Chapter 7 Developing Corporate Strategy

1 OBJECTIVES Define corporate strategy 1 Understand the roles of economies of scope and revenue-enhancement synergy in corporate strategy 2 Explain the different forms of diversification 3 Understand when it makes sense for a firm to own a particular business 4 Explain the corporate strategy implications of the stable and dynamic perspectives 5 6 Explain the profit pool and portfolio perspectives of corporate strategic expansion

2 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

3 THREE CORPORATE STRATEGY DECISIONS THAT ARISE WHEN MAKING ENTRY/EXIT DECISIONS In which business arenas should a company 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?

4 A SHIFT IN IBM’S CORPORATE STRATEGY The Answers can change What businesses should we be in? PC’s and Mainframes THEN….. Computer Services

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

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

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

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

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 DIVERSIFICATION IS DIFFICULT TO MANAGE

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

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)

The U.S. Automobile Industry’s Profit Pool

16 RELATED VERSUS UNRELATED DIVERSIFICATION Related diversification Unrelated diversification

17 BRINKER INTERNATIONAL Horizontal From one market segment to another Casual dining Maggiano’s Romano’s Macaroni Grill Chili’s

18 COMPETITIVE ADVANTAGE Arenas SpecializedGeneral Organi- zational structure SystemsProcesses ResourcesImplementation

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

Portfolio Management 5-20