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 7Developing 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

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


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

The Answers can change

What businesses should

we be in?

PC’s and Mainframes

THEN…..

Computer Services


INTEGRATION

Examples

  • General motors began operating steel plants

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


P & G manufactures paper towels

and diapers.

P & G

Can a paper production plant

be shared?

?


19

Does this createvalue?

  • Economies of scale & scope?

  • Revenue- enhancement opportunities?

MUST DETERMINE VALUE CREATION

Geographic diversification

Horizontaldiversification

Verticaldiversification


INTEGRATION

Example

Fed Ex acquired Kinko’s

Drop off and pick up points for packages


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

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


OPPORTUNUTIES TO EXPLOIT POTENTIAL ECONOMIES OF SCOPE

Fit among parent-subsidiary resources

Fit of parent-subsidiary dominant logic


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

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


The U.S. Automobile Industry’s Profit Pool


RELATED VERSUS UNRELATED DIVERSIFICATION

  • Unrelated

  • diversification

  • Related

  • diversification


BRINKER INTERNATIONAL

Maggiano’s

Horizontal

  • From one market segment to another

  • Casual dining

Romano’s

Macaroni Grill

Chili’s


COMPETITIVE ADVANTAGE

Resources

Implementation

Arenas

Organi-zationalstructure

Specialized

General

Systems

Processes


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


Portfolio Management

5-20


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