IIM-K EPGP 11 CS-B S5-6 2019-20 Corporate Strategy

Session 5-6
Corporate Level Strategy

Growth & Diversification;
Alliances & M&A
ePGP 11 CS 2019-20 Section-B S5-6:

August 9, 2019 Corporate Level Strategy: Growth & 1
Diversification; Alliances & M&A
What Is Scope of Strategy?
Scope of Strategy
Strategy of a Strategy of a
Company or Firm Business Unit
Multiple Businesses Business Operations
Entry, Expansion, Markets, Products,

Diversification, Profits, Growth &
Control & Exit Competition
Scope of the Firm
©2016-2019 P Rameshan

Ext. Int. Strat. Strat.
Anal. Anal. Direc. Ch/Opt.
Strategic Planning
Vision, Mission
Strat. Plan Formul. Goals, Targets
Strategic Plan Direction
Corporate,
Strategy Business,
Testing Operational
Organization
Resource Assess. Structure,
Org. Adj. Systems,
Processes
Implement. Financial,
Human,
Other
Monitor.
Feedback
Strategic Management Process

©2006-2019 P Rameshan ePGP 11 CS 2019-20 Section-B S5-6:
Relationship among Corporate, Business &
Functional Strategies
Corporate Strategy
Business Strategy
Business 1 Business 2 Business 3
Functional/Operational Strategy
Functional Areas Functional Areas Functional Areas
©2006-2019 P Rameshan
Strategic Thin Lines
Corporate Strategy
What business to be in?
How to control the businesses?
How to achieve external growth?
Business Strategy
How to compete in a chosen business?
How to grow the business internally?
Functional Strategy
How to be efficient?
How to give quality & customer service?
How to create new product attributes?

Firm’s Life Cycle*
Disappear
Start-up ance
Growth Revival Failure

(With high/low π)
Lower Size Decline

Diversific Refocus
ation
Restructu
ring
Larger Slowdown Stagnation

Size
Merger, Getting Acquied or

Takeover
* ©2016-2019 P Rameshan

Scope of Corporate Strategy
Growth
Organic Inorganic
Greenfield Franchising Licensing SA JV M&A
Con
New New New New solid
New
atio
Customers Markets Products Stages Industries n
Backward Forward New

Reso
urces
Horizontal Vertical Core Competence
Integration Integration Extension
Related Diversification Greenfield Conglomeration

©2016-2019 P Rameshan Unrelated Industries
Business Portfolio Selection:
BCG Matrix
Relative Market Share*
(Cash Generation)
High High Low
25%
Industry Growth Rate
Stars Question Marks

II I
Modest +/- Cash Flow Large Negative Cash Flow
(Cash Use)
10%
Cash Cows Cash Flow
Dogs
III IV
Large Positive Cash Flow Modest +/- Cash Flow
Low
10 1.0/1.5 0.1
* Company’s Share/Largest Competitor’s Share

Business Portfolio Selection:
BCG Matrix
Actual or Projected Industry Growth Rate High High Actual or Planned Relative Market Share* Low
25%
Actual/Expected Actual/Expected
Stars Question Marks
II I
10%
Actual/Expected Actual/Expected
Cash Cows Dogs
III IV
Low
10 1.5 0.1
* Company’s Share/Closest Competitor’s Share

IE Matrix of Strategic Decisions
IFE Matrix Total Weighted Scores (Level of strength)
Strong Average Weak
3.0-4.0 2.0-2.99 1.0-1.99
4.0 3.0 2.0 1.0
High
3.0-4.0 I II III
3.0 Grow & Build Grow & Build Hold & Maintain
EFE
Matrix Medium
Total 2.0-2.99 IV V VI
Weighted Grow & Build Hold & Maintain Harvest or Divest
Scores 2.0
(Level of
responsiven Low
ess) 1.0-1.99 VII VIII IX
Hold & Maintain Harvest or Divest Harvest or Divest
1.0

Market Evaluation for Entry
Factors (Rating Scale 0-10*) Brazil Russia India China

