in which the firm competes This is sometimes referred to as the diversification of a firm’s portfolio of businesses Diversification refers to the process of adding new businesses to the company that are distinct from the established operations Most large firms are diversified to some degree 5 5 6 Three Dimension of Diversification Scope Vertical Integration Geography Product Market 6 Apple competes in PC, software, and consumer electronics; Apple sells its products in Asia, Europe, as well as US (geographic markets), and apple has retail business (vertical integration). Diversification Modes “Horizontal” vs “Vertical” Merger/Acquisition Joint Ventures - a commercial enterprise undertaken jointly by two or more parties which otherwise retain their distinct identities. Alliances-A business alliance is a formal business relationship between two or more organizations that share similar short and long-term objectives12. The alliance is often motivated by cost reduction and improved service for the customer1 7 7 HORIZONTAL VS. VERTICAL If you acquire competitors, it is horizontal If you acquire either suppliers or buyers, then it is vertical 8 8 9 VERTICAL INTEGRATION Vertical integration strategy considers to what extent a firm integrate activities of the industry whole value chains. Two Types of Integration: - Backward integration - Forward Integration Disintegration Outsourcing 9 10 Intel Motorola Dow Chemicals Best Buy Apple HP Examples Intermediate Manufacturer Raw Materials Assembly Distribution End User Upstream Downstream The Raw Material to Consumer Value Chain in the PC Industry The danger of going vertical You generally cannot buy all customers or suppliers. When you buy customers, you end up in a subsidizing relationship, and your competitors will court other customers When you buy suppliers, you lose some innovativeness: transfer pricing is a major no-win hassle. 11 11 12 DISCUSSION QUESTIONS: AMAZON ACQUIRING WHOLE FOODS Why did Amazon decide to purchase Whole Foods? Do you think that the acquisition help create value for the combined company? Are there any downsides to the acquisition? https://www.cnbc.com/2018/06/15/a-year-after-amazon-announced-whole-foods-deal-heres-where-we-stand.html https://www.youtube.com/watch?v=CHT9VVL22NM https://youtu.be/Cq5kBswU9VI https://www.youtube.com/watch?v=qK2lNUVfmMQ 12 ADDING VALUE BY DIVERSIFICATION Diversification most effectively adds value by either of two mechanisms: By developing economies of scope between business units in the firms which leads to synergistic benefits By developing market power which leads to greater returns 13 13 Motivations For Diversification Economies of Scope Sharing Activities Proctor & Gamble in the Disposable Diaper & Paper Towel businesses Transferring Core Competencies Leveraging Existing Resources 14 14 15 Core competence and core product 15 When there is harsh environment, which tree is more likely to survive? When the tree is trying to grow bigger, with more branches and leaves, it should have the nutrition provided by its roots. That’s why when Apple wants to diversify, consumer related products make more sense than hotels or construction. Other Motivations For Diversification Market power pooled negotiation power predatory pricing Financial Synergies The BCG Matrix portfolio management Managerial Objectives Growth maximization Executive pay is tied to firm size (Hambrick & Finkelstein 1995) Acquisitions leads to higher pay (Lambert & Larcker 1987; Rose & Shepard 1997; Schmidt & Fowler 1990) 16 16 The Boston Consulting Group (BCG) Matrix Relative Market Share Industry Growth Rate Low High Low High Dogs Stars Cash Cows Question Marks 17 17 INSTITUTIONAL THEORY Mimetic Isomorphism It simply means that sometimes you copy someone because you don’t know what else to do. Sometimes the safe thing to do is to copy someone who is successful. 18 18 Diversifications occur because of mimetic isomorphism. Merck bought Medco in 1993. Merck wanted control of the distribution channel. So Lilly bought PCS (a major Medco competitor). Lilly paid $4 billion for PCS, and sold it for $1.5 billion four years later… Oops! But the stock price did go up. Recently, CVS merged with Aetna for $69 billion in October 2017, while Cigna bought Express Scripts for $52 in March 2018. 