Chapter 7 - Developing Corporate Strategy pptx

Chapter 7Developing Corporate Strategy... OBJECTIVES Define corporate strategy 1 Understand the roles of economies of scope and revenue-enhancement synergy in corporate strategy 2 Explai

Chapter 7

Developing Corporate Strategy

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 Explain the corporate strategy implications of

DIVERSIFICATION

Diversification process Types of businesses

Heavy reliance on acquisition

Many seemingly un-related businesses

Primarily organic Many businesses

clustered in a few related industries

Company

Product extensions/

new product lines

Few related product lines

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?

A SHIFT IN IBM’S CORPORATE STRATEGY

The Answers can change

What businesses should

we be in?

PC’s and Mainframes

THEN…

Computer Services

INTEGRATION

• General motors began operating steel plants

• Dupont moved from gunpowder making onto dynamite, nitro-glycerine,

guncotton, and smokeless power

Examples

P & G

?

Can a paper production plant

Can a paper production plant

be shared?

P & G manufactures paper towels and diapers

MUST DETERMINE VALUE CREATION

Geographic diversification

Horizontal diversification

Does this create value?

• Economies of scope?

• Revenue- enhancement opportunities?

INTEGRATION

Example Fed Ex acquired Kinko’s Drop off and pick up points for packages

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

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”

DIVERSIFICATION IS DIFFICULT TO MANAGE

Diversification and Performance in S&P 500 and S&P

MidCap Firms (1992-2000)

0%

1%

2%

3%

4%

5%

6%

7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

ROA TSR

OPPORTUNUTIES TO EXPLOIT POTENTIAL ECONOMIES OF SCOPE

Fit among parent-subsidiary resources

Fit of parent-subsidiary dominant logic

OTHER REASONS TO DIVERSIFY

Risk reduction

Empire building

More efficient for investors to diversify themselves

Rarely results in higher share- holder value or margins

Acquisition motivated by executive

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)

RELATED VERSUS UNRELATED DIVERSIFICATION

Related diversification Unrelated

diversification

BRINKER INTERNATIONAL

Horizontal

• From one market segment to another

• Casual dining

Maggiano’s

Romano’s Macaroni Grill

Chili’s

COMPETITIVE ADVANTAGE

Arenas

Organi-zational structure

Organi-zational

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