Demand is growing 4 5 8 6
Government is stable 5 6 4 8
Procedures are easy 5 4 5 7
Cheap manpower is available 6 5 7 6
Support industries are strong 4 3 6 7
Competition is weak 2 5 1 3
Policies are stable 4 5 4 8
Long term potential is good 3 2 7 6
Premium segments are strong 5 6 9 8

Innovative products are received well 4 4 6 6
Per capita income is high 5 5 5 6
Institutional mechanisms are good 6 3 8 5
Social environment is friendly 5 4 5 5
Total 58 57 75 81
* 0 = extremely unfavourable; 10 = extremely favourable

Levels of Corporate Diversification*
Diversification
Low level Very high level
Single business: > 95%

from single business (Jet?) Unrelated business: < 70%
Dominant business: 70- Moderate to high from dominant business &
95% from single business no common links among
(Pepsi?) businesses
Related constrained: < 70% from
(HLL?)
dominant business and all businesses
related (Bajaj?)
Related linked: < 70% from dominant
business and limited linkage among
businesses (L&T?)
* Rumelt’s classification ePGP 11 CS 2019-20 Section-B S5-6:
Reasons for Diversification
Economies of Scale Diversifying Shareholders’

& Scope Portfolio Risks
Economizing on Adding Value Through

Transaction Costs Acquiring Undervalued
Firms
Leveraging on Internal
Scope of Capital Transfer

Tests of Corporate Diversification
Tests of Success
Attractiveness Test Better-off Test
Industries chosen must be Either target unit or

structurally attractive or acquiring unit must gain
capable of being made competitive advantage
attractive from its link with the
Cost of Entry Test
other
Cost of entry must not

capitalize all future profits
ePGP 11 CS 2019-20 Section-B S5-6: Corporate

August 9, 2019 Level Strategy: Growth & Diversification; 14
Alliances & M&A
Why Strategic Alliances?
Slow cycle market Fast cycle market
Standard cycle market
Market access New market entry

Establish market franchise Speedier new product entry
Market leadership
Sharing heavy R&D costs
Reducing uncertainty
Market power
Access to resources
Overcoming trade barriers
Pooling capital resources
Types of M&A by Purpose
M&A
For Elimination of For Access to

Excess Industry Emerging Industry (with
Capacity Industry Convergence)
For Geographical For Access to

Expansion R&D Results
For Product Extension or

International Coverage

Requirements of Effective Acquisitions
Effective
Acquisitions
Choice of Adaptation
friendly skills
acquisitions
Flexibility
Careful
(organizationa
selection of
l culture,
targets
operations etc)
Continued
Careful negotiation of
innovation &
the terms/price of
investment in
acquisition
R&D
Availability of Maintenance of
sufficient slack lower debts after
funds acquisition

Case 3
The Walt Disney Co.

& Pixar Inc.

Discussion Question
Was Disney’s continued relation with Pixar important for

Disney?
If yes, why?
If no, why?

Discussion Question
Did Disney’s success evolve over the years without discontinuity?
If yes, how?
If no, why?

Disney’s Success
Walt Disney
Period of Setback
Michael Eisner,
Roy Disney &
Jeffrey Katzenberg
Jeffrey Katzenberg’s
Departure & Problems
Pixar Partnership
Robert Iger

Discussion Question
Did Disney’s Computer-Generated animation works

suddenly emerge?
If yes, how?
If no, why?

Disney’s Computer Generated Works
Secret Lab for 3-D Work
Failure & Closure of Lab
Return to 2-D
CG Animation
Department
Pixar Movies
Circle 7 for Pixar Sequels

Discussion Question
Did box office collections decide the financial success of

Disney movies?
If yes, how?
If no, why?

Financial Success of Disney Movies
Box Office Video Games & Other

Including Sequels Uses of Characters
Home Video Sales Merchandize

(Largest Revenue Sales
by 2005)
Pay-per-view & TV Showings

Video-on-demand
Cable Channels

Discussion Question
Did Pixar evolve over the years without discontinuity?
If yes, how?
If no, why?

