Today I will share my insights about corporate strategy course, which is backed by University of London and UCL in the coursera platform.
Course Topics:
Corporate Strategy
-Multi-business firms
-Business vsCorporate Strategy
-Sum-of-the-Parts Analysis
Diversification
-Synergies
-4C's Synergies
-5-step Approach
Divestiture
-3-step Approach
Corporate Headquarters
-Resource Allocation
What is a multi-business firm?
The key to define multi-business firm is the fact that these firms compete across multiple businesses. Global examples include Berkshire Hathaway which is run by Warren Buffett. Examples of businesses that they operate are diamonds, airplanes and so on.
To note that, one can question what they are selling, how they produce or distribute goods and who their customers are to describe businesses of a firm then understand and differentiate these multiple businesses.
Local example from Turkey can be Koc Group, they operate in energy, finance, automotive, consumer durables
How can we define corporate strategy, if a key decision is competing across multiple businesses or in other terms, if it is a multi-business firm?
We can focus on 2 things: portfolio selection and portfolio organization. Basically, the first stage of having robust corporate strategy for multi-business firms is deciding on which businesses to be active in and after that how value can be created across businesses in the portfolio. For example, a corporation having subsidiaries each providing a different product or service but are at different stages of the production process can be a multi-business firm.
Corporate strategy vs Business strategy
# of Businesses (Single vs Multiple): Business Strategy is at business level while corporate strategy is at corporation level. From the earlier example of Koc Group, we can exemplify that any strategy about subsidiary of Koc Group, e.g. Yapı Kredi Leasing, is an example to business strategy whereas Koc Group’s decision about acquiring a new company is regarded as corporate strategy
The Goal(Competitive Advantage vs Corporate Advantage): Competitive Advantage is the difference between Customers’ willingness to pay and suppliers’ willing to supply whereas corporate advantage corporate advantage exists if the collection of businesses owned together is more valuable than the sum of values of individual businesses owned separately
i.e. V[AB]=V(A)+V(B) []:jointly owned, (): separately owned
Competitors: Competitors of a firm with single business are the rival companies which are operating in the same segment, however, competitors of a multi-business firm could be mutual funds, activist investors, private equities and so on. Corporate strategists follow 2 different paths while competing, namely modification or selection. Modification is making changes to create value,synergy, given a set of businesses, whereas selection is basically choosing which businesses to add to the bundle.
Note. It makes sense to follow selection as a corporate strategy unless you are in a country with efficient capital markets because in selection strategy we do not try to make changes in businesses to create value so to compare our performance we can use mutual fund managers. To overperform, we should choose undervalued companies and this is probable with inefficient capital markets
Sum-of-the-parts Analysis (SOTP)
SOTP is a valuation technique for multi-business firms. The idea is that one can value the parent company by summing up aggregate divisions. In addition to that we also add debt. This method is also known as breakup value analysis. Equity value per share found with SOTP could be different from its share price, usually it is greater than the share price. In such situation one can say that share is undervalued so could be traded on with the belief that share price will go up
EV(SOTP)= sum(Earnings*(EV/E multiple))
Could we use SOTP to get ideas about corporate advantages?
No, because in the formula we have earnings and this earning is made when a business was a part of a multi-business firm so we do not know what earnings would be like if those businesses were owned separately.
However, we can use SOTP to tell you whether the market values, a given level of earnings, differently for your multi-business firm than for comparable single business firms.
“Thus, a sum-of-the-parts analysis cannot tell us whether we have a corporate advantage. However, it can give us an indication of how well the market values our earnings. And in effect that means, how well the market appreciates and understands our corporate strategy”
Diversification
Whether you diversify at the very first place? If yes, which business is right for you? How?
How to Diversify?
“The next example is Moxy, which is a new hotel chain, and do you know who's behind this? Well, you might be surprised to learn, that one of the founders of this hotel chain is Ikea. Of course, we all know Ikea from its furniture, that you need to self-assemble, but they also have a real estate business, they typically rent out office space to companies. But now they've decided, we want to use our real estate business and enter the hotel business. And what's interesting is that they teamed up with Marriott, which is one of the largest hotel operators in the world.”
