1. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-1 Corporate Strategy: Leveraging Resources by Robert Pitts & David Lei Slides prepared by John P. Orr Webster University Chapter 6

2. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-2 What you will learn… The concept of corporate strategy The notion of a “resource-based view” of corporate strategy How effective corporate strategy can be used to extend and leverage a firm’s distinctive competence The broad types of corporate strategy –Vertical Integration –Related Diversification –Unrelated Diversification Slide 1 of 3

3. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-3 What you will learn… Economic forces that motivate the pursuit of different corporate strategies How to balance the benefits and costs of diversification Benefits of sharing and leveraging resources among businesses or activities Costs accompanying diversification andthe limitations of sharing Slide 2 of 3

4. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-4 What you will learn… How companies undertake corporate restructuring to boost shareholder value How spin-offs and divestitures represent a form of restructuring designed to regain focus and renewed competitiveness Slide 3 of 3 Corporation B-1 B-2 B-n

5. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-5 The Kellogg Company Cereal market fades Gutierrez as CEO Vegetarian and alternative foods Growth through snack foods Accelerating internal product development Strategic Snapshot

6. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-6 Resources and Strategy Resource-Based View of the Firm An evolving set of strategic management ideas that place considerable emphasis on the firm’s ability to distinguish itself from rivals by means of investing in hard-to- imitate and specific resources, such as: Technologies Skills Capabilities Assets Management approaches

7. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-7 Resource-Based View: Key Concepts Ideally, distinctive resources are hard for competitors to duplicate A firm’s resources should be highly specialized and durable Firms need to monitor the environment so that their corporate resources do not suffer from easy substitution by rivals

8. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-8 Enlarging the Firm’s Scope of Operations Entrance into… New stages of activity (i.e., vertical integration) New businesses/ industries (i.e., industry-based diversification) Exhibit 6-1

9. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-9 Strategic Competency in action A New Corporate Vision: Transforming DuPont Enter CEO Chad Holliday Biotechnology + chemistry Heritage of Nylon and Lycra Agribusiness and ‘bio-refinery’ Exiting the pharmaceutical and petroleum industries

10. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-10 Strategies – Vertical Integration Full vs. partial integration Backward integration Forward integration Costs of vertical integration

11. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-11 Strategies – Related Diversification Focus on internal development Mutually reinforcing businesses Making competence hard to imitate Ensuring managerial fit

12. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-12 Strategies – Unrelated Diversification Acquisitions vs. internal development Attempting to beat the market Conglomerate discount? Limited unrelated diversification

13. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-13 Benefits of Diversification A.More attractive terrain Faster growth Greater profitability More stability B.Access to resources Physical assets and access to markets Technologies and skills Expertise C.Sharing of activities (any activity) Exhibit 6-2

14. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-14 Exhibit 6-3A Sharing Expertise Among Businesses Partial List of Businesses Computer/workstations Laser printers Digital imaging Engineering systems Microprocessors Shared Expertise Engineering skills Rapid product development Distinctive manufacturing quality Leverage design skills Hewlett-Packard

15. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-15 Exhibit 6-3B Sharing Expertise Among Businesses Partial List of Businesses LCD Technology Office Equipment Video Equipment Calculators Shared Expertise Precision manufacture Flat-screen technology Miniaturization Fast innovation Sharp Corp.

16. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-16 Exhibit 6-3C Sharing Expertise Among Businesses Partial List of Businesses Soft drinks (Pepsi, Mountain Dew) Snack food (Frito Lay) Gatorade Quaker Oats Tropicana juices Shared Expertise Distribution systems Marketing research Segmentation skills Consumer advertising Brand development Advertising PepsiCo

17. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-17 Exhibit 6-3D Sharing Expertise Among Businesses Partial List of Businesses Heart devices Pacemakers Spinal surgery Nervous system disorders Shared Expertise Shared R&D skills Wireless initiatives Advanced technologies for less invasive treatments Medtronic

18. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-18 Exhibit 6-4A Sharing Activities Among Businesses Firm Partial List of Businesses Key Shared Activities 3M Sandpaper, tapes, fabric treatments, sealants, weather-stripping, Post- It notes, medical patches, signs Technology development, coatings adhesives, thin-film substrates Altria Cigarettes, packaged foods, consumer nondurables Marketing: distribution, advertising, market research, promotion

19. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-19 Exhibit 6-4B Sharing Activities Among Businesses Firm Partial List of Businesses Key Shared Activities IBM Semiconductors, computers, network systems, disk drives, software, electronic commerce Technology: silicon etching, systems, advanced materials, miniaturization. Marketing: distribution Fidelity Investments Mutual funds, brokerage, securities, annuities Operations: network management, telecommunications, internal logistics. Marketing: distribution, sales, service, Internet

20. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-20 Exhibit 6-5 Costs of Diversification Ignorance (about newly entered fields) Ignorance (about newly entered fields) Coordination Communication Compromise Accountability Coordination Communication Compromise Accountability Neglect (of core business) Neglect (of core business)

21. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-21 © 2000 South-Western Publishing Balancing the Benefits & Costs of Diversification BenefitsCosts More attractive terrain Access to key resources Sharing resources Ignorance Neglect Coordination Exhibit 6-6

22. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-22 Conditions Leading to Powerful Diversification Benefits Achieving more attractive terrain (Rarely benefits all stakeholders) Transferring resources which are… Completely important to the receiving business Difficult for receiving business to duplicate Hard for competitors to imitate Shared activities must be… Large in dollar terms Susceptible to economies of scale and experience Exhibit 6-7

23. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-23 Exhibit 6-8 Limiting Diversification Costs Limit Costs of Ignorance by... Entering familiar fields Centering new areas internally rather than by acquisition Limit Costs of Neglect by… Ensuring new businesses fit easily with existing ones Leveraging a distinctive competence systemwide Limit Costs of Cooperation by… Carefully managing the sharing of activities Designing support systems that promote interrelationships

24. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-24 Steps in Corporate Restructuring Selective focus on carefully chosen activities or niches Divestitures and spinoffs Corporation Business-1 Business-2 Business-n Exhibit 6-9

25. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-25 Strategic Competency in action Creating Distinctive Value The 3M Company Legends in innovation McKnight builds in-house labs Scientists share across projects Post-Its glue failed at first Boosting health care and electronics

26. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-26 Exhibit 6-10A* Recent Key Corporate Spin-Offs *Selected firms only FirmSpun OffIndustry/Intent Baxter Healthcare Allegiance Divest low-margin, mature medical supply unit AT&TLucent Technologies Separate telecom equipment maker from service firm PepsiCoTricon Global Restaurants Free up KFC, Taco Bell, Pizza Hut into new unit

27. Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6-27 Exhibit 6-10B* Recent Key Corporate Spin-Offs *Selected firms only FirmSpun OffIndustry/Intent DuPontConoco Use cash from spin- off to focus on life sciences American Express Lehman Bros. Separate brokerage/ underwriting unit from travel services H.J. HeinzWeight Watchers unit Focus on condiment and flavorings business