Chapter 7 Developing Corporate Strategy

1. Chapter 7Developing Corporate Strategy

2. 1 • Why these businesses? • How does corporate ownership add value to these businesses? 2 • How does ownership of one business contribute to the competitive advantage of other businesses the corporation owns? 3 Corporate Strategy – Three Questions

3. Objectives 1 • Define corporate strategy 2 • Understand the role 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

4. Diversification Profiles • Company • Diversification process • Types of businesses • General Heavy reliance Electric on acquisition • Many seemingly un-related businesses • 3M Primarily organic • Many businesses clustered in a few related industries • MITY Product extensions/ new product lines • Few, related product lines

5. 7 Diversification Profile - GE

6. 7 Diversification Profile – 3M

7. 7 Diversification Profile – MITY Enterprises

8. In which business arenas should a company compete? 1 • Also, how do we create synergiesbetween ourbusinesses? • What vehicles should it use to enter or exita business? 2 • What underlying economic logic makes it sensible to compete in multiple businesses? 3 Corporate Strategy Decisions on Entry and Exit of Businesses

9. Vertical Integration – Backward or Forward Examples • General Motors began making steel • DuPont moved from gunpowder making to dynamite, nitroglycerine, guncotton, and smokeless powder • Pepsi developed fast food operations; Coca-Cola began bottling

10. 19 Does this createvalue? • Economies of scope? • Revenue- enhancement opportunities? Determine value creation Geographic diversification Horizontaldiversification Verticaldiversification

11. Economies of scope Revenue-enhancement synergies • Lower price of a common input by combining purchases • Bundle products to appeal to new customers • Share manufacturing capacity to reduce average costs • Cross-sell to existing customers • Share marketing or distribution to reduce average costs • Achieve higher valuation from larger, more predictable cash flows Sources of value from diversification and expansion

12. Diversification doesn’t guarantee enhanced value Non-value generating Value generating Revenue • Revenue enhancement • No cross-selling opportunities Profit • Economies of scope • Diseconomies of scope Value Costs Valuation of profit • Investor-perceived “quality” • No perceived value logic

13. Diversification is difficult to manage

14. Opportunities to exploit potential economies of scale Fit among parent-subsidiary resources Fit of parent-subsidiary dominant logics

15. Risk reduction Empire building Compensation Poor reasons to diversify More efficient for investors to diversify for themselves Rarely results in higher shareholder value or margins Acquisition motivated by executive pay - a bigger company usually impliesa bigger paycheck – does not create value

16. 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

17. 1 • Does the business unit add value to the corporation? 2 • Does the corporation’s owning the business unit add more value than alternative ways of linking a business to the corporation? Would alliance, joint venture, internal business development or acquisition of a different business generate more value? Who should own the business? • Two key questions • ?

18. Competitive Advantage • Resources • Implementation • Arenas • Specialized • General • Structure • Systems • Processes

19. Cabinets • Plumbing • Sales • Decorative architectural products • Specialty products Masco Corporation • Independent – unattractive • Combined – profitable • HomeDepot • Home Depot • Manu-facturing, design and marketing • Lowe’s • Lowe’s

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. Stable Contexts • Dynamic Contexts • Collaboration is solidified through static structural arrangement among wholly-owned businesses • The business units’ role is to execute their given strategies • Business unit incentives combine business-level and corporate-level rewards to promote cooperation • Dynamic collaboration is fluid, with networks being created, changed, and disassembled between combinations of owned businesses and alliances • The business units’ roles are to execute their strategies and seek new collaborative opportunities • Business unit incentives emphasize business-level rewards to promote aggressive execution and collaborative-search objectives • 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 as well as 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

22. 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 stable and dynamic contexts • Describe the relationship between corporate strategy and competitive advantage Summary