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

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objectives
OBJECTIVES

1

  • Define corporate strategy

2

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

3

  • Explain the different forms of diversification

4

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

5

  • Describe the relationship between corporate strategy and competitive advantage

6

  • Explain the corporate strategy implications of the stable and dynamic perspectives
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 com-pany compete?

1

  • Also, how do we create synergiesbetween our busi-nesses?
  • Which vehicles should it use to enter/exita business?

2

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

3

THREE CORPORATE STRATEGY DECISIONS THAT ARISE WHEN MAKING ENTRY/EXIT DECISIONS
evolution of diversification
EVOLUTION OF DIVERSIFICATION
  • Vertical Integratione.g. General Motors began operating steel plants to ensure supply of raw materials
  • Expansion into related businessese.g. Dupont moved from gunpowder making onto dynamite, nitro-glycerine, guncotton, and smokeless power
  • Rapid consolidation at turn of the century led to antitrust lawse.g. Standard Oil
  • Wave of conglomerations in 1960s* Unrelated acquisitions expanded the size of companies* Widespread use of portfolio planning (e.g. BCG Matrix – see my research)
  • Corporate Raiders in 1980s broke up many conglomerates
  • New wave of acquisitions in 1990s and 2000s* Mainly related acquisitions
a brief history and geneology of a conglomerate itt

2

1980: fluid control industry

1979: Begins selling 250 business units, including all telecom businesses

1968: Buys Sheraton Hotels

1995: ITT Corporation (hospitality, entertainment, IT services)

Now part of Starwood Hotel & Resorts

1968: Buys Continental Bakery (Hostess)

Sold in 1984 to Interstate Bakery

A BRIEF HISTORY AND GENEOLOGY OF A CONGLOMERATE :ITT

1995: ITT Industries (auto, defense & electric systems, & fluid-control)

The Surviving ITT

1940: Electronics businesses

1925: telecom equipment mfr.

1920

International Telephone and Telegraph

1995: ITT Hartford (financial services)

Now Hartford Financial Services

1960 Enters auto parts industry

1969: Buys Hartford Insurance

must determine value creation

19

Does this createvalue?

  • Economies of scope?
  • Revenue- enhancement opportunities?
MUST DETERMINE VALUE CREATION

Geographic diversification

Horizontaldiversification

Verticaldiversification

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
example of poor economic logic
EXAMPLE OF POOR ECONOMIC LOGIC
  • In 1990s, Diversified from long-distance telephone services into wireless cell phone service and cable TV
  • In 2002, decided to split thecompany apart
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

What is a 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

profit pools
PROFIT POOLS
  • Profit pool analysis helps identify opportunities
who should own the business

1

  • Does the business unit add value to the corporation?

2

  • Does the corporation owning the business unit add more value than alternative ways of linking a business to the corporation? (would an alliance, a joint venture, internal business development or acquisition of a differ-ent business generate more value?)
WHO SHOULD OWN THE BUSINESS?
  • Two key questions
  • ?
competitive advantage
COMPETITIVE ADVANTAGE
  • Resources
  • Implementation
  • Arenas
  • Organi-zationalstructure
  • Specialized
  • General
  • Systems
  • Processes
masco corporation

Cabinets

  • Plumbing
  • Sales
  • Decorative architectural products
  • Specialty products
MASCO CORPORATION
  • Independent – unattractive
  • Combined – profitable
  • Homedepot
  • Home depot
  • Manu-facturing design and Marketing
  • Lowe’s
  • Lowe’s
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
corporate strategy in stable and dynamic contexts

Stable Contexts

  • Dynamic Contexts
  • Collaboration is solidified through static structural arrangement among wholly-owned businesses
  • The business units’ roles are to execute their given strategy
  • Business units’ incentives combine business with corporate-level rewards to promote cooperation
  • Balanced-scorecard objectives emphasize performance against budget and in comparison to within-firm peer unit
  • Dynamic Collaboration is fluid with networks being created, changed, and disassembled between combinations of owned and alliance businesses
  • The business units’ roles are to execute their strategy and seek new collaborative opportunities
  • Business units’ incentives emphasize business-level rewards to promote aggressive execution and collaborative-search objectives
  • Balanced-scorecard objectives gauge performance relative to competitors in terms of growth, market share, and profitability
  • Key objectives are the pursuit of economies of scale and scope
  • Key objectives are growth, maneuverability, and economies of scope
  • Top management team emphasizes collaboration among the businesses and the form of that collaboration
  • Top management team emphasizes the creation of a collaborative context that is rich in terms of content and linkages
CORPORATE STRATEGY IN STABLE AND DYNAMIC CONTEXTS
how would you do that

Damage core brand

  • Requires producersand directors withdifferent skills
  • Leverage production
  • Leverage distribution
  • ?
  • ?
HOW WOULD YOU DO THAT?
  • Walt Disney wants to enter more mature film entertainment (e.g., Kill Bill)
  • Pros
  • Cons
  • What are Walt Disney’s strategic options?
summary

1

  • Define corporate strategy

2

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

3

  • Explain the different forms of diversification

4

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

6

5

  • Explain the corporate strategy implications of the stable and dynamic perspectives
  • Describe the relationship between corporate strategy and competitive advantage
SUMMARY
exercises
EXERCISES
  • Identify the vertical, horizontal and geographical scope of MGM-Mirage of your choice. How similar are the resource requirements (how related is the firm)? Determine if there is a dominant logic connecting the businesses.
  • Design a future corporate strategy for MGM-Mirage.