Developing Corporate Strategy OBJECTIVES Define corporate strategy Understand
Developing Corporate Strategy
OBJECTIVES Define corporate strategy Understand the roles of economies of scope and revenue-enhancement synergy in corporate strategy Explain the different forms of diversification Understand when it makes sense for a firm to own a particular business Describe the relationship between corporate strategy and competitive advantage Explain the corporate strategy implications of the stable and dynamic perspectives 1
DIVERSIFICATION Company Diversification process Types of businesses Heavy reliance on acquisition Many seemingly unrelated businesses Primarily organic Many businesses clustered in a few related industries Product extensions/ new product lines Few related product lines 2
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 businesses? 3
DIVERSIFICATION PROFILES 4
DIVERSIFICATION PROFILES (Continued) 5
DIVERSIFICATION PROFILES (Continued) 6
INTEGRATION Examples • General motors began operating steel plants • Dupont moved from gunpowder making onto dynamite, nitro-glycerine, guncotton, and smokeless power 7
A BRIEF HISTORY AND GENEOLOGY OF A CONGLOMERATE : ITT 1980: fluid control industry 1920 International Telephone and Telegraph 1925: telecom equipment mfr. 1940: Electronics businesses 1995: ITT Industries (auto, defense & electric systems, & fluid-control) The Surviving ITT 1979: Begins selling 250 business units, including all telecom businesses 1960 Enters auto parts industry 1995: ITT Hartford (financial services) Now Hartford Financial Services 1969: Buys Hartford Insurance 1968: Buys Sheraton Hotels 1968: Buys Continental Bakery (Hostess) Sold in 1984 to Interstate Bakery 1995: ITT Corporation (hospitality, entertainment, IT services) Now part of Starwood Hotel & Resorts 8
MUST DETERMINE VALUE CREATION Geographic diversification Horizontal diversification Does this create value? • Economies of scope? • Revenueenhancement opportunities? Vertical diversification 9
SOURCES OF VALUE FROM DIVERSIFICATION/EXPANSION Economies of scope Revenue-enhancement synergies q Lower price of a common q Bundle products to appeal to resource by combining purchases q Share manufacturing capacity new customers q Cross sell to existing customers to reduce average costs q Share distribution to reduce average distribution costs q Achieve higher valuation from larger, more predictable cash flows 10
DIVERSIFICATION DOES NOT NECESSARILY CREATE VALUE Revenue Value generating Non-value generating • Revenue • No cross-sell enhancement opportunities Profit Value Costs Valuation of profit • Economic of scope • Investor-perceived “quality” • Dis-economies of scope • No perceived value logic 11
EXAMPLE OF POOR ECONOMIC LOGIC • In 1990 s, Diversified from longdistance telephone services into wireless cell phone service and cable TV • In 2002, decided to split the company apart 12
DIVERSIFICATION IS DIFFICULT TO MANAGE 13
OPPORTUNUTIES TO EXPLOIT POTENTIAL ECONOMIES OF SCOPE Fit among parentsubsidiary resources Fit of parentsubsidiary dominant logic 14
OTHER REASONS TO DIVERSIFY Risk reduction More efficient for investors to diversify themselves Empire building Rarely results in higher shareholder value or margins Compensation Acquisition motivated by executive pay - a bigger company usually implies a bigger pay check -rarely creates value 15
FORMS AND SCOPE OF DIVERSIFICATION Geographic Wal-Mart expanded into Europe Horizontal • From one market segment to another • From one industry to another Vertical Coke and Pepsi expanded into water Pulte Homes Inc. created Pulte Mortgage LLC) 16
PROFIT POOLS Profit pool analysis helps identify opportunities 17
WHO SHOULD OWN THE BUSINESS? Two key questions ? 1 Does the business unit add value to the corporation? 2 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 different business generate more value? ) 18
COMPETITIVE ADVANTAGE Resources Implementation Arenas Specialized General Organizational structure Systems Processes 19
MASCO CORPORATION Independent – unattractive Combined – profitable Cabinets Home depot Plumbing Manufacturing design and Marketing Decorative architectural products Lower Sales Lower Specialty products 20
CORPORATE OWNERSHIP IN A DYNAMIC CONTEXT • Economies of scope • Revenue enhancement • In dynamic markets, • Nimbleness • Response time diversification can hinder competitiveness • This is why Adaptec, Palm, and 3 Com spun off businesses 21
CORPORATE STRATEGY IN STABLE AND DYNAMIC CONTEXTS Stable Contexts Dynamic Contexts Collaboration is solidified through static structural arrangement among wholly-owned businesses Dynamic Collaboration is fluid with networks being created, changed, and disassembled between combinations of owned and alliance businesses Key objectives are the pursuit of economies of scale and scope Key objectives are growth, maneuverability, and economies of 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 businesslevel 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 22
HOW WOULD YOU DO THAT? Walt Disney wants to enter more mature film entertainment (e. g. , Kill Bill) Pros Cons Leverage production Damage core brand Leverage distribution Requires producers and directors with different skills ? What are Walt Disney’s strategic options? ? 23
SUMMARY 1 Define corporate strategy 2 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 24
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