Case Western Reserve University
Weatherhead School of Management
PLCY 490
Diversification and Merger Strategy
FALL 2002
Mondays 8:15 – 10:15 PM
Professor Sayan Chatterjee
OFFICE: Enterprise 508
PHONE: x5373 FAX: x4785 E-MAIL: or Outlook
Assistant: Teresa Kabat
PHONE: x2076 FAX: x4785 E-MAIL: or Outlook
Please read this document carefully.
Statement of Objectives
This course explores the determinants of successful diversification (corporate) strategy and the role that mergers and acquisitions play in it. Corporate diversification can be anything that changes the core business model of a firm. This can be simply an addition of an activity without changing the product or market such as may happen with vertical integration upstream or downstream. Corporate diversification may also entail new but related product lines, entering new markets with existing products and entering new or existing markets with unrelated products.
The fundamental premise of the course is that successful corporate diversification strategy is rooted in competitive advantage arising from capabilities residing at the business unit level. Starting from analyzing business level strategies of very simple firms, the course successively builds frameworks towards more complicated business level strategies. Once we have developed a sound grounding on the frameworks to discuss competitive strategy, the course develops frameworks to discuss diversification strategy based around the concept of core competencies and market entry strategies. Finally, the course develops concepts to analyze acquisitions. Finally, the course develops the concepts that are useful in acquisitions (realizing that in many cases acquisitions are part of an overall corporate diversification strategy). These concepts will address individual acquisitions, acquisition programs as well as as well as issues in post-merger integration. Guest speakers from industry may complement the course content.
Statement of the Relationship of the Proposed Course to the School's Objectives and Other Electives
This course should complement courses in competitive strategy, industry analysis and purely financial approaches to diversification as well as mergers and acquisitions.
General Description of the Content of the Course
See the attached syllabus.
Description of Anticipated Instructional Methodologies and Teaching Materials (or Development Strategy)
The primary learning tool is class discussion based on a combination of readings and cases. A wide range of issues relating to effective management of corporate growth is discussed. The readings are a mix of theoretical, conceptual and empirical articles drawn from the academic and popular business press. The cases are based on corporate growth and diversification issues faced by both domestic and international firms.
Use of frameworks: The course will be built around a series of concepts/frameworks that help us discuss issues of competitive advantage and how these competitive advantages feed into corporate strategy. I have two basic premises behind this approach. First, the use of a framework leads us to approach the case material from a perspective that has been shown to be generalizable. Second, the use of a common framework makes the discussion process more efficient. We can debate the assumptions and the logic that follow from the common framework, instead of spending time on deciding the starting point. I use the same approach with my business clients and generally this is a process that has worked well.
I have one caveat about frameworks. I use a framework. This framework works for me because I have developed it on my own and refine it as need be. I always urge both my students and corporate clients to try to modify a framework that we develop in the classroom/training to their own thinking style and/or one that will work best in their organization. This may be something as simple as choosing different labels to constructing a new conceptual architecture.
Once we have developed the frameworks, the primary method of learning is going to be class discussion. The discussions will be supplemented by short lectures and summaries by the instructor.
Preparation for class and participation: Most of the situations that we will encounter during the course cannot be solved using structured techniques. These situations will have to be approached from many sides and with an open mind. It is, therefore, imperative that each of us thinks about the situation at hand and shares the logic of our opinion as clearly as we can. At the same time we have to listen to others and use their logic to shape our own thinking. To effectively participate in class, your preparation should have a plan. When I read a case, I am always trying to see how I can hang the case facts on conceptual hooks, or a framework. However, if I simply read the case/article, without thinking how I may apply it, then chances are, at best, I can repeat the facts and not provide any insight.
I am not going to ask you to do a write-up for each class. However, you can be expected to be called upon at any time during the class.
Workload: The workload in this class is going to be very heavy. The workload is not going to be busywork but work targeted for you to get the maximum out of the class. For example, I will not ask you to write a one-page summary for each case. However, I will give specific assignments for some cases to make sure you have thought through complex issues. The cases have varying demands. Some are short cases while others are quite lengthy. However, all the cases will require you to spend a fair amount of time thinking about the issues.