Pixar’s Evolution
Edwin Catmull &
John Lasseter
LucasFilm Computers,
Renamed Pixar
Steve Jobs & Pixar since 1986
3-D Method & Proprietary

Animation Softwares
Short Films & Oscar Awards
CG Feature Films

Discussion Question
Was Pixar’s success due to its leadership rather than technology?
If yes, how?
If no, why?

Pixar’s Evolution
Creative Leadership
Talented people
Creative Environment &Culture
Technology & Competences
John Lasseter’s Involvement

& Steve Job’s Commitment
One Movie a Year &

DreamWorks’ Competition

Discussion Question
Was the Disney-Pixar partnership mutually beneficial?
If yes, how?
If no, why?

Disney-Pixar Partnership
Comp. Anim. Prod. Negotiations &

Systems (CAPS) Disagreements
Since 2002
3-Film Agreement Huge Success &
1991 & Toy Story Huge Revenues
5% Ownership 10-year & 5-

1997 movie Agreement

Discussion Question
Would Iger have been successful in retaining Disney’s

partnership with Pixar?
If yes, how?
If no, why?

Iger’s Pixar Partnership
Joint Success Iger’s

Keenness
Pixar as Smash Pixar’s

Hit Success Inclinations
Disney’s Rival Attempts

Predicaments

Discussion Question
Should Disney have considered sustaining its success of

Pixar partnership through a continued partnership
(‘buy’) rather than through acquisition (‘make’)?
If yes, why?
If no, why?

Iger’s Pixar Partnership
Pixar’s Value Pixar’s

Terms
Old Disney Steve Jobs

Nostalgia
Cultural
Past Success Contrast

Corporate Strategic Decision
Business Partnership with Pixar Business Strategic

Decision
Leveraging Pixar Partnership Operational Strategic

Actions
Acquiring Pixar Corporate Strategic

Decision

Provoking Question
Should Disney buy Pixar?
If yes, why?
If no, why?

Pixar Acquisition
Pixar’s Value & Disney-Pixar-Apple

P-E Multiple Brand Leverage
Old Disney Steve Jobs on

Nostalgia Disney Board
Steve Jobs & Disney’s Future

John Lesseter in CG Animation

Should Disney Acquire Pixar?
Yes No
Reliance on Pixar for Hits Near Perfect Strategic Fit Own Animation Studio
Vitality of CG Animation Films Continuation of Partnership
Possibility of Acquisition Lasseter as Only Difference
Fear of Pre-Pixar Decline Pixar Seeking Other Partners Other Successful Animators
High Returns of Pixar Alliance Likely Cultural Clash
Pixar’s Persistent Success Post-Merger Control Issues
Pixar’s Animation Technology Steve Jobs’ Personality
Rights on Past Pixar Productions High Cost of Acquisition (46x)
Pixar’s Creativity & Culture Disney-Job-Lasseter Combine

ePGP 11 CS 2019-20 Section-B S5-6: Chance of Talent Exodus
Should Disney Acquire Pixar?
Yes No
Reliance on Pixar for Hits Own Animation Studio
Vitality of CG Animation Films Continuation of Partnership
Possibility of Acquisition Lasseter as Only Difference
Fear of Pre-Pixar Decline Other Successful Animators
High Returns of Pixar Alliance Likely Cultural Clash
Pixar’s Persistent Success Post-Merger Control Issues
Pixar’s Animation Technology Steve Jobs’ Personality
Rights on Past Pixar Productions High Cost of Acquisition
Pixar’s Creativity & Culture ePGP 11 CS 2019-20 Section-B S5-6: Chance of Talent Exodus
Pixar Seeking Other Partners
©2016-2019 P Rameshan Diversification; Alliances & M&A
Pixar Valuation & Impact on Disney Equity
2005 MCap Equity Equity Underlyi Underlyin Underlyi Underlyi Underlyi Underlyi
Swap Swap ng Pixar g Pixar ng Pixar ng Pixar ng Pixar ng Pixar
(bn.) Disney Equity Equity Equity Equity Equity Equity
?, Pixar 5.9 Lower* Upper^ Upper Lower Upper Lower Upper Lower
X X (bn.)@ (bn.)$ (bn.)+ (bn.)# (bn.)% (bn.)&
DCF-based 1.093 1.468 3.84 2.86 5.76 4.29 6.77 5.04

