Corporate Strategy Development: Understanding Diversification and Competitive Advantage

1. Chapter 7Developing Corporate Strategy

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

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 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

5. 7 DIVERSIFICATION PROFILES

6. 7 DIVERSIFICATION PROFILES (Continued)

7. 7 DIVERSIFICATION PROFILES (Continued)

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

9. 2 1980: fluid control industry 1979: Begins selling 250 business units, including all telecom businesses 1968: Buys Sheraton Hotels 1995: ITT Corporation (hospitality, entertainment, IT services) Now part of Starwood Hotel & Resorts 1968: Buys Continental Bakery (Hostess) Sold in 1984 to Interstate Bakery A BRIEF HISTORY AND GENEOLOGY OF A CONGLOMERATE :ITT 1995: ITT Industries (auto, defense & electric systems, & fluid-control) The Surviving ITT 1940: Electronics businesses 1925: telecom equipment mfr. 1920 International Telephone and Telegraph 1995: ITT Hartford (financial services) Now Hartford Financial Services 1960 Enters auto parts industry 1969: Buys Hartford Insurance

10. 19 Does this createvalue? • Economies of scope? • Revenue- enhancement opportunities? MUST DETERMINE VALUE CREATION Geographic diversification Horizontaldiversification Verticaldiversification

11. 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

12. 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

13. EXAMPLE OF POOR ECONOMIC LOGIC • In 1990s, Diversified from long-distance telephone services into wireless cell phone service and cable TV • In 2002, decided to split thecompany apart

14. DIVERSIFICATION IS DIFFICULT TO MANAGE

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

16. 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

17. 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

18. PROFIT POOLS • Profit pool analysis helps identify opportunities

19. 1 • Does the business unit add value to the corporation? 2 • Does the corporation owning the business unit add more value than alternative ways of linking a business to the corporation? (would an alliance, a joint venture, internal business development or acquisition of a differ-ent business generate more value?) WHO SHOULD OWN THE BUSINESS? • Two key questions • ?

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

21. Cabinets • Plumbing • Sales • Decorative architectural products • Specialty products MASCO CORPORATION • Independent – unattractive • Combined – profitable • Homedepot • Home depot • Manu-facturing design and Marketing • Lower • Lower

22. 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

23. Stable Contexts • Dynamic Contexts • Collaboration is solidified through static structural arrangement among wholly-owned businesses • The business units’ roles are to execute their given strategy • Business units’ incentives combine business with corporate-level rewards to promote cooperation • Balanced-scorecard objectives emphasize performance against budget and in comparison to within-firm peer unit • Dynamic Collaboration is fluid with networks being created, changed, and disassembled between combinations of owned and alliance businesses • The business units’ roles are to execute their strategy and seek new collaborative opportunities • Business units’ incentives emphasize business-level rewards to promote aggressive execution and collaborative-search objectives • Balanced-scorecard objectives gauge performance relative to competitors in terms of growth, market share, and profitability • Key objectives are the pursuit of economies of scale and scope • Key objectives are growth, maneuverability, and economies of scope • Top management team emphasizes collaboration among the businesses and the form of that collaboration • Top management team emphasizes the creation of a collaborative context that is rich in terms of content and linkages CORPORATE STRATEGY IN STABLE AND DYNAMIC CONTEXTS

24. Damage core brand • Requires producersand directors withdifferent skills • Leverage production • Leverage distribution • ? • ? HOW WOULD YOU DO THAT? • Walt Disney wants to enter more mature film entertainment (e.g., Kill Bill) • Pros • Cons • What are Walt Disney’s strategic options?

25. 1 • Define corporate strategy 2 • Understand the roles of economies of scope and revenue-enhancement synergy in corporate strategy 3 • Explain the different forms of diversification 4 • Understand when it makes sense for a firm to own a particular business 6 5 • Explain the corporate strategy implications of the stable and dynamic perspectives • Describe the relationship between corporate strategy and competitive advantage SUMMARY

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