Financial Markets And Corporate Strategy 2nd Edition Solutions
The second European edition of Financial Markets and Corporate Strategy provides comprehensive coverage of financial markets and corporate finance, brought to life by real world examples, cases and insights. Placed in a truly international context, this new and updated edition takes an academic and practical view-point to guide students through the challenges of studying and practicing finance.
Financial Markets And Corporate Strategy 2nd Edition Solutions
Aimed specifically at an international audience, this edition boasts hundreds of references to new and relevant non-US research papers from top finance journals. Whilst retaining the well respected structure of the successful US text, Professor David Hillier has also made a number of additions which include:Fully updated research, data and examples in every chapter.
Coverage of the global financial crisis, the impact it made on the financial markets and the lessons being learnt by the finance industry.
A stronger emphasis on corporate governance and agency theory.
Updates on accounting standards, bankruptcy laws, tax rules and tax systems.
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A diversified company has two levels of strategy: business unit (or competitive) strategy and corporate (or companywide) strategy. Competitive strategy concerns how to create competitive advantage in each of the businesses in which a company competes. Corporate strategy concerns two different questions: what businesses the corporation should be in and how the corporate office should manage the array of business units.
The need to rethink corporate strategy could hardly be more urgent. By taking over companies and breaking them up, corporate raiders thrive on failed corporate strategy. Fueled by junk bond financing and growing acceptability, raiders can expose any company to takeover, no matter how large or blue chip.
Recognizing past diversification mistakes, some companies have initiated large-scale restructuring programs. Others have done nothing at all. Whatever the response, the strategic questions persist. Those who have restructured must decide what to do next to avoid repeating the past; those who have done nothing must awake to their vulnerability. To survive, companies must understand what good corporate strategy is.
While there is disquiet about the success of corporate strategies, none of the available evidence satisfactorily indicates the success or failure of corporate strategy. Most studies have approached the question by measuring the stock market valuation of mergers, captured in the movement of the stock prices of acquiring companies immediately before and after mergers are announced.
These studies show that the market values mergers as neutral or slightly negative, hardly cause for serious concern.1 Yet the short-term market reaction is a highly imperfect measure of the long-term success of diversification, and no self-respecting executive would judge a corporate strategy this way.
Any successful corporate strategy builds on a number of premises. These are facts of life about diversification. They cannot be altered, and when ignored, they explain in part why so many corporate strategies fail.
Diversified companies do not compete; only their business units do. Unless a corporate strategy places primary attention on nurturing the success of each unit, the strategy will fail, no matter how elegantly constructed. Successful corporate strategy must grow out of and reinforce competitive strategy.
To understand how to formulate corporate strategy, it is necessary to specify the conditions under which diversification will truly create shareholder value. These conditions can be summarized in three essential tests:
The three tests for successful diversification set the standards that any corporate strategy must meet; meeting them is so difficult that most diversification fails. Many companies lack a clear concept of corporate strategy to guide their diversification or pursue a concept that does not address the tests. Others fail because they implement a strategy poorly.
The concept of corporate strategy most in use is portfolio management, which is based primarily on diversification through acquisition. The corporation acquires sound, attractive companies with competent managers who agree to stay on. While acquired units do not have to be in the same industries as existing units, the best portfolio managers generally limit their range of businesses in some way, in part to limit the specific expertise needed by top management.
In a portfolio strategy, the corporation seeks to create shareholder value in a number of ways. It uses its expertise and analytical resources to spot attractive acquisition candidates that the individual shareholder could not. The company provides capital on favorable terms that reflect corporatewide fundraising ability. It introduces professional management skills and discipline. Finally, it provides high-quality review and coaching, unencumbered by conventional wisdom or emotional attachments to the business.
Hanson emphasizes low costs and tight financial controls. It has cut an average of 25% of labor costs out of acquired companies, slashed fixed overheads, and tightened capital expenditures. To reinforce its strategy of keeping costs low, Hanson carves out detailed one-year financial budgets with divisional managers and (through generous use of performance-related bonuses and share option schemes) gives them incentive to deliver the goods.
To work, the restructuring strategy requires a corporate management team with the insight to spot undervalued companies or positions in industries ripe for transformation. The same insight is necessary to actually turn the units around even though they are in new and unfamiliar businesses.
But the need to capture the benefits of relationships between businesses has never been more important. Technological and competitive developments already link many businesses and are creating new possibilities for competitive advantage. In such sectors as financial services, computing, office equipment, entertainment, and health care, interrelationships among previously distinct businesses are perhaps the central concern of strategy.
The value chain helps expose the last two (and most important) concepts of corporate strategy. The transfer of skills among business units in the diversified company is the basis for one concept. While each business unit has a separate value chain, knowledge about how to perform activities is transferred among the units. For example, a toiletries business unit, expert in the marketing of convenience products, transmits ideas on new positioning concepts, promotional techniques, and packaging possibilities to a newly acquired unit that sells cough syrup. Newly entered industries can benefit from the expertise of existing units and vice versa.
The fourth concept of corporate strategy is based on sharing activities in the value chains among business units. Procter & Gamble, for example, employs a common physical distribution system and sales force in both paper towels and disposable diapers. McKesson, a leading distribution company, will handle such diverse lines as pharmaceuticals and liquor through superwarehouses.
The ability to share activities is a potent basis for corporate strategy because sharing often enhances competitive advantage by lowering cost or raising differentiation. But not all sharing leads to competitive advantage, and companies can encounter deep organizational resistance to even beneficial sharing possibilities. These hard truths have led many companies to reject synergy prematurely and retreat to the false simplicity of portfolio management.
A corporate strategy based on shared activities clearly meets the better-off test because business units gain ongoing tangible advantages from others within the corporation. It also meets the cost-of-entry test by reducing the expense of surmounting the barriers to internal entry. Other bids for acquisitions that do not share opportunities will have lower reservation prices. Even widespread opportunities for sharing activities do not allow a company to suspend the attractiveness test, however. Many diversifiers have made the critical mistake of equating the close fit of a target industry with attractive diversification. Target industries must pass the strict requirement test of having an attractive structure as well as a close fit in opportunities if diversification is to ultimately succeed.
Each concept of corporate strategy is not mutually exclusive of those that come before, a potent advantage of the third and fourth concepts. A company can employ a restructuring strategy at the same time it transfers skills or shares activities. A strategy based on shared activities becomes more powerful if business units can also exchange skills. As the Marriott case illustrates, a company can often pursue the two strategies together and even incorporate some of the principles of restructuring with them. When it chooses industries in which to transfer skills or share activities, the company can also investigate the possibility of transforming the industry structure. When a company bases its strategy on interrelationships, it has a broader basis on which to create shareholder value than if it rests its entire strategy on transforming companies in unfamiliar industries.