david j. bryce © 2002 the multi-business, diversified firm manec 387 economics of strategy manec...
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David J. Bryce © 2002David J. Bryce © 2002
The Multi-Business, Diversified FirmThe Multi-Business, Diversified Firm
MANEC 387Economics of Strategy
MANEC 387Economics of Strategy
David J. BryceDavid J. Bryce
David J. Bryce © 2002David J. Bryce © 2002
Corporate vs. Business Unit StrategyCorporate vs. Business Unit Strategy
• Business Unit Strategy– To whom will we sell, for what price?
– How will we source, manufacture, distribute, etc. our product?
• Corporate Strategy– What business(es) should we be in?
– How will we get in (or out) of them?
– How will we coordinate or integrate businesses to create value?
• Business Unit Strategy– To whom will we sell, for what price?
– How will we source, manufacture, distribute, etc. our product?
• Corporate Strategy– What business(es) should we be in?
– How will we get in (or out) of them?
– How will we coordinate or integrate businesses to create value?
Adapted from M. Porter, 2001, HBR
David J. Bryce © 2002David J. Bryce © 2002
Corporate-Level Strategy and the Multi-business FirmCorporate-Level Strategy and the Multi-business Firm
• Corporate strategy is action taken to gain competitive advantage through multiple business units
• Value is created through the configuration and coordination of multi-business activities
• Corporate strategy is action taken to gain competitive advantage through multiple business units
• Value is created through the configuration and coordination of multi-business activities
David J. Bryce © 2002David J. Bryce © 2002
Scope of the FirmScope of the FirmHorizontal Scope
Ver
tical
Sco
pe
Manuf.
Distrib
Sales
Prod./Ind. A
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales
outp
ut-p
rodu
cts
Prod./Ind. B Prod./Ind. C
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales. . .
Inpu
t-pr
oduc
ts
. . .“Vertical
Integration”
“Horizontal Integration”
David J. Bryce © 2002David J. Bryce © 2002
Wal-martWal-martHorizontal Scope
Ver
tical
Sco
pe
Manuf.
Distrib
Sales
Prod./Ind. A
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales
outp
ut-p
rodu
cts
Prod./Ind. B Prod./Ind. C
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales. . .
Inpu
t-pr
oduc
ts
. . .
David J. Bryce © 2002David J. Bryce © 2002
GEGEHorizontal Scope
Ver
tical
Sco
pe
Manuf.
Distrib
Sales
Refrigerators
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales
outp
ut-p
rodu
cts
Aircraft Engines Prod./Ind. C
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales. . .
Inpu
t-pr
oduc
ts
. . .Compressors
David J. Bryce © 2002David J. Bryce © 2002
Why Diversify? Why Diversify?
• Secure Market Power– Cross-subsidization, mutual forbearance,
reciprocal buying
– Shown to be an incomplete, if not an incorrect view
• Mitigate Business (Cycle) Risk– Perspective from finance
– Few firms are just “portfolio” investors
• Secure Market Power– Cross-subsidization, mutual forbearance,
reciprocal buying
– Shown to be an incomplete, if not an incorrect view
• Mitigate Business (Cycle) Risk– Perspective from finance
– Few firms are just “portfolio” investors
David J. Bryce © 2002David J. Bryce © 2002
Why Diversify?Why Diversify?
• Achieve Efficiency (or “Synergy”)– Pursue related or complementary activities
– Most common type of diversification
– Associated with higher levels of performance than previous two types
• Dynamic Learning– Related to the efficiency motivation
– Firms invest in activities that leverage existing skills and knowledge
– Firms introduce new activities to build skills and knowledge
– Objective is to develop a “capabilities portfolio” that is ready for new opportunities when they emerge
• Achieve Efficiency (or “Synergy”)– Pursue related or complementary activities
– Most common type of diversification
– Associated with higher levels of performance than previous two types
• Dynamic Learning– Related to the efficiency motivation
– Firms invest in activities that leverage existing skills and knowledge
– Firms introduce new activities to build skills and knowledge
– Objective is to develop a “capabilities portfolio” that is ready for new opportunities when they emerge
David J. Bryce © 2002David J. Bryce © 2002
How to Choose Industries/Products for ExpansionHow to Choose Industries/Products for Expansion
1. Strategically Important 2. Strategically Related; i.e.
commonality in one of the following:1. Customers2. Channels3. Inputs4. Processes5. Market Knowledge
