Developing Corporate Strategy

1 DIVERSIFICATION Diversification processTypes of businesses Heavy reliance on acquisition Many seemingly un- related businesses Primarily organicMany businesses clustered in a few related industries Company Product extensions/ new product lines Few related product lines

2 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?

3 DIVERSIFICATION PROFILES

4 DIVERSIFICATION PROFILES (Continued)

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

7 A BRIEF HISTORY AND GENEOLOGY OF A CONGLOMERATE :ITT 1920 International Telephone and Telegraph 1925: telecom equipment mfr. 1940: Electronics businesses 1980: fluid control industry 1995: ITT Industries (auto, defense & electric systems, & fluid-control) The Surviving ITT 1979: Begins selling 250 business units, including all telecom businesses 1995: ITT Hartford (financial services) Now Hartford Financial Services 1969: Buys Hartford Insurance 1960 Enters auto parts industry 1968: Buys Sheraton Hotels 1968: Buys Continental Bakery (Hostess) Sold in 1984 to Interstate Bakery 1995: ITT Corporation (hospitality, entertainment, IT services) Now part of Starwood Hotel & Resorts

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

9 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

10 DIVERSIFICATION DOES NOT NECESSARILY CREATE VALUE Profit Revenue Value Costs Valuation of profit Non-value generating No cross-sell opportunities Dis-economies of scope No perceived value logic Value generating Revenue enhancement Economic of scope Investor-perceived “quality”

11 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 the company apart

12 OPPORTUNUTIES TO EXPLOIT POTENTIAL ECONOMIES OF SCOPE Fit among parent- subsidiary resources Fit of parent- subsidiary dominant logic In conglomerates

13 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

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

15 PROFIT POOLS Profit pool analysis helps identify opportunities

16 WHO SHOULD OWN THE BUSINESS? ? Two key questions 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 differ- ent business generate more value?) 2

17 COMPETITIVE ADVANTAGE Arenas SpecializedGeneral Organi- zational structure SystemsProcesses ResourcesImplementation

18 MASCO CORPORATION Independent – unattractiveCombined – profitable CabinetsPlumbing Decorative architectural products Specialty products Home depot Lowe Home depot Lowe Sales Manu- facturing design and Marketing

19 CORPORATE OWNERSHIP IN A DYNAMIC CONTEXT Nimbleness Response time Economies of scope Revenue enhancement In dynamic markets, diversification can hinder competitiveness This is why Adaptec, Palm, and 3Com spun off businesses

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

21 HOW WOULD YOU DO THAT? Walt Disney wants to enter more mature film entertainment (e.g., Kill Bill) ProsCons Leverage productionLeverage distribution?Damage core brandRequires producers and directors with different skills ? What are Walt Disney’s strategic options?