Term Project: You may choose a term project in lieu of taking a final exam. The term project would involve applying the concepts developed in class to write a case for analyzing the diversification strategy of a firm, acquisition program of a firm or analysis of a single acquisition or merger. Ideally the term project should be done in a small group or 2 to 3 students. Please contact me by the end of drop add if you plan to do a term project.
Assignments: There will be several take home assignments (no more than five) during the course. Some assignments will relate to specific issues in the case to be discussed in the following class. Some assignments will be written analysis of cases that we may not be able to cover completely in the allotted class time (in particular see session 3 and 5). There may also be assignments where I will pose a strategic situation and ask you to generate some options. The possible assignments are indicated in the syllabus.
Final Exam: The final exam will be the analysis of a case dealing with a corporate diversification and/or acquisition decision. Depending on the length of the case, I may give the case to you ahead of time or during the exam.
Anticipated Grading Approach and Student-Performance Standards.
Evaluation will be based in the following distribution: Please let me know ahead of time if you will miss a class. More than 2 absences during the semester will be detrimental to your grade.
Class participation: 35%
Assignments: 30%
Term project/Final Exam: 35%
In grading class participation, I tend to give extra weight to comments that are building on others’ comments. This is not an exact science, and you are welcome to discuss your participation grades with me at discrete intervals during the course.
Most of the assignments will involve making some logical conclusions. In grading assignments and exams, I will give you a fair amount of latitude in making reasonable starting assumptions, as none of us can be certain about the future. However, once you make a starting assumption, I am more interested in the logic that leads to your conclusions. Clarity in presenting your arguments will generate extra credit. I prefer nested bullet points but if you prefer text that is fine too. Typically, clear and parsimonious presentation of your ideas will allow you to spot logical problems easily.
An Overview of the Course Material
The cases and supplemental materials have been chosen with one simple objective. They are the best materials that I know for internalizing concept(s) and not because of their newsworthiness. The readings are chosen with the same objectives. Some are simply articles from the business press. Some of my own frameworks are not yet published and I will make these available as power point presentations. Some material is still being developed and will be distributed later. I may use cases that have been developed by organizations for internal decision-making. Some of these cases have confidential material and will be so marked. The organizations have given me permission to use these in classroom settings with the caveat that they should not be disseminated beyond the class.
Schedule of Classes
Session 1 August 26, 2002
COMPETITIVE STRATEGY
TOPIC: A Language for Understanding Competitive Advantage
CONCEPTS:
· What is a business model?
· Critical activities and table stakes and capabilities
· A framework for understanding customer values
· A methodology for developing a business model
CASE: Southwest (from MBAC 411)
READINGS:
· Stalk, G, P. Evans and L. E. Shulman. 1992. “Competing on capabilities: The new rules of corporate strategy”, HBR, 92209.
Session 2 September 9, 2002
TOPIC: Competitive Positioning?
Case: Alcoa Forge and the PUV division
PREPARATION QUESTIONS:
What do you recommend that Alcoa Forge do with the PUV business?
READINGS:
· Stalk, G, P. Evans and L. E. Shulman. 1992. “Competing on capabilities: The new rules of corporate strategy”, HBR, 92209.
DIVERSIFICATION/CORPORATE STRATEGY
Session 3 September 16, 2002
TOPIC: Consolidating a new product line
CASE: CTS Knights Watch Crystal Diversification
PREPARATION QUESTIONS:
1. Critically evaluate (strategically and financially) the Tuning Fork decision and suggest an action plan if CTSK decided to pursue this technology with a view to becoming a leading player.
2. Now suggest an action plan if CTSK decides its primary emphasis is going to be on the XY flexure.
a. Develop an action plan if CTSK feels that the Tuning Fork is at least five years away.
b. Develop an action plan if CTSK feels that the Tuning Fork may arrive before three years.
Session 4 September 23, 2002
TOPIC: A Language for Understanding Corporate Strategy
CONCEPTS:
- How do you apply Porter’s model to diversification decisions?
- What is the role of capabilities in diversification decisions?
- What is the role of competencies in diversification decisions?
