Chapter 7 developing corporate strategy
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Chapter 7 Developing Corporate Strategy. OBJECTIVES . 1. Define corporate strategy. Understand the roles of economies of scope and revenue-enhancement synergy in corporate strategy. 2. 3. Explain the different forms of diversification. 4.

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Chapter 7 Developing Corporate Strategy

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Chapter 7 developing corporate strategy

Chapter 7Developing Corporate Strategy


Chapter 7 developing corporate strategy

OBJECTIVES

1

Define corporate strategy

Understand the roles of economies of scope and revenue-enhancement synergy in corporate strategy

2

3

Explain the different forms of diversification

4

Understand when it makes sense for a firm to own a particular business

Explain the corporate strategy implications of the stable and dynamic perspectives

5

Explain the profit pool and portfolio perspectives of corporate strategic expansion

6


Diversification

DIVERSIFICATION

Company

Diversification process

Types of businesses

Heavy reliance on acquisition

Many seemingly un-related businesses

Primarily organic

Many businesses clustered in a few related industries

Product extensions/new product lines

Few related product lines

MITY


Three corporate strategy decisions that arise when making entry exit decisions

In which business arenas should a

company compete?

1

Also, how do we create synergiesbetween our busi-nesses?

Which vehicles should it use to enter/exita business?

2

What underlining economic logic makes it sensible to compete in multiple businesses?

3

THREE CORPORATE STRATEGY DECISIONS THAT ARISE WHEN MAKING ENTRY/EXIT DECISIONS


A shift in ibm s corporate strategy

A SHIFT IN IBM’S CORPORATE STRATEGY

The Answers can change

What businesses should

we be in?

PC’s and Mainframes

THEN…..

Computer Services


Integration

INTEGRATION

Examples

  • General motors began operating steel plants

  • Dupont moved from gunpowder making onto dynamite, nitro-glycerine, guncotton, and smokeless power


Chapter 7 developing corporate strategy

P & G manufactures paper towels

and diapers.

P & G

Can a paper production plant

be shared?

?


Must determine value creation

19

Does this createvalue?

  • Economies of scale & scope?

  • Revenue- enhancement opportunities?

MUST DETERMINE VALUE CREATION

Geographic diversification

Horizontaldiversification

Verticaldiversification


Integration1

INTEGRATION

Example

Fed Ex acquired Kinko’s

Drop off and pick up points for packages


Sources of value from diversification expansion

Economies of scope

Revenue-enhancement synergies

  • Lower price of a common resource by combining purchases

  • Bundle products to appeal to new customers

  • Share manufacturing capacity to reduce average costs

  • Cross sell to existing customers

  • Share distribution to reduce average distribution costs

  • Achieve higher valuation from larger, more predictable cash flows

SOURCES OF VALUE FROM DIVERSIFICATION/EXPANSION


Diversification does not necessarily create value

DIVERSIFICATION DOES NOT NECESSARILY CREATE VALUE

Non-value generating

Value generating

Revenue

  • Revenue enhancement

  • No cross-sell opportunities

Profit

  • Economic of scope

  • Dis-economies of scope

Value

Costs

Valuation of profit

  • Investor-perceived “quality”

  • No perceived value logic


Diversification is difficult to manage

DIVERSIFICATION IS DIFFICULT TO MANAGE


Opportunuties to exploit potential economies of scope

OPPORTUNUTIES TO EXPLOIT POTENTIAL ECONOMIES OF SCOPE

Fit among parent-subsidiary resources

Fit of parent-subsidiary dominant logic


Other reasons to diversify

Risk reduction

Empire building

Compensation

OTHER REASONS TO DIVERSIFY

More efficient for investors to diversify themselves

Rarely results in higher share- holder value or margins

Acquisition motivated by executive pay - a bigger company usually impliesa bigger pay check -rarely creates value


Forms and scope of diversification

FORMS AND SCOPE OF DIVERSIFICATION

Wal-Martexpanded intoEurope

Geographic

Horizontal

  • From one market segment to another

  • From one industry to another

Coke andPepsi expandedinto water

Pulte HomesInc. created Pulte Mortgage LLC)

Vertical


Chapter 7 developing corporate strategy

The U.S. Automobile Industry’s Profit Pool


Related versus unrelated diversification

RELATED VERSUS UNRELATED DIVERSIFICATION

  • Unrelated

  • diversification

  • Related

  • diversification


Brinker international

BRINKER INTERNATIONAL

Maggiano’s

Horizontal

  • From one market segment to another

  • Casual dining

Romano’s

Macaroni Grill

Chili’s


Competitive advantage

COMPETITIVE ADVANTAGE

Resources

Implementation

Arenas

Organi-zationalstructure

Specialized

General

Systems

Processes


Corporate ownership in a dynamic context

CORPORATE OWNERSHIP IN A DYNAMIC CONTEXT

  • Economies of scope

  • Revenue enhancement

  • In dynamic markets, diversification can hinder competitiveness

  • This is why Adaptec, Palm, and 3Com spun off businesses

  • Nimbleness

  • Response time


Chapter 7 developing corporate strategy

Portfolio Management

5-20


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