Supporters of value-based strategy believe that the creation of value ismeasurable, using discounted cash flow concepts. It is a truism to say that some strategic decisions made by organisations add to the value of the shareholders’ investment, while others reduce it. When Hanson bought Imperial Foods it paid ￡2.1 billion. Within a few months it had sold the brewing interests for ￡1.4 billion. Other disposals and cost reductions left Hanson with a very profitable cash-generating tobacco company, after it had regained most of the purchase price from the disposals. There is no doubt that Hanson added to the value of its shareholders.
There is also no doubt that on the stock market the perception was that Imperial as a whole was worth less than the sum of its parts, an example of the so-called ‘conglomerate discount’ on share prices. Decisions taken in the past by Imperial did not add as much to shareholder value as decisions taken by the acquirer. More recently another organisation with mixed interests became the subject of a hostile bid. In this case an organisation was established by various interests to mount a bid for BAT, which at that time was involved in insurance, tobacco, retailing, and various manufacturing interests.
BAT split off many of its interests, effectively creating separate entities in which its shareholders could choose whether they wished to retain their investment or sell it. BAT became a two-industry business, with more focus and less suspicion that good businesses might be propping up bad ones. The bid failed.These examples led to the conclusion that although shareholder value is created when returns on old assets and new investments exceed the cost of capital, in a diversified organisation there has to be something that increases the overall value, so that there is synergy.Figure shows five ways in which diversified companies can affect shareholder value.
Shared resources or activities between components of a company offer one way to increase shareholder value. An example might be a distribution system which is used by all the SBUs, which because of overall size offers real economies of scale. In addition, because total costs are shared among all users, the cost for each may be lower than if they all had to provide such a facility. Purchasing, research and development and sometimes management development are other examples where value may be added by sharing. Such sharing sometimes offers increased potential for differentiation.
However, there are also dangers of diseconomies from sharing activities, particularly from loss of flexibility and the advantage of time through increased bureaucracy. Central purchasing and supplies gone mad has, for example, resulted in situations where a replacement light bulb could only be obtained from a central warehouse some miles away. An organisation has to sift the evidence very carefully in order to ensure that the value gained is real.
Related to shared resources are the spillover benefits that may be gained between SBUs from activities undertaken by any one of them. This may create windfall gains for the other divisions. The third area on Figure is shared knowledge and skills. Buzzell and Gale found from the analysis of the PIMS database that clusters of businesses in similar environments have been found to outperform clusters of dissimilar businesses. Knowledge and skills, whether technical, managerial or commercial, can be passed from one business to another, thus improving performance in a way that might otherwise not have happened. Porter3 set three criteria:
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Strategic Management Tutorial
From Planning To Strategic Management And Beyond
Strategic Management: Success Or Failure?
A Look At The Total Process
The Challenge Of The Future
The Environment: Assumptions In Planning
Techniques For Assessing The Environment
Business Philosophy (ethics And Morality) And Strategic Management
The Corporate Appraisal – Assessing Strengths And Weaknesses
Analysing The Industry And Competitors
Analysing The Uk Management Development And Training Industry: A Case History
The Search For Shareholder Value
Vision And Objectives
Strategic Portfolio Analysis
Portfolio Analysis In Practice
Strategic Planning – A Second Look At The Basic Options
Multinational And Global Strategy
Technology And Manufacturing
Strategic Planning For Human Resources
Relating To The External Environment
Evaluating A Business Plan
Project Planning And Appraisal
From Plans To Actions
Management Of Change
Introducing Strategic Management
Why Planning Sometimes Fails
Strategic Management To Strategic Change?
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