Swap
Sensitivity- 1.268 2.356 3.31 1.78 4.97 2.67 5.84 3.14
based Swap
Stock Price 1.613 2.247 2.60 1.87 3.91 2.80 4.59 3.29
Street Swap
Stock Price 1.374 1.939 3.06 2.17 4.59 3.25 5.39 3.82
Base Swap
Industry 1.716 2.365 2.45 1.78 3.67 2.66 4.31 3.13
Swap Data
Industry 20 30 Price: Price: Price: Price: Price: Price:
EBITDA X 35? *@4.2 ^$4.2 *+6.3 ^#6.3 *%7.4 ^&7.4
EBITDA 2005 Disney Pixar 0.7X of 0.7X of 1.07X 1.07X 1.25X 1.25X
(bn.) 4.6 0.21 Pixar Pixar of Pixar of Pixar of Pixar of Pixar
MCap MCap MCap MCap MCap MCap
Based on Exhibit 11 & other case data (p.11)

Walt Disney
Acquisition a Necessity?
Acquire Continue to Partner Alternative
Business Risk Future Pixar with

Eliminated Uncertainties Rivals
Continued Future Threat &

Leadership Threat Risk
Financial
Risk

Corporate Level Strategy: Growth &
August 9, 2019 Diversification; Alliances & M&A 42
Walt Disney
Acquire or No?
Structural Cost of Better-off/

Attractiveness Acquisition Worse-off
Disney as Pixar as Pixar Acquire Not Acquire

Leader Leader Valuation
Rival
Not Another Threat
Higher Price
Acquire Partner
Continued
Continue Buy
Leadership
as Partner
Financial
Risk
Better-off
Market Business
Threat Risk
Worse-off
©2016-2019 P Rameshan ePGP 11 CS 2019-20 Section-B S5-6:

Corporate Level Strategy: Growth &
August 9, 2019 Diversification; Alliances & M&A 43
Recent for Pixar
Latest film Finding Dory, 2016
Total films so far 17
Total revenues so far $10.8 billion
Average revenue $634 million
Top box office films 3 out of 50 so far
Top 3 in the world Toy Story-3 with $1.1 billion
Academy awards 16 since 2001
Disney 2017-18 Revenue $59.4 b; Net profit $13.1 b

2019: John Lasseter is continuing with Disney
Pixar films after 2006 include: Ratatouille, Cars 2-3, Toy
Story 3, Finding Dory, Incredibles 2 (Revenues of last 3
exceeded $1 billion each)
Post-2006: Total movie cost: $2.3b; Total revenue: $9.5b
Valuation in M&A: Approaches
There are mainly three types of valuation approaches: Asset-based

approach, income-based approach, & market-based approach
Asset-based approach: This approach values the assets of target

organization. Used when a business has very low or negative value as
going concern (because assets may be the most or only valuable item).
For a profitable business, this valuation yields the lowest value (because
market value of target organization may be more than the recorded
value of assets).
This may be used jointly with other approaches
Example:
A buyer is willing to value a retailer with leased premises at 3 x
EBIT
But, seller has own premises.
So, buyer is willing to pay
3 x (EBIT - implied lease value) + Value of own premises

Income-based approach: This approach values future income-streams of

target organization. Based on net present value of future incomes estimated by
applying a particular discount rate using specified formula. This method is
widely used for evaluating the value of financial investments. However, while
valuing a company, subjective estimates of future incomes and discount rates
used may render the valuations risky
Illustration
(Future Value) or (periodic cash flow) (R) (Rt)
PV = = or Σ
(Periods) (n) (t)
(1+(discount rate)) (1+i) (1+i)
NPV = PV - Cost

Market-based approach: This approach values target organization

based on recent acquisition values of similar other organizations by
comparing one or more selected parameters…
Example:
Target organization has an EBIT of ‘q’ in the latest accounting year
& comparable companies were sold at an average of 5 x EBIT, then,
value of target organization may be 5 x q.

