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Chapter 7 Developing Corporate Strategy

Chapter 7 Developing Corporate Strategy. 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.

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Chapter 7 Developing Corporate Strategy

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  1. Chapter 7Developing Corporate Strategy

  2. 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 profit pool and portfolio perspectives of corporate strategic expansion 6

  3. 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

  4. In which business arenas should a company 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

  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 Examples • General motors began operating steel plants • Dupont moved from gunpowder making onto dynamite, nitro-glycerine, guncotton, and smokeless power

  7. P & G manufactures paper towels and diapers. P & G Can a paper production plant be shared? ?

  8. 19 Does this createvalue? • Economies of scale & scope? • Revenue- enhancement opportunities? MUST DETERMINE VALUE CREATION Geographic diversification Horizontaldiversification Verticaldiversification

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

  10. 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

  11. 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

  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. Risk reduction Empire building Compensation OTHER REASONS TO DIVERSIFY 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

  15. 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

  16. The U.S. Automobile Industry’s Profit Pool

  17. RELATED VERSUS UNRELATED DIVERSIFICATION • Unrelated • diversification • Related • diversification

  18. BRINKER INTERNATIONAL Maggiano’s Horizontal • From one market segment to another • Casual dining Romano’s Macaroni Grill Chili’s

  19. COMPETITIVE ADVANTAGE Resources Implementation Arenas Organi-zationalstructure Specialized General Systems Processes

  20. CORPORATE OWNERSHIP IN A DYNAMIC CONTEXT • Economies of scope • Revenue enhancement • In dynamic markets, diversification can hinder competitiveness • This is why Adaptec, Palm, and 3Com spun off businesses • Nimbleness • Response time

  21. Portfolio Management 5-20

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