0. Chapter 7 Developing Corporate Strategy

1. 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

2. 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

3. 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

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

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

7. MUST DETERMINE VALUE CREATION19
MUST DETERMINE VALUE CREATION
Geographic diversification
Does this create value?
Economies of scope?
Revenue- enhancement opportunities?
Horizontal diversification
Vertical diversification

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
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

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
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

15. RELATED VERSUS UNRELATED DIVERSIFICATION

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

17. COMPETITIVE ADVANTAGE
Resources
Implementation
Arenas
Organi- zational structure
Specialized
General
Systems
Processes

18. 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