19 19 HAPPENS ELSEWHERE TOO In the 1970s GM bought a rental car company Shortly thereafter, Ford bought one and Chrysler bought one. None of them ever made it work. 20 20 Levels of Diversification Modes Single Business – 95% of sales in main businesses Dominant Business – 70% to 95% of sales in main businesses Related Business – 70% or more of sales in related businesses Unrelated Business – Less than 70% of sales in related businesses 21 Diversification & Performance Is there an optimal level of diversification? 22 Dominant Related Unrelated Performance 22 Corporate Strategy & Mergers & Acquisitions The objective of corporate strategy is to create value through the diversification of the firm into new business activities. This diversification activity can occur in one of three ways: internal development strategic alliances and joint ventures mergers & acquisitions 23 23 MERGERS AND ACQUISITIONS Merger A transaction where two firms agree to integrate their operations on a relatively coequal basis because they have resources and capabilities that together may create a stronger competitive advantage Acquisition A transaction where one firm buys another firm with the intent of more effectively using a core competence by making the acquired firm a subsidiary within its portfolio of businesses Takeover An acquisition where the target firm did not solicit the bid of the acquiring firm 24 24 25 Some Large M&A Amazon agree to acquire One Medical for $3.9 billion on February 22, 2023. Amgen agreed to acquire Horizon Therapeutics for $26.4 billions in December 1, 2022. Bristol Myers Squibb agreed to acquire Celgene in a $74 billion cash-and-stock deal on January 3, 2019. IBM agreed to acquire software and services company Red Hat Inc. for about $33 billion on October 28, 2018 AT&T acquired Time Warner for $85.4 billion on June 2018 T-Mobile agreed to pay $26.5 billion for Sprint in an all-stock merger in April 2018. AOL bought Time Warner for $165 billion (Largest US acquisition ever in 2000: Pfizer-Allergan merger was proposed at $160b but didn’t happen) AOL spun out in 2009 Exxon and Mobil merged in $80 billion deal (Dec 1998) Citicorp and Travelers merged in $70 billion deal (April 1998) 25 Acquiring for Synergy: DELTA Airlines bought Northwest Airlines in 2008 (paying $17.7 billion) DELTA Atlanta, Georgia World’s second largest airline filed for bankruptcy in September 2005 hastened by two major factors : The terrorist attack of 9/11 the unprecedented rise in fuel prices Sky Team partner NORTHWEST Eagan, Minnesota World’s seventh largest airline Sky Team partner Merger implementation Cost savings => a major outcome Culture ? 26 26 Acquiring for Synergy: DELTA Airlines bought Northwest Airlines in 2008 (paying $17.7 billion) We believe that consolidation in the airline industry is inevitable, and we want to control our future. Combining our companies creates an airline with the size, scale and global presence to weather economic downturns and compete long-term in the global market place. Richard Anderson, Chief Executive, Delta Airlines 27 27 Issues at Citicorp-Travelers Merger 1998 Citi was primarily commercial bank and Travelers was primarily investment bank (through Salomon Bros division) Citi had been burnt by its reckless investments in real estate and had completely exited investment banking only few years earlier Synergy lower than expected Expertise needed for each is distinct and customers may be different High culture differences Commercial bank needed to be more risk-averse and employees compensated accordingly 28 “I cannot think of one positive thing that developed as a result of these two companies. The miracle of Citigroup is that it still is in the position it is in, given the massive mismanagement.” --Richard X. Bove, financial services analyst at Punk Ziegel 29 The “Synergy Trap” On average, corporate acquisition strategies reduce the value of the acquiring firm while shareholders of target firms gain (Sirower, The Synergy Trap, 1997) 66% of firms in sample destroyed value Virtually no effect of relatedness Excessive acquisition premiums often to blame NPV of acquisition = Synergy – Premium Remember, premium is paid in time 0 and synergies occur later 29 CULTURE Probably the hardest thing to overcome is a clash of organizational cultures. Turf battles, turnover, etc. Culture is a very important element of an organization, and highly resistant to change. 