Corporate Development and Strategy Mergers and Acquisitions, New Ventures, and Brand Extensions

Mergers and acquisitions, new ventures, and brand extensions—all aspects of corporate development—are unquestionably strategic business functions. By all the traditional criteria for distinguishing between strategic and tactical decisions, corporate development issues qualify as strategic.

The commitments in question are large, they involve the overall direction of the enterprise, and they have long-term consequences. The most common method for evaluating alternative courses of action

in these areas is a business case analysis consisting of detailed projections of future distributable cash flows discounted back to the present. But discounted cash flow, as we have argued in chapter 16, is by itself a critically flawed tool for making decisions of this sort. The values calculated to justify initiatives depend on projections, into the distant future, of growth rates, profit margins, costs of capital, and other crucial yet highly uncertain variables. Also, a typical discounted cash flow analysis rests on a number of critical assumptions about the nature and intensity of future competition that are

rarely explicit and generally untested. The strategic framework we have developed in this book, especially the view that the most important determinant of strategy is whether an incumbent firm benefits from competitive advantages, applies directly to issues of corporate development. In fact, the utility of this approach in clarifying decision making in this area is an important test of its worth. At a minimum, clarifying the competitive environment in which new initiatives will succeed or fail should provide an essential check on whether the conclusions of a discounted cash flow–based business case are reasonable.

COMPETITION DEMYSTIFIED

A Radically Simplified Approach to Business Strategy

BRUCE GREENWALD AND JUDD KAHN