1. Chapter 7 Developing Corporate Strategy

2. FIRST - A NOTE ON THE PRESENTATIONS Presentation Content: Description of the topic Key findings in the literature (focused literature review) Challenges and unanswered questions Recommendations for dealing with the challenges Professional powerpoint format; all group members participate Send a copy of the slides to samertz@comcast.net the day before the presentationsamertz@comcast.net Presentation dates for groups – approved topics: August 4:August 11: – Stakeholder Analysis- Smartphones – Role of Vision & Mission – Netflix – Whole Foods 1

3. A NOTE ON THE REMAINING CASES Thanks to those of you who have already submitted the case write-ups As a reminder – if you haven’t completed the case write-ups, the last opportunities to submit cases are July 28 (Balanced Scorecard) and August 2 (Daimler Chrysler) Final case will be announced on July 19 – this is due on August 11. This case analysis is an individual effort. 2

4. 3 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

5. 4 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

6. 5 EXAMPLES OF PRODUCT AND REGIONAL CONCENTRATIONS

7. 6 Portfolio planning: practice of mapping diversified businesses or products based on their relative strengths or market attractiveness THE CONGLOMERATE VERSION OF PORTFOLIO PLANNING

8. 7 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? Synergies occur when the combined benefits of firm activities in two or more arenas are more than the sum of those benefits alone

9. 8 A SHIFT IN IBM’S CORPORATE STRATEGY The Answers can change What businesses should we be in? PC’s and Mainframes THEN….. Computer Services

10. 9 VERTICAL INTEGRATION AS A FORM OF DIVERSIFICATION General motors began operating steel plants Dupont moved from gunpowder making onto dynamite, nitro-glycerine, guncotton, and smokeless power Examples

11. 10 P & G ILLUSTRATES ECONOMIES OF SCOPE ? Can a paper production plant be shared? P & G manufactures paper towels and diapers.

12. 11 SCOPE CAN BE EXPANDED THROUGH THREE LEVELS Geographic diversification Horizontal diversification Vertical diversification Does this create value? Economies of scope? Revenue- enhancement opportunities?

13. 12 INTEGRATION Example Fed Ex acquired Kinko’s Drop off and pick up points for packages

14. 13 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

15. 14 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”

16. 15 DIVERSIFICATION IS DIFFICULT TO MANAGE

17. 16 OPPORTUNUTIES TO EXPLOIT POTENTIAL ECONOMIES OF SCOPE Fit among parent- subsidiary resources Fit of parent- subsidiary dominant logic

18. 17 DIVERSIFICATION IS NOT ALWAYS IN THE BEST INTEREST OF SHAREHOLDERS 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

19. 18 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

20. 19 RELATED VERSUS UNRELATED DIVERSIFICATION Related diversification Unrelated diversification Business units operated by the firm are highly related Business units operated by the firm are highly dissimilar

21. 20 BRINKER INTERNATIONAL – LOW LEVELS OF DIVERSIFICATION Horizontal From one market segment to another Casual dining Maggiano’s Romano’s Macaroni Grill Chili’s

22. 21 COMPETITIVE ADVANTAGE Arenas SpecializedGeneral Organi- zational structure SystemsProcesses Resources Implementation Levers Under which conditions will the portfolio create value for shareholders? Degree of relatedness

23. 22 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 More stable firms operate in a tightly integrated fashion Firms in dynamic contexts must have strong capabilities in the areas of learning, knowledge transfer, rapid responsiveness