developing corporate strategy. 1 diversification diversification processtypes of businesses heavy...
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Developing Corporate Strategy
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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
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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/exita business?
What underlining economic logic makes it sensible to compete in multiple businesses?
Also, how do we create synergiesbetween our busi-nesses?
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DIVERSIFICATION PROFILES
GE Product Scope
20%
14%
14%9%
8%
7%
6%
6%
5%
4%7%
Insurance
Commercial Finance
Power Systems
Consumer Finance
Aircraft Engines
Medical Systems
Industrial Products andSystems
Consumer Products
NBC
Plastics
Various other (<4%individually)
GE Geographic Scope
60%23%
10%
4% 3%
US
Europe
Pacif ic Basin
Americas
Other international
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DIVERSIFICATION PROFILES (Continued)
3M Geographic Scope
40%
26%
25%
9%
US
Asia/Pacific
Europe & Middle East
Latin America, Africa &Canada
3M Product Scope
21%
19%
17%
14%
11%
9%
9% Health Care
Industrial
Display & Graphics
Consumer & Office
Safety & Protection
Electro &Communications
Transportation
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DIVERSIFICATION PROFILES (Continued)
MITY Enterprises Geographic Scope
85%
15%
U.S.
International
MITY Enterprises Product Scope
86%
14%
Multipurpose roomfurniture
Healthcare seating
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INTEGRATION
• General motors began operating steel plants
• Dupont moved from gunpowder making onto dynamite, nitro-glycerine, guncotton, and smokeless power
Examples
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A BRIEF HISTORY AND GENEOLOGY OF A CONGLOMERATE :ITT
1920International Telephone
and Telegraph
1925: telecom
equipment mfr.
1940: Electronics businesses
1980: fluid control industry
1995: ITT Industries (auto, defense & electric systems, & fluid-control)
The Surviving ITT
1979: Begins selling 250
business units, including all
telecom businesses
1995: ITT Hartford (financial services)
Now Hartford Financial Services
1969: Buys Hartford Insurance
1960 Enters auto parts industry
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
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MUST DETERMINE VALUE CREATION
Geographic diversification
Horizontaldiversification
Verticaldiversification
Does this createvalue?
• Economies of scope?
• Revenue- enhancement opportunities?
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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
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DIVERSIFICATION DOES NOT NECESSARILY CREATE VALUE
Profit
Revenue
ValueCosts
Valuation of 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 “quality”
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EXAMPLE OF POOR ECONOMIC LOGIC
• In 1990s, Diversified from long-distance telephone services into wireless cell phone service and cable TV
• In 2002, decided to split thecompany apart
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OPPORTUNUTIES TO EXPLOIT POTENTIAL ECONOMIES OF SCOPE
Fit among parent-subsidiary resources
Fit of parent-subsidiary dominant logic
In conglomerates
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OTHER REASONS TO DIVERSIFY
Risk reduction
Empire building
Compensation
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
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FORMS AND SCOPE OF DIVERSIFICATION
Geographic
Horizontal• From one market
segment to another• From one industry
to another
Vertical
Wal-Martexpanded into
Europe
Coke andPepsi expanded
into water
Pulte HomesInc. created Pulte
Mortgage LLC)
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THE U.S. AUTO INDUSTRY’S PROFIT POOL
25%
15
10
5
0
0100%
Share of Industry Revenue
op
era
ting m
arg
in
auto manufacturing
new car dealersused car dealers
auto loans
auto insurance
aftermarket partssource: Harvard Business Review, May-J une 1998
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leasing
warranty
gasolineservice repair
auto rental
The automotive industry encompasses many value-chain activities. The way that profits and revenues are distributed among these activities varies greatly. The most profitable areas of the car business are not the ones that generate the biggest revenues.
PROFIT POOLS
Profit pool analysis helps identify opportunities
Profit pool analysis helps identify opportunities
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WHO SHOULD OWN THE BUSINESS?
??
Two key questionsTwo key questions
Does the business unit add value to the corporation?
1
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 differ-ent business generate more value?)
2
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COMPETITIVE ADVANTAGE
ArenasArenas
SpecializedSpecialized GeneralGeneralOrgani-zationalstructure
Organi-zationalstructure
SystemsSystems ProcessesProcesses
ResourcesResources ImplementationImplementation
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MASCO CORPORATION
Independent – unattractiveIndependent – unattractive Combined – profitableCombined – profitable
Cabinets Cabinets
Plumbing Plumbing
Decorative architectural products
Decorative architectural products
Specialty productsSpecialty products
Home depot Home depot
LoweLowe
Homedepot Homedepot
LoweLowe
Sales Sales
Manu-facturing design
and Marketing
Manu-facturing design
and Marketing
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CORPORATE OWNERSHIP IN A DYNAMIC CONTEXT
• Nimbleness
• Response time
• Economies of scope
• Revenue enhancement
• In dynamic markets, diversification can hinder competitiveness
• This is why Adaptec, Palm, and 3Com spun off businesses
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Dynamic Collaboration is fluid with networks being created, changed, and disassembled between combinations of owned and alliance businesses
Dynamic Collaboration is fluid with networks being created, changed, and disassembled between combinations of owned and alliance businesses
Collaboration is solidified through static structural arrangement among wholly-owned businesses
Collaboration is solidified through static structural arrangement among wholly-owned businesses
Key objectives are growth, maneuverability, and economies of scopeKey objectives are growth, maneuverability, and economies of scope
Key objectives are the pursuit of economies of scale and scopeKey objectives are the pursuit of economies of scale and scope
Top management team emphasizes collaboration among the businesses and the form of that collaboration
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
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 strategyThe business units’ roles are to execute their given strategy
The business units’ roles are to execute their strategy and seek new collaborative opportunitiesThe business units’ roles are to execute their strategy and seek new collaborative opportunities
Business units’ incentives combine business with corporate-level rewards to promote cooperationBusiness units’ incentives combine business with corporate-level rewards to promote cooperation
Business units’ incentives emphasize business-level rewards to promote aggressive execution and collaborative-search objectives
Business units’ incentives emphasize business-level 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 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
Balanced-scorecard objectives gauge performance relative to competitors in terms of growth, market share, and profitability
CORPORATE STRATEGY IN STABLE AND DYNAMIC CONTEXTS
Dynamic ContextsDynamic ContextsStable ContextsStable Contexts
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HOW WOULD YOU DO THAT?
Walt Disney wants to enter more mature film entertainment (e.g., Kill Bill)Walt Disney wants to enter more mature film entertainment (e.g., Kill Bill)
ProsPros ConsCons
Leverage productionLeverage production
Leverage distributionLeverage distribution
??
Damage core brandDamage core brand
Requires producersand directors withdifferent skills
Requires producersand directors withdifferent skills
??
What are Walt Disney’s strategic options?
What are Walt Disney’s strategic options?