30 30 DIFFICULTIES Time: Going back to the NPV analysis, sometimes it takes longer to integrate an acquisition, and the resulting “clock” eliminates any gains from the acquisition. If you pay a premium for an acquisition (and you almost always will), the longer it takes to make it work, the less you earn. 31 31 Chapter 6 Corporate strategy: Key topics : Diversification , motivation for diversification , mergers and acquisitions . Diverse companys have two levels of strategy 1. Business-Level Strategy (Competitive Strategy) youtube ex How to position the company within each industry in which the company competes to create competitive advantage · low cost · differentiation · integrated low cost/differentiation · focused low cost · focused differentiation 2. Corporate-Level Strategy (Company-wide Strategy) youtube ex How to coordinate diverse businesses to create value for the corporation as a whole. Coca Cola vs Pepsi Coca has a greater diversification 1. You see all the red more than 500 brands in the map2. Pepsi has 53% of its revenue from food sales. Diversification - refers to the process of adding new businesses to the company that are distinct from the established operations. ENTER NEW MARKETS BY LAUNCHING OR AQUIRING NEW PRODUCTS. IE; INNOVATIONS AND MARKET DISRUPTION. CAN INVEST IN MIX VS ALL EGGS IN ONE BASKET. Three Dimension of Diversification Scope 1. Vertical integration 2. Geography 3. Product mkt Diversification Modes: “Horizontal” vs “Vertical” · Merger/Acquisition · Joint Ventures · Alliances Horizontal integration- is the acquisition of a business operating at the same level of the value chain in the same industry—that is, they make or offer similar goods or services. If you acquire competitors, it is horizontal - Vertical integration strategy - the combination in one company of two or more stages of production normally operated by separate companies. If you acquire either suppliers or buyers, then it is vertical. Two Types of Integration: raw materials -> manufacting -> distribution-> retails. 1.Backward integration- Aquiring a business operating earlier in the supply chain . ex: retailer buys whole sale. 2.Forward Integration-manufacturer factory buys the distributor. Disintegration-a situation in which a company is divided into smaller companies, or an industry changes so that it contains more small companies and fewer large ones Outsourcing-is the business practice of hiring a party outside a company to perform services or create goods that were traditionally performed in-house by the company's own employees and staff. ADDING VALUE BY DIVERSIFICATION 1.By developing economies of scope between business units in the firms which leads to synergistic benefits 2.By developing market power which leads to greater returns · Core competence vs core product definitions Core competencies and core products are related concepts in a firm's product portfolio. Core competencies are the collective learning in the organization, especially the capacity to coordinate diverse production skills and integrate streams of technologies1. They are the engines for the development of core products and services2. Core products are the tangible results of core competencies2. Competencies are the roots of which the corporation grows, like a tree whose fruit are end products2. Market power 1.pooled negotiation power- get definition 2.predatory pricing- illegal business practice of setting prices for a product unrealistically low in order to eliminate the competition then increase when gone. Financial Synergies The BCG Matrix- The Boston Consulting Group Matrix (BCG Matrix), also referred to as the product portfolio matrix, is a business planning tool used to evaluate the strategic position of a firm’s brand portfolio. · · The horizontal axis of the BCG Matrix represents the amount of market share of a product and its strength in the particular market. By using relative market share, it helps measure a company’s competitiveness. · The vertical axis of the BCG Matrix represents the growth rate of a product and its potential to grow in a particular market. 1. Question marks: Products with high market growth but a low market share. Keep an eyes bc can be ur next stars/ number 1 or dogs and sell 2. Stars: Products with high market growth and a high market share.-keep funding focused with support of cash cows 3. Dogs: Products with low market growth and a low market share.- cut or sell etc not promising 4. Cash cows: Products with low market growth but a high market share.-invest in other industries b cur highest in mkt share or supports stars portfolio management- · Managerial Objectives- research · Growth maximization · Executive pay is tied to firm size (Hambrick & Finkelstein 1995) · Acquisitions leads to higher pay (Lambert & Larcker 1987; Rose & Shepard 1997; Schmidt