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 5 Explain the corporate strategy implications of the stable and dynamic perspectives 6 Explain the corporate strategy implications of the stable and dynamic perspectives

MITY 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 MITY Product extensions/ new product lines Few related product lines

THREE CORPORATE STRATEGY DECISIONS THAT ARISE WHEN MAKING ENTRY/EXIT DECISIONS In which business arenas should a com- pany compete? Which vehicles should it use to enter/exit a business? What underlining economic logic makes it sensible to compete in multiple businesses? Also, how do we create synergies between our busi- nesses? 1 2 3

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 Can a paper production plant be shared? P & G manufactures paper towels and diapers.

MUST DETERMINE VALUE CREATION 19 MUST DETERMINE VALUE CREATION Geographic diversification Does this create value? Economies of scope? Revenue- enhancement opportunities? Horizontal diversification Vertical diversification

INTEGRATION Example Fed Ex acquired Kinko’s Drop off and pick up points for packages

SOURCES OF VALUE FROM DIVERSIFICATION/EXPANSION Economies of scope Lower price of a common resource by combining purchases Share manufacturing capacity to reduce average costs Share distribution to reduce average distribution costs Revenue-enhancement synergies Bundle products to appeal to new customers Cross sell to existing customers Achieve higher valuation from larger, more predictable cash flows

DIVERSIFICATION DOES NOT NECESSARILY CREATE VALUE Non-value generating Value generating Revenue Revenue enhancement No cross-sell opportunities Profit Value Economic of scope Dis-economies of scope 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

OTHER REASONS TO DIVERSIFY Risk reduction Empire building Compensation 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 implies a bigger pay check -rarely creates value

FORMS AND SCOPE OF DIVERSIFICATION Wal-Mart expanded into Europe Geographic Horizontal From one market segment to another From one industry to another Coke and Pepsi expanded into water Pulte Homes Inc. created Pulte Mortgage LLC) Vertical

RELATED VERSUS UNRELATED 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- zational structure 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