Chapter 7 Developing Corporate Strategy 2 OBJECTIVES Define corporate strategy 1 Understand the roles of economies of scope and revenue-enhancement synergy in corporate strategy 2 Explain the different forms of diversification 3 Understand when it makes sense for a firm to own a particular business 4 Explain the corporate strategy implications of the stable and dynamic perspectives 5 6 Explain the corporate strategy implications of the stable and dynamic perspectives 3 DIVERSIFICATION Diversification process Types of businesses Heavy reliance on acquisition Many seemingly un- related businesses Primarily organic Many businesses clustered in a few related industries Company Product extensions/ new product lines Few related product lines 4 THREE CORPORATE STRATEGY DECISIONS THAT ARISE WHEN MAKING ENTRY/EXIT DECISIONS In which business arenas should a com- pany 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 busi- nesses? 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 • General motors began operating steel plants • Dupont moved from gunpowder making onto dynamite, nitro-glycerine, guncotton, and smokeless power Examples 7 P & G ? Can a paper production plant be shared? P & G manufactures paper towels and diapers. 8 MUST DETERMINE VALUE CREATION Geographic diversification Horizontal diversification Vertical diversification Does this create value? • Economies of scope? • Revenue- enhancement opportunities? 9 INTEGRATION Example Fed Ex acquired Kinko’s Drop off and pick up points for packages 10 SOURCES OF VALUE FROM DIVERSIFICATION/EXPANSION Economies of scope  Lower price of a common resource by combining purchases  Share manufacturing capacity to reduce average costs  Share distribution to reduce average distribution costs Revenue-enhancement synergies  Bundle products to appeal to new customers  Cross sell to existing customers  Achieve higher valuation from larger, more predictable cash flows [...]...DIVERSIFICATION DOES NOT NECESSARILY CREATE VALUE Value generating Revenue 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 11 DIVERSIFICATION IS DIFFICULT TO MANAGE 12 OPPORTUNUTIES TO EXPLOIT POTENTIAL... 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 14 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... diversification 16 BRINKER INTERNATIONAL Maggiano’s Horizontal • From one market segment to another • Casual dining Romano’s Macaroni Grill Chili’s 17 COMPETITIVE ADVANTAGE Resources Implementation Arenas Specialized General Organizational structure Systems 18 Processes CORPORATE OWNERSHIP IN A DYNAMIC CONTEXT • Economies of scope • Revenue enhancement • In dynamic markets, • Nimbleness • Response time diversification . Chapter 7 Developing Corporate Strategy 2 OBJECTIVES Define corporate strategy 1 Understand the roles of economies of scope and revenue-enhancement synergy in corporate strategy 2 Explain. firm to own a particular business 4 Explain the corporate strategy implications of the stable and dynamic perspectives 5 6 Explain the corporate strategy implications of the stable and dynamic. profit Non-value generating • No cross-sell opportunities • Dis-economies of scope • No perceived value logic Value generating • Revenue enhancement • Economic of scope • Investor-perceived