- Is there a difference between capabilities and competencies?
- How does Porter’s article relate to the concepts of capabilities and competencies?
READINGS:
· Porter, M. 1987. “From competitive advantage to corporate strategy”, HBR, 87307.
· Stalk, G, P. Evans and L. E. Shulman. 1992. “Competing on capabilities: The new rules of corporate strategy”, HBR, 92209.
· Prahalad, C. K and G. Hamel. 1990. “The core competence of the corporation”, HBR, 90311.
CASES: Microsoft Corporation
Microsoft’s Big Bet
Microsoft’s Xbox
PREPARATION QUESTIONS:
- What capabilities and/or competencies allowed Microsoft to dominate the applications market?
- What capabilities and/or competencies is Microsoft trying to develop to position itself for the future?
Session 5 September 30, 2002
TOPIC: Developing Competencies
CASE: Enron Gas Services HBS 9-294-076
PREPARATION QUESTIONS:
To be distributed
READINGS:
· Prahalad, C. K and G. Hamel. 1989. “Strategic Intent”, HBR, 89308*.
Session 6 October 7, 2002
TOPIC: Leveraging Competencies in Diversification
CASE: Enron’s Diversification
PREPARATION QUESTIONS:
To be distributed
Session 7 October 14, 2002
TOPIC: Choosing between and acquisition and greenfield diversification
CASE: Walsh Petroleum
PREPARATION QUESTIONS:
Valley Oil Acquisition
1. What is your assessment of Walsh Petroleum’s present competitive situation?
2. Think about the industry structure and the competitive forces affecting Walsh as well as its own capabilities.
3. What is your assessment of Walsh’s financial position?
4. What are the pros and cons of acquiring Valley Oil?
5. What are the implications of the Valley Oil acquisition to Walsh’s core business?
6. How much should Walsh be willing to pay for Valley Oil? (Remember you need to be able to finance the deal).
C-Store Diversification
1. What are the pros and cons in the C-store alternative? How do all the family considerations fit into the picture?
2. Develop some profit estimates based on Table 3 in the case and page 484.
Divestment
1. Would you consider selling out if you are John?
Overall: Which option(s) would you recommend?
MODE OF ENTRY
Session 8 October 21, 2002
TOPIC: Mode of entry
CASE: EMI and the CT Scanner (A) (9-383-194)
PREPARATION QUESTIONS:
As a board member of EMI, are you convinced of the company’s need to diversify away from the entertainment business?
- As of 1972, will you vote for the six million capital requests to enter the scanner/medical electronic business?
- Does the entry decision meet Porter’s three tests?
- What is the size of potential market?
- What are the structural factors?
- What do you think EMI’s competitive advantage will be in the new market?
- Think about the critical activities in the value chain. What are the capabilities needed for success?
- If you decide to enter the business:
- Which mode of entry would you choose?
- Which market or markets (U.S., Europe, Rest of the World) would you choose?
- Prepare a five-year plan post-entry laying out what contingencies may arise and how you wish to tackle them.
- I would like you to explore the possibility of a licensing and/or joint venture with GE.
- We will do some role-playing to see if we can come up with an agreement. Prepare the negotiating positions for both GE and EMI.
- If EMI enters this market can it develop some competencies that may allow it to enter other markets?
Please note that a colleague of mine will lead this class. I will be out of town.
Session 9 October 28, 2002
TOPIC: Mid-Term Exam
CASE: (Will be handed out in previous session)
PREPARATION QUESTIONS: (Will be handed out during exam)
Session 10 November 4, 2002
TOPIC: Environmental Change and Competitive Strategy in Pharmaceutical Industries
CASE: Merck in 1993
READINGS:
· “The Core Competence of the Corporation”.
PREPARATION QUESTIONS:
- Traditionally, how have pharmaceutical companies conducted R&D? What was the rationale behind Roy Vagelos’s restructuring of Merck’s R&D process?
- Discuss the logic behind the traditional methods used to market pharmaceutical.
3. What changes are occurring in the health care environment in the late 1980s and early 1990s? Given these changes, how would you as Roy Vagelos position Merck?