1. Strategically Important 2. Strategically Related; i.e.
commonality in one of the following:1. Customers2. Channels3. Inputs4. Processes5. Market Knowledge
David J. Bryce © 2002David J. Bryce © 2002
Sequential Entry and Dynamic Learning: ExampleSequential Entry and Dynamic Learning: Example
Texas InstrumentsTexas Instruments
IBMIBMComputer Storage
Devices (3572)
Electronic Computers (3571)
Computer Terminals (3575)
Computer Peripherals (3577)
Software (7372)Semi-conductors
(3674)
Semi-conductors
(3674)
Electronic Computers (3571)
Search & Navigation (3812)
Software (7372)Texas InstrumentsTexas Instruments
IBMIBMComputer Storage
Devices (3572)
Electronic Computers (3571)
Computer Terminals (3575)
Computer Peripherals (3577)
Software (7372)Semi-conductors
(3674)
Semi-conductors
(3674)
Electronic Computers (3571)
Search & Navigation (3812)
Software (7372)
Source: COMPUSTAT Business Segment Files, 1977-1996
David J. Bryce © 2002David J. Bryce © 2002
Patterns of Historic Entry in Industries Related to Semiconductors, 1977-1996
Patterns of Historic Entry in Industries Related to Semiconductors, 1977-1996
Semiconductors(3674)
Engineering Services(8711)
Computer Storage Devices(3572)
Radio/ TV Communication
Equip(3663)
Computer Peripherals
(3577)
Electronic Components
(3679)
Patent Owners & Lessors(6794)
Search & Navigation Equip.(3812)
Process Control Instruments
(3823)
Electronic Capacitors
(3675)
Printed Circuit Boards(3672)
Special Industries Machinery
(3559)
*
*
*
*
* p<0.10
Semiconductors(3674)
Engineering Services(8711)
Computer Storage Devices(3572)
Radio/ TV Communication
Equip(3663)
Computer Peripherals
(3577)
Electronic Components
(3679)
Patent Owners & Lessors(6794)
Search & Navigation Equip.(3812)
Process Control Instruments
(3823)
Electronic Capacitors
(3675)
Printed Circuit Boards(3672)
Special Industries Machinery
(3559)
*
*
*
*
* p<0.10
David J. Bryce © 2002David J. Bryce © 2002
A General Inter-industry Relatedness IndexA General Inter-industry Relatedness Index
Index available for download at http://msm.byu.edu/strategy/bryce/
David J. Bryce © 2002David J. Bryce © 2002
Examples of the Measure at WorkExamples of the Measure at Work
• Two most related industries (z = 3.51):– SIC 2131, “Tobacco, Chewing and Smoking”– SIC 2141, “Tobacco Stemming and Redrying”
• Two most unrelated industries (z = -7.0):– SIC 2097 “Ice” – SIC 2397 “Schiffli Machine Embroidery”
• Two most related industries (z = 3.51):– SIC 2131, “Tobacco, Chewing and Smoking”– SIC 2141, “Tobacco Stemming and Redrying”
• Two most unrelated industries (z = -7.0):– SIC 2097 “Ice” – SIC 2397 “Schiffli Machine Embroidery”
David J. Bryce © 2002David J. Bryce © 2002
Examples of the Measure at WorkExamples of the Measure at Work
• Industries that don’t share same 1-digit class (percentile: 100, z = 3.07) – SIC 2951, “Paving Mixtures and Blocks” – SIC 3273, “Concrete, Ready-Mixed”
• A more interesting example (percentile: 100, z = 3.04)– SIC 2542, “Metal Partitions and Fixtures”– SIC 3581, “Automatic Vending Machines.”
• Industries that don’t share same 1-digit class (percentile: 100, z = 3.07) – SIC 2951, “Paving Mixtures and Blocks” – SIC 3273, “Concrete, Ready-Mixed”
• A more interesting example (percentile: 100, z = 3.04)– SIC 2542, “Metal Partitions and Fixtures”– SIC 3581, “Automatic Vending Machines.”
David J. Bryce © 2002David J. Bryce © 2002
So what is related to Schiffli?So what is related to Schiffli?
• SIC 2397 Schiffli Machine Embroidery”– (91) SIC 3582, “Commercial Laundry
Equipment”– (89) SIC 3961, “Costume Jewelry”– (78) SIC 2512, “Upholstered Furniture”
• SIC 2397 Schiffli Machine Embroidery”– (91) SIC 3582, “Commercial Laundry
Equipment”– (89) SIC 3961, “Costume Jewelry”– (78) SIC 2512, “Upholstered Furniture”
David J. Bryce © 2002David J. Bryce © 2002
Examples of the Measure at WorkExamples of the Measure at Work
• Energizer bought Schick in 2003 : Razors and Batteries– SIC 3691, “Storage Batteries” – SIC 3421, “Cutlery”
• Energizer bought Schick in 2003 : Razors and Batteries– SIC 3691, “Storage Batteries” – SIC 3421, “Cutlery”
Percentile: 62 (z = 0.31)
A stronger relatedness than average, and stronger than one might expect a priori.
David J. Bryce © 2002David J. Bryce © 2002
Research questions that can now be tackled - Research questions that can now be tackled -
– Which markets does a firm enter as a function of its knowledge?
– How do a corporation’s capabilities evolve over time? Does the speed of this evolution affect performance, how?
– Under what conditions are long-leaps successful?
– Which markets does a firm enter as a function of its knowledge?
– How do a corporation’s capabilities evolve over time? Does the speed of this evolution affect performance, how?
– Under what conditions are long-leaps successful?
time
Relatedness Centroid
+0.2
+0.1
0
-0.1
-0.2
David J. Bryce © 2002David J. Bryce © 2002
Summary and TakeawaysSummary and Takeaways
• Corporate Strategy is about structuring a portfolio of businesses that hang together and make strategic sense
• It is sometimes motivated by economizing on transaction costs
• Other (strategic) motivations include dynamic learning, efficiency, or sometimes market power and risk management
• New tools are emerging for examining relatedness that will help in determining optimal corporate diversification trajectories
• Corporate Strategy is about structuring a portfolio of businesses that hang together and make strategic sense
• It is sometimes motivated by economizing on transaction costs
• Other (strategic) motivations include dynamic learning, efficiency, or sometimes market power and risk management
• New tools are emerging for examining relatedness that will help in determining optimal corporate diversification trajectories