0. Chapter 7 Developing Corporate Strategy

1. 1 2 3 4 5 6 OBJECTIVES Define corporate strategy
Understand the roles of economies of scope and revenue-enhancement synergy in corporate strategy 3
Explain the different forms of diversification 4
Understand when it makes sense for a firm to own a particular business 5
Describe the relationship between corporate strategy and competitive advantage 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 underlying economic logic makes it sensible to compete in multiple businesses?
Also, how do we create synergies between our busi- nesses? 1 2 3

4. DIVERSIFICATION PROFILES7
DIVERSIFICATION PROFILES

5. DIVERSIFICATION PROFILES (Continued)7
DIVERSIFICATION PROFILES (Continued)

6. DIVERSIFICATION PROFILES (Continued)7
DIVERSIFICATION PROFILES (Continued)

7. EVOLUTION OF DIVERSIFICATION
Vertical Integration e.g. General Motors began operating steel plants to ensure supply of raw materials
Expansion into related businesses e.g. Dupont moved from gunpowder making onto dynamite, nitro-glycerine, guncotton, and smokeless power
Rapid consolidation at turn of the century led to antitrust laws e.g. Standard Oil
Wave of conglomerations in 1960s * Unrelated acquisitions expanded the size of companies * Widespread use of portfolio planning (e.g. BCG Matrix – see my research)
Corporate Raiders in 1980s broke up many conglomerates
New wave of acquisitions in 1990s and 2000s * Mainly related acquisitions

8. A BRIEF HISTORY AND GENEOLOGY OF A CONGLOMERATE :ITT2
A BRIEF HISTORY AND GENEOLOGY OF A CONGLOMERATE :ITT
1980: fluid control industry
1995: ITT Industries (auto, defense & electric systems, & fluid-control)
The Surviving ITT
1940: Electronics businesses
1979: Begins selling 250 business units, including all telecom businesses
1925: telecom equipment mfr.
1920
International Telephone and Telegraph
1995: ITT Hartford (financial services)
Now Hartford Financial Services
1960 Enters auto parts industry
1969: Buys Hartford Insurance
1968: Buys Sheraton Hotels
1995: ITT Corporation (hospitality, entertainment, IT services)
Now part of Starwood Hotel & Resorts
1968: Buys Continental Bakery (Hostess)
Sold in 1984 to Interstate Bakery

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

10. 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

11. 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

12. 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

13. DIVERSIFICATION IS DIFFICULT TO MANAGE

14. OPPORTUNUTIES TO EXPLOIT POTENTIAL ECONOMIES OF SCOPE
Fit among parent- subsidiary resources
Fit of parent- subsidiary dominant logic
What is a dominant logic?

15. 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

16. 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

17. PROFIT POOLS
Profit pool analysis helps identify opportunities

18. 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

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

20. Manu-facturing design and Marketing
MASCO CORPORATION
Independent – unattractive
Combined – profitable
Cabinets
Home depot
Home depot
Plumbing
Manu-facturing design and Marketing
Sales
Decorative architectural products
Lowe’s
Lowe’s
Specialty products

21. 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

22. CORPORATE STRATEGY IN STABLE AND DYNAMIC CONTEXTS
Stable Contexts
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

23. HOW WOULD YOU DO THAT?
Walt Disney wants to enter more mature film entertainment (e.g., Kill Bill)
Pros
Cons
What are Walt Disney’s strategic options?
Leverage production
Damage core brand
Leverage distribution
Requires producers and directors with different skills ? ?

24. SUMMARY 1 Define corporate strategy 2
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
Describe the relationship between corporate strategy and competitive advantage 5
Explain the corporate strategy implications of the stable and dynamic perspectives 6

25. EXERCISES
Identify the vertical, horizontal and geographical scope of MGM-Mirage of your choice. How similar are the resource requirements (how related is the firm)? Determine if there is a dominant logic connecting the businesses.
Design a future corporate strategy for MGM-Mirage.