Conditions for Diversification: Bargain vs Synergy
4Cs Synergies Framework
5-step Approach to the Diversification Decision
1.Finding Synergies: To find synergies one should have a closer look to value chain before and after diversification and try to observe similar processes within value chain
2.Identifying resource gaps: Do we have enough resources for conducting new business or which resources are needed
3. Identifying candidates:we are considering inorganic growth first, there are three types of potential candidates: The first is insider generalist. These are companies that are already active in the new business and occupy all steps in the value chain. The second category is also insiders, but this time specialists, so they are active in the new business but only do a subset of the value chain segment. So only a few steps of the value chain. And then the last category is outsiders. So these are companies that might help you to enter new business but are not active in that business themselves. Now, if your resource gap is very large, then a useful starting point might be to begin with insiders and particularly an insider generalist
4.Ally or acquire
5.Organic or inorganic growth
Divestiture
Divestiture is basically exiting from a business though could be thought as the opposite of diversification. Similar questions with diversification decisions arise when divestiture is the center of attention. Whether we should divest?If so, from which particular business should we divest? Lastly, How? What I mean is what modes of divestiture can we choose from?
An equity carve-out is when part of a business is sold to the general public
A spin-off is divesting a business by distributing shares in that business to the original shareholders
A sell-off is selling your business to another company. Hence, that other company acquires your business
Divestiture Test
A divestiture can be valuable if operating a business separately is worth more than operating that businesses jointly with the other businesses and if a business is worth more to another owner. For example, another company might be able to create more synergies
Divestiture example:
In October 2015, the Hewlett-Packard Company completed a split-up that resulted in the official formation of two new entities: HP Inc. and Hewlett-Packard Enterprises.
Corporate Headquarters
Corporate headquarters could be controlled differently like widely held, family, state, another firm and so on. Widely held means none of the shareholders have more than %20 share in the firm.
HQ Influence Models
We will discuss four different ways that corporate headquarters can influence the underlying businesses. We can think of headquarters influence models along two dimensions. First, the nature of the relationship between the businesses in the portfolio. On the one end, standalone. The headquarters does not encourage any meaningful relationship between the different businesses in the portfolio. On the other end, linkage. The headquarters encourages businesses to work closely together. The second dimension of HQ influence is the nature of the relationship between headquarters and the businesses. Directive control is when headquarters is heavily involved in the strategic decisions of the businesses. In contrast, evaluative control is when HQ lets the responsibility for the strategic decisions with the businesses. But it would evaluate those decisions afterwards through monitoring of outcomes and financial targets. Directive control is more steering on behavior and evaluative control is more steering on outcomes.
Hence, 2 important things to consider when trying to form HQ influence model are: 1. Extent of collaboration between businesses (Standalone vs Linkage)
2. Nature of relationship between HQ and the businesses (Directive vs Evaluative)
Resource Allocation
Financial Perspective:From financial perspective, it makes sense to fulfill the investment requirement of the business with the largest NPV value, then allocating the remaining amount accordingly by considering NPV amounts
Uncertainty Perspective:Most of the time future returns are uncertain. In such situations firms should use their stable but profitable firms in their portfolio to explore these businesses. BCG matrix provides insight for this. According to the matrix, we need “Star” companies in our portfolio as they have both high market share and market growth. We do also need “Cash Cows” because we need stable profit to invest in “Question Marks”. In other terms, we exploit Cash Cows to explore Question Marks.
Synergy Perspective: If the forecasted NPV of a business increases when another investment is made to another subsidiary business then we can conclude that synergy exists between those firms. As you may notice we do not have synergy indicated in BCG matrix so another framework is provided by Bart Venneste and Phanish Puranam, namely Synergistic Portfolio Framework.
Given the framework, the companies that we should consider are givers, fits,and takers intuitively.
Social Perspective: Using the financial perspective, we said, let us give most to the businesses with the highest returns or NPVs and least to businesses with the lowest NPVs. However, beyond financial perspective, we do also need to consider the fact that not allocating enough resources to a business with lower NPV may cause demotivation and distrust in the company.
Comments