Chapter 7
Developing Corporate
Strategy
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 Explain the corporate strategy implications of the
stable and dynamic perspectives
6 Explain the corporate strategy implications of
the stable and dynamic perspectives
1
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
2
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 underlining economic logic makes it
sensible to compete in multiple businesses?
Also,
how do
we create
synergies
between
our businesses?
3
A SHIFT IN IBM’S CORPORATE STRATEGY
The Answers can change
What businesses should
we be in?
PC’s and Mainframes
THEN…..
Computer Services
4
INTEGRATION
Examples
• General motors began operating
steel plants
• Dupont moved from gunpowder making
onto dynamite, nitro-glycerine,
guncotton, and smokeless power
5
P&G
Can a paper production plant
be shared?
?
P & G manufactures paper towels
and diapers.
6
MUST DETERMINE VALUE CREATION
Geographic
diversification
Horizontal
diversification
Does this create
value?
• Economies of
scope?
• Revenueenhancement
opportunities?
Vertical
diversification
7
INTEGRATION
Example
Fed Ex acquired Kinko’s
Drop off and pick up points for packages
8
SOURCES OF VALUE FROM DIVERSIFICATION/EXPANSION
Economies of scope
Revenue-enhancement synergies
 Lower price of a common
 Bundle products to appeal
resource by combining
purchases
 Share manufacturing capacity
to new customers
 Cross sell to existing customers
to reduce average costs
 Share distribution to reduce
average distribution costs
 Achieve higher valuation from
larger, more predictable cash
flows
9
DIVERSIFICATION DOES NOT NECESSARILY CREATE VALUE
Value generating
Revenue • Revenue
enhancement
Non-value
generating
• No cross-sell
opportunities
Profit
Value
Costs
Valuation
of profit
• Economic of
scope
• Investor-perceived
“quality”
• Dis-economies of
scope
• No perceived
value logic
10
DIVERSIFICATION IS DIFFICULT TO MANAGE
Diversification and Performance in S&P 500 and S&P
MidCap Firms (1992-2000)
7%
50%
40%
ROA
5%
35%
30%
4%
25%
3%
20%
15%
2%
10%
1%
Total Shareholder Returns
45%
6%
ROA
TSR
5%
0%
0%
Low (25 %tile)
Moderate (50th %tile) High (75th %tile)
Level of Diversification
11
OPPORTUNUTIES TO EXPLOIT POTENTIAL ECONOMIES OF SCOPE
Fit among
parentsubsidiary
resources
Fit of parentsubsidiary
dominant
logic
12
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
13
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)
14
RELATED VERSUS UNRELATED DIVERSIFICATION
Unrelated
diversification
Related
diversification
15
BRINKER INTERNATIONAL
Maggiano’s
Horizontal
• From one market
segment to another
• Casual dining
Romano’s
Macaroni Grill
Chili’s
16
COMPETITIVE ADVANTAGE
Resources
Implementation
Arenas
Specialized
General
Organizational
structure
Systems
Processes
17
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
18