Chapter 7 - Developing Corporate Strategy pptx

Chapter 7
Developing Corporate
Strategy
2
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
the stable and dynamic perspectives
3
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
4
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?
5
A SHIFT IN IBM’S CORPORATE STRATEGY
The Answers can change
What businesses should
we be in?
PC’s and Mainframes
THEN…
Computer Services

6
INTEGRATION
•
General motors began operating
steel plants
•
Dupont moved from gunpowder making
onto dynamite, nitro-glycerine,
guncotton, and smokeless power
Examples
7
P & G
?
Can a paper production plant
be shared?
P & G manufactures paper towels
and diapers.
8
MUST DETERMINE VALUE CREATION
Geographic
diversification
Horizontal
diversification
Vertical
diversification
Does this create
value?
•
Economies of
scope?

•
Revenue-
enhancement
opportunities?
9
INTEGRATION
Example
Fed Ex acquired Kinko’s
Drop off and pick up points for packages
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
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”
12
DIVERSIFICATION IS DIFFICULT TO MANAGE
13
OPPORTUNUTIES TO EXPLOIT POTENTIAL ECONOMIES OF SCOPE
Fit among
parent-
subsidiary
resources
Fit of parent-
subsidiary
dominant
logic
14
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
15
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)
16
RELATED VERSUS UNRELATED DIVERSIFICATION
Related
diversification
Unrelated
diversification
17
BRINKER INTERNATIONAL

Horizontal
•
From one market

segment to another
•
Casual dining
Maggiano’s
Romano’s
Macaroni Grill
Chili’s
18
COMPETITIVE ADVANTAGE
Arenas
Specialized General
Organi-
zational
structure
Systems Processes
Resources Implementation
19
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