… Choice of comparable companies & parameters to be compared are crucial
in this approach. Parameters normally used are some form of earnings; in
some cases total revenue or book value may be appropriate. One commonly
used earning parameter is ‘EBITDA plus owner’s salary & fringe benefits’.
Where multiple comparable parameters are available, a weighted measure of
value can also be used.
Illustration
Item Average of Comparable Companies
Parameter Sales/Value EBIT/Value EBITDA/Value Book Value/ Total
Value
Multiplier 0.5 6 4 2
Item Target Company

Parameter Sales EBIT EBITDA Book Value Total
Amount 50m 5m 6m 10m
Value 25m 30m 24m 20m
Weight 20% 20% 40% 20%
Weighted Value 5m 6m 9.6m 4m 24.6m


IIM-K EPGP 11 CS-B S5-6 2019-20 Corporate Strategy

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Session 5-6

Corporate Level Strategy

ePGP 11 CS 2019-20 Section-B S5-6:

Multiple Businesses Business Operations

Entry, Expansion, Markets, Products,

Scope of the Firm

ePGP 11 CS 2019-20 Section-B S5-6:

Strategic Management Process

Business 1 Business 2 Business 3

How to achieve external growth?

How to compete in a chosen business?

How to grow the business internally?

How to create new product attributes?

ePGP 11 CS 2019-20 Section-B S5-6:

Growth Revival Failure

Lower Size Decline

Larger Slowdown Stagnation

Merger, Getting Acquied or

ePGP 11 CS 2019-20 Section-B S5-6:

Greenfield Franchising Licensing SA JV M&A

Backward Forward New

Related Diversification Greenfield Conglomeration

Stars Question Marks

ePGP 11 CS 2019-20 Section-B S5-6:

ePGP 11 CS 2019-20 Section-B S5-6:

ePGP 11 CS 2019-20 Section-B S5-6:

Factors (Rating Scale 0-10*) Brazil Russia India China

Premium segments are strong 5 6 9 8

* 0 = extremely unfavourable; 10 = extremely favourable

ePGP 11 CS 2019-20 Section-B S5-6:

Low level Very high level

Single business: > 95%

Economies of Scale Diversifying Shareholders’

Economizing on Adding Value Through

ePGP 11 CS 2019-20 Section-B S5-6:

Attractiveness Test Better-off Test

Industries chosen must be Either target unit or

Cost of entry must not

ePGP 11 CS 2019-20 Section-B S5-6: Corporate

Slow cycle market Fast cycle market

Standard cycle market

Market access New market entry

For Elimination of For Access to

For Geographical For Access to

For Product Extension or

ePGP 11 CS 2019-20 Section-B S5-6:

ePGP 11 CS 2019-20 Section-B S5-6:

The Walt Disney Co.

ePGP 11 CS 2019-20 Section-B S5-6:

Was Disney’s continued relation with Pixar important for

ePGP 11 CS 2019-20 Section-B S5-6:

Did Disney’s success evolve over the years without discontinuity?

ePGP 11 CS 2019-20 Section-B S5-6:

ePGP 11 CS 2019-20 Section-B S5-6:

Did Disney’s Computer-Generated animation works

ePGP 11 CS 2019-20 Section-B S5-6:

Failure & Closure of Lab

Circle 7 for Pixar Sequels

ePGP 11 CS 2019-20 Section-B S5-6:

Did box office collections decide the financial success of

ePGP 11 CS 2019-20 Section-B S5-6:

Box Office Video Games & Other

Home Video Sales Merchandize

Pay-per-view & TV Showings