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Chapter 7 Developing Corporate Strategy

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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Chapter 7 Developing Corporate Strategy

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  1. Chapter 7Developing Corporate Strategy

  2. 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

  3. 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

  4. In which business arenas should a company compete? 1 Also, how do we create synergies between our businesses? 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

  5. 7 DIVERSIFICATION PROFILES

  6. 7 DIVERSIFICATION PROFILES (Continued)

  7. 7 DIVERSIFICATION PROFILES (Continued)

  8. INTEGRATION Examples • General motors began operating steel plants • Dupont moved from gunpowder making onto dynamite, nitro-glycerine, guncotton, and smokeless power

  9. 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

  10. 19 Does this createvalue? • Economies of scope? • Revenue- enhancement opportunities? MUST DETERMINE VALUE CREATION Geographic diversification Horizontaldiversification Verticaldiversification

  11. 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

  12. 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

  13. 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

  14. OPPORTUNUTIES TO EXPLOIT POTENTIAL ECONOMIES OF SCOPE Fit among parent-subsidiary resources Fit of parent-subsidiary dominant logic

  15. 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

  16. 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

  17. PROFIT POOLS Profit pool analysis helps identify opportunities

  18. Does the business unit add value to the corporation? 1 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 different business generate more value?) 2 WHO SHOULD OWN THE BUSINESS? Two key questions ?

  19. COMPETITIVE ADVANTAGE Resources Implementation Arenas Organi-zationalstructure Specialized General Systems Processes

  20. Cabinets Plumbing Sales Decorative architectural products Specialty products MASCO CORPORATION Independent – unattractive Combined – profitable Homedepot Home depot Manu-facturing design and Marketing Lower Lower

  21. 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

  22. 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

  23. 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?

  24. 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

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