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The Multi-Business, Diversified Firm

The Multi-Business, Diversified Firm. MANEC 387 Economics of Strategy. David J. Bryce. Corporate vs. Business Unit Strategy. Business Unit Strategy To whom will we sell, for what price? How will we source, manufacture, distribute, etc. our product? Corporate Strategy

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The Multi-Business, Diversified Firm

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  1. The Multi-Business, Diversified Firm MANEC 387 Economics of Strategy David J. Bryce

  2. Corporate vs. Business Unit Strategy • Business Unit Strategy • To whom will we sell, for what price? • How will we source, manufacture, distribute, etc. our product? • Corporate Strategy • What business(es) should we be in? • How will we get in (or out) of them? • How will we coordinate or integrate businesses to create value? Adapted from M. Porter, 2001, HBR

  3. Corporate-Level Strategy and the Multi-business Firm • Corporate strategy is action taken to gain competitive advantage through multiple business units • Value is created through the configuration and coordination of multi-business activities

  4. Scope of the Firm “Horizontal Integration” Horizontal Scope Prod./Ind. B Prod./Ind. C Prod./Ind. A Sales Sales Sales output-products Distrib Distrib Distrib Manuf. Manuf. Manuf. Vertical Scope . . . “Vertical Integration” Sales Sales Sales Distrib Distrib Distrib Input-products Manuf. Manuf. Manuf. . . .

  5. Wal-mart Horizontal Scope Prod./Ind. B Prod./Ind. C Prod./Ind. A Sales Sales Sales output-products Distrib Distrib Distrib Manuf. Manuf. Manuf. . . . Sales Sales Sales Vertical Scope Distrib Distrib Distrib Input-products Manuf. Manuf. Manuf. . . .

  6. GE Horizontal Scope Prod./Ind. C Refrigerators Aircraft Engines Sales Sales Sales output-products Distrib Distrib Distrib Manuf. Manuf. Manuf. . . . Compressors Sales Sales Sales Vertical Scope Distrib Distrib Distrib Input-products Manuf. Manuf. Manuf. . . .

  7. Why Diversify? • Secure Market Power • Cross-subsidization, mutual forbearance, reciprocal buying • Shown to be an incomplete, if not an incorrect view • Mitigate Business (Cycle) Risk • Perspective from finance • Few firms are just “portfolio” investors

  8. Why Diversify? • Achieve Efficiency (or “Synergy”) • Pursue related or complementary activities • Most common type of diversification • Associated with higher levels of performance than previous two types • Dynamic Learning • Related to the efficiency motivation • Firms invest in activities that leverage existing skills and knowledge • Firms introduce new activities to build skills and knowledge • Objective is to develop a “capabilities portfolio” that is ready for new opportunities when they emerge

  9. How to Choose Industries/Products for Expansion • Strategically Important • Strategically Related; i.e. commonality in one of the following: • Customers • Channels • Inputs • Processes • Market Knowledge

  10. Sequential Entry and Dynamic Learning: Example Source: COMPUSTAT Business Segment Files, 1977-1996

  11. Patterns of Historic Entry in Industries Related to Semiconductors, 1977-1996

  12. A General Inter-industry Relatedness Index Index available for download at http://msm.byu.edu/strategy/bryce/

  13. Examples of the Measure at Work • Two most related industries (z = 3.51): • SIC 2131, “Tobacco, Chewing and Smoking” • SIC 2141, “Tobacco Stemming and Redrying” • Two most unrelated industries (z = -7.0): • SIC 2097 “Ice” • SIC 2397 “Schiffli Machine Embroidery”

  14. Examples of the Measure at Work • Industries that don’t share same 1-digit class (percentile: 100, z = 3.07) • SIC 2951, “Paving Mixtures and Blocks” • SIC 3273, “Concrete, Ready-Mixed” • A more interesting example (percentile: 100, z = 3.04) • SIC 2542, “Metal Partitions and Fixtures” • SIC 3581, “Automatic Vending Machines.”

  15. So what is related to Schiffli? • SIC 2397 Schiffli Machine Embroidery” • (91) SIC 3582, “Commercial Laundry Equipment” • (89) SIC 3961, “Costume Jewelry” • (78) SIC 2512, “Upholstered Furniture”

  16. Examples of the Measure at Work • Energizer bought Schick in 2003 : Razors and Batteries • SIC 3691, “Storage Batteries” • SIC 3421, “Cutlery” • Percentile: 62 (z = 0.31) • A stronger relatedness than average, and stronger than one might expect a priori.

  17. Research questions that can now be tackled - • Which markets does a firm enter as a function of its knowledge? • How do a corporation’s capabilities evolve over time? Does the speed of this evolution affect performance, how? • Under what conditions are long-leaps successful? Relatedness Centroid +0.2 +0.1 0 -0.1 -0.2 time

  18. Summary and Takeaways • Corporate Strategy is about structuring a portfolio of businesses that hang together and make strategic sense • It is sometimes motivated by economizing on transaction costs • Other (strategic) motivations include dynamic learning, efficiency, or sometimes market power and risk management • New tools are emerging for examining relatedness that will help in determining optimal corporate diversification trajectories

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