Chapter 7 Developing Corporate Strategy

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Chapter 7Developing Corporate Strategy
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OBJECTIVES
Define corporate strategy
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Understand the roles of economies of scope and
revenue-enhancement synergy in corporate strategy
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Explain the different forms of diversification
Understand when it makes sense for a firm to own
a particular business
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Explain the corporate strategy implications of
the stable and dynamic perspectives
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Explain the corporate strategy implications of
the stable and dynamic perspectives
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DIVERSIFICATION
Diversification process
Types of businesses
Company
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
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THREE CORPORATE STRATEGY DECISIONS THAT ARISE
WHEN MAKING ENTRY/EXIT DECISIONS
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A SHIFT IN IBMS CORPORATE STRATEGY
The Answers can change What businesses should we
be in? PCs and Mainframes THEN.. Computer
Services
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INTEGRATION
Examples

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

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P G
Can a paper production plant be
shared?
?
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MUST DETERMINE VALUE CREATION
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Geographic diversification
Horizontaldiversification
Verticaldiversification
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INTEGRATION
Example Fed Ex acquired Kinkos Drop off and pick
up points for packages

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SOURCES OF VALUE FROM DIVERSIFICATION/EXPANSION
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DIVERSIFICATION DOES NOT NECESSARILY CREATE VALUE
Non-value generating
Value generating
Revenue

• No cross-sell opportunities

• Revenue enhancement

Profit

• Dis-economies of scope

• Economic of scope

Value
Costs
Valuation of profit

• No perceived value logic

• Investor-perceived quality

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DIVERSIFICATION IS DIFFICULT TO MANAGE
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OPPORTUNUTIES TO EXPLOIT POTENTIAL ECONOMIES OF
SCOPE
Fit among parent-subsidiary resources
Fit of parent-subsidiary dominant logic
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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
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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
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RELATED VERSUS UNRELATED DIVERSIFICATION
Unrelated diversification
Related diversification
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BRINKER INTERNATIONAL
Maggianos

• Horizontal
• From one market segment to another
• Casual dining

Romanos Macaroni Grill
Chilis
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COMPETITIVE ADVANTAGE
Resources
Implementation
Arenas
Organi-zationalstructure
Specialized
General
Systems
Processes
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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