Chapter 7 Developing Corporate Strategy

1. Chapter 7Developing Corporate Strategy

2. Presentation Content: • Description of the topic • Key findings in the literature (focused literature review) • Challenges and unanswered questions • Recommendations for dealing with the challenges • Professional powerpointformat; all group members participate • Send a copy of the slides to samertz@comcast.net the day before the presentation • Presentation dates for groups – approved topics: August 4: August 11: • Stakeholder Analysis - Smartphones • Role of Vision & Mission • Netflix • Whole Foods FIRST - A NOTE ON THE PRESENTATIONS

3. Thanks to those of you who have already submitted the case write-ups • As a reminder – if you haven’t completed the case write-ups, the last opportunities to submit cases are July 28(Balanced Scorecard) and August 2 (Daimler Chrysler) • Final case will be announced on July 19– this is due on August 11. This case analysis is an individual effort. A NOTE ON THE REMAINING CASES

4. OBJECTIVES 1 Define corporate strategy Understand the roles of economies of scope and revenue-enhancement synergy in corporate strategy 2 3 Explain the different forms of diversification 4 Understand when it makes sense for a firm to own a particular business Explain the corporate strategy implications of the stable and dynamic perspectives 5 Explain the corporate strategy implications of the stable and dynamic perspectives 6

5. 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 Product extensions/new product lines Few related product lines MITY

6. EXAMPLES OF PRODUCT AND REGIONAL CONCENTRATIONS

7. THE CONGLOMERATE VERSION OF PORTFOLIO PLANNING Portfolio planning: practice of mapping diversified businesses or products based on their relative strengths or market attractiveness

8. In which business arenas should a com-pany compete? 1 Also, how do we create synergiesbetween our busi-nesses? Which vehicles should it use to enter/exita business? 2 What underlining economic logic makes it sensible to compete in multiple businesses? 3 THREE CORPORATE STRATEGY DECISIONS THAT ARISE WHEN MAKING ENTRY/EXIT DECISIONS Synergies occur when the combined benefits of firm activities in two or more arenas are more than the sum of those benefits alone

9. A SHIFT IN IBM’S CORPORATE STRATEGY The Answers can change What businesses should we be in? PC’s and Mainframes THEN….. Computer Services

10. VERTICAL INTEGRATION AS A FORM OF DIVERSIFICATION Examples • General motors began operating steel plants • Dupont moved from gunpowder making onto dynamite, nitro-glycerine, guncotton, and smokeless power

11. P & G manufactures paper towels and diapers. P & G ILLUSTRATES ECONOMIES OF SCOPE Can a paper production plant be shared? ?

12. 19 Does this createvalue? • Economies of scope? • Revenue- enhancement opportunities? SCOPE CAN BE EXPANDED THROUGH THREE LEVELS Geographic diversification Horizontaldiversification Verticaldiversification

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

14. Economies of scope Revenue-enhancement synergies • Lower price of a common resource by combining purchases • Bundle products to appeal to new customers • Share manufacturing capacity to reduce average costs • Cross sell to existing customers • Share distribution to reduce average distribution costs • Achieve higher valuation from larger, more predictable cash flows SOURCES OF VALUE FROM DIVERSIFICATION/EXPANSION

15. DIVERSIFICATION DOES NOT NECESSARILY CREATE VALUE Non-value generating Value generating Revenue • Revenue enhancement • No cross-sell opportunities Profit • Economic of scope • Dis-economies of scope Value Costs Valuation of profit • Investor-perceived “quality” • No perceived value logic

16. DIVERSIFICATION IS DIFFICULT TO MANAGE

17. OPPORTUNUTIES TO EXPLOIT POTENTIAL ECONOMIES OF SCOPE Fit among parent-subsidiary resources Fit of parent-subsidiary dominant logic

18. Risk reduction Empire building Compensation DIVERSIFICATION IS NOT ALWAYS IN THE BEST INTEREST OF SHAREHOLDERS 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 impliesa bigger pay check -rarely creates value

19. FORMS AND SCOPE OF DIVERSIFICATION Wal-Martexpanded intoEurope Geographic Horizontal • From one market segment to another • From one industry to another Coke andPepsi expandedinto water Pulte HomesInc. created Pulte Mortgage LLC Vertical

20. RELATED VERSUS UNRELATED DIVERSIFICATION • Unrelated • diversification • Business units operated by the firm are highly related • Business units operated by the firm are highly dissimilar • Related • diversification

21. BRINKER INTERNATIONAL – LOW LEVELS OF DIVERSIFICATION Maggiano’s Horizontal • From one market segment to another • Casual dining Romano’s Macaroni Grill Chili’s

22. COMPETITIVE ADVANTAGE Under which conditions will the portfolio create value for shareholders? Implementation Levers Resources Arenas Organi-zationalstructure Specialized General Systems Processes Degree of relatedness

23. CORPORATE OWNERSHIP IN A DYNAMIC CONTEXT Firms in dynamic contexts must have strong capabilities in the areas of learning, knowledge transfer, rapid responsiveness • Economies of scope • Revenue enhancement • In dynamic markets, diversification can hinder competitiveness • This is why Adaptec, Palm, and 3Com spun off businesses More stable firms operate in a tightly integrated fashion • Nimbleness • Response time