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Corporate Strategy: Diversification, Synergy, and Value Creation

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pravat
21 diapositives · 359 Views · Jan 16, 2013

The essential elements of corporate strategy, focusing on defining its role and the significance of economies of scope and revenue-enhancement synergies. It addresses diversification forms—related and unrelated—and examines when it is advantageous for firms to own specific businesses. The text delves into profit pool and portfolio perspectives, emphasizing strategic decisions regarding entry and exit. Additionally, the interconnections between different business operations, value creation, and challenges of managing diversification are analyzed, providing key insights for effective corporate strategy development.

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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