Chapter 7 Developing Corporate Strategy OBJECTIVES Define corporate strategy Understand the roles of economies of scope and revenue enhancement synergy in corporate strategy Explain the different forms of diversification Understand when it makes sense for a firm to own a particular business Describe the relationship between corporate strategy and competitive advantage Explain the corporate strategy implications of the stable and dynamic perspectives 2 DIVERSIFICATION Company Diversification process Types of businesses Heavy reliance on acquisition Many seemingly unrelated businesses Primarily organic Many businesses clustered in a few related industries Product extensions new product lines Few related product lines 3 THREE CORPORATE STRATEGY DECISIONS THAT ARISE WHEN MAKING ENTRY EXIT DECISIONS In which business arenas should a company compete Which vehicles should it use to enter exit a business What underlying economic logic makes it sensible to compete in multiple businesses Also how do we create synergies between our businesses 4 DIVERSIFICATION PROFILES 5 DIVERSIFICATION PROFILES Continued 6 DIVERSIFICATION PROFILES Continued 7 EVOLUTION OF DIVERSIFICATION 1 2 3 4 5 6 Vertical Integration e g General Motors began operating steel plants to ensure supply of raw materials Expansion into related businesses e g Dupont moved from gunpowder making onto dynamite nitro glycerine guncotton and smokeless power Rapid consolidation at turn of the century led to antitrust laws e g Standard Oil Wave of conglomerations in 1960s Unrelated acquisitions expanded the size of companies Widespread use of portfolio planning e g BCG Matrix see my research Corporate Raiders in 1980s broke up many conglomerates New wave of acquisitions in 1990s and 2000s Mainly related acquisitions 8 A BRIEF HISTORY AND GENEOLOGY OF A CONGLOMERATE ITT 1980 fluid control industry 1920 International Telephone and Telegraph 1925 telecom equipment mfr 1940 Electronics businesses 1995 ITT Industries auto defense electric systems fluid control The Surviving ITT 1979 Begins selling 250 business units including all telecom businesses 1960 Enters auto parts industry 1995 ITT Hartford financial services Now Hartford Financial Services 1969 Buys Hartford Insurance 1968 Buys Sheraton Hotels 1968 Buys Continental Bakery Hostess Sold in 1984 to Interstate Bakery 1995 ITT Corporation hospitality entertainment IT services Now part of Starwood Hotel Resorts 9 MUST DETERMINE VALUE CREATION Geographic diversification Horizontal diversification Does this create value Economies of scope Revenueenhancement opportunities Vertical diversification 10 SOURCES OF VALUE FROM DIVERSIFICATION EXPANSION Economies of scope Revenue enhancement synergies Lower price of a common Bundle products to appeal to Share manufacturing capacity Cross sell to existing customers Share distribution to reduce Achieve higher valuation from resource by combining purchases to reduce average costs average distribution costs new customers larger more predictable cash flows 11 DIVERSIFICATION DOES NOT NECESSARILY CREATE VALUE Revenue Value generating Non value generating Revenue No cross sell enhancement opportunities Profit Value Costs Valuation of profit Economic of scope Investor perceived quality Dis economies of scope No perceived value logic 12 EXAMPLE OF POOR ECONOMIC LOGIC In 1990s Diversified from longdistance telephone services into wireless cell phone service and cable TV In 2002 decided to split the company apart 13 DIVERSIFICATION IS DIFFICULT TO MANAGE 14 OPPORTUNUTIES TO EXPLOIT POTENTIAL ECONOMIES OF SCOPE Fit among parentsubsidiary resources Fit of parentsubsidiary dominant logic What is a dominant logic 15 OTHER REASONS TO DIVERSIFY Risk reduction More efficient for investors to diversify themselves Empire building Rarely results in higher shareholder value or margins Compensation Acquisition motivated by executive pay a bigger company usually implies a bigger pay check rarely creates value 16 FORMS AND SCOPE OF DIVERSIFICATION Geographic Wal Mart expanded into Europe Horizontal From one market segment to another From one industry to another Vertical Coke and Pepsi expanded into water Pulte Homes Inc created Pulte Mortgage LLC 17 PROFIT POOLS Profit pool analysis helps identify opportunities 18 WHO SHOULD OWN THE BUSINESS Two key questions 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 different business generate more value 19 COMPETITIVE ADVANTAGE Resources Implementation Arenas Specialized General Organizational structure Systems Processes 20 MASCO CORPORATION Independent unattractive Combined profitable Cabinets Home depot Home depot Plumbing Manufacturing design and Marketing Decorative architectural products Lowe s Sales Lowe s Specialty products 21 CORPORATE OWNERSHIP IN A DYNAMIC CONTEXT Economies of scope Revenue enhancement In dynamic markets Nimbleness Response time diversification can hinder competitiveness This is why Adaptec Palm and 3Com spun off businesses 22 CORPORATE STRATEGY IN STABLE AND DYNAMIC CONTEXTS Stable Contexts Dynamic Contexts Collaboration is solidified through static structural arrangement among wholly owned businesses Dynamic Collaboration is fluid with networks being created changed and disassembled between combinations of owned and alliance businesses 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 The business units roles are to execute their given strategy The business units roles are to execute their strategy and seek new collaborative opportunities Business units incentives combine business with corporate level rewards to promote cooperation Business units incentives emphasize businesslevel rewards to promote aggressive execution and collaborative search objectives Balanced scorecard objectives emphasize performance against budget and in comparison to within firm peer unit Balanced scorecard objectives gauge performance relative to competitors in terms of growth market share and profitability 23 HOW WOULD