Corporate Strategy

MGMT611 schema Natalya Vinokurova Corporate Strategy Session 15 1 Corporate Scope Corporate center Division A in constancy a Division B in industriousness b Division C in industry c Division D in industry d The average U. S. Fortune 500 company operates in four different industries Diversification is even more prominent in other part of the world Grupos, chaebol, business houses, keiretsu, and so on Poor corporate strategy is common Excite, one of the leading Internet services companies, yesterday received a takeover volunteer from Zapata, a Texas-based group with holdings in marine protein and food packaging companies.Citing the excellent fit with Zapatas new strategic direction, Avram Glazer, Zapatas chief executive officer, tell the proposed transaction makes sense for Excites sh arholders because of the capital resources that Zapata tin can bring to Excite. Financial Times, May 22, 1998 2 What diversified corporation did this become? 3 decomposition of Variance in Pr ofitability Evidence from the United States Year 2% Industry 18% Corporate parent 4% Transient 46% In the U. S. corporate strategy is typically the icing on the cake, not the cake itself Business building blocks must be competitive on their own merits in beautiful industries But the icing can make the decisive difference between a good cake and a bad one Business portion 30% Note Ignores covariance terms based on 58,132 observations of 12,296 business segments in 628 industries in the United States Source Anita M. McGahan and Michael E. Porter, How Much Does Industry Matter Really? strategic Management Journal, 1997 4Decomposition of Variance in Profitability Evidence from 14 Emerging Economies In much of the rest of the world, corporate strategy is more prominent social status in a diversified entity has a larger effect on profitability The effect on profitability is more likely to be unconditional Source Tarun Khanna and Jan W. Rivkin, Estimating the Performance Effec ts of Business Groups in Emerging Markets, Strategic Management Journal, 2000 Countries Argentina, Brazil, Chile, India, Indonesia, Israel, Mexico, Peru, the Philippines, South Africa, South Korea, Taiwan, Thailand, and Turkey Litmus Test of Corporate Strategy Is the combination of all businesses of the firm worth more than the sum of how much each business is worth individually? The answer could be less, e. g. J. C. Penney telemarketing air division was worth 3X the market value of the entire firm When deciding whether or not to acquire another business, you need to decide BOTH whether you turn out a competitive advantage running that business AND how it will contri barelye to the fit among the other 6 businesses you are runningAcrobat Document 7 The Walt Disney Company Stock expense vs. S&P 500, 1984-1994 8 The Walt Disney Company Stock Price vs. S&P 500, 1995-2005 9 Two big problems 1. Growth at all be This is an example of what happens when a solid corporate strategy m eets an aggressive growth goal 2. Mismatch between strategy and organizational structure You can have a corporation with businesses that are closely connected like the classic Disney businesses and then run the businesses to compensateher in a tightly integrated way.That can work. You can have a corporation with the broader scope of later Disney and run them in a loosely coupled way. That can work. But if you have a corporation with the broader scope of later Disney and run them like the classic Disney, with heavy-handed management from the top, searching for synergy that doesnt really existthen you get into trouble. In 2005, ABC President Robert Iger replaces Eisner 10 The Walt Disney Company Stock Price vs. S&P 500, 2005-2012 11 The Walt Disney Company Take-aways Core lessons of corporate-level strategy Competition occurs at the level of the business unit Corporate strategy is a success or failure to the extent that it enhances business unit competitive advantage Is the co ition gap between WTP and cost larger than it would be otherwise? Two tests Better-off Does the presence of the corporation in a given market improve the descend competitive advantage of business units over and above what they could achieve on their own? (Whats the added value of the corporation? Ownership Does ownership of the business unit produce a greater competitive advantage than an alternative arrangement would produce? A corporation is more likely to pass the tests when it has some share resource that (a) creates competitive advantage for the business units and (b) is difficult to trade efficiently via the market E. g. , access to animated characters Making business units better off sounds easy, but it typically requires sophisticated structures, systems, and processes, plus cultural supports 12 Corporate strategy entails trade-offsEither focus on or focus on Guidance on the Projects overall Grading The project must cover all three components of the class Human an d Social Capital Strategy Multinational Management Components of Grade (NOT equally weighted) Use of frameworks (most important issue) Quality of research Innovativeness/Insight of analysis Integration of different components of class Quality of communication 14 ? of grade will be based on presentation ? on final project write up We will also use a peer assessment to coif the grade for effort put in by each team memberA Word on Plagiarism Any text (more than 2 consecutive words) interpreted from another source must be In inverted commas Clearly identified with the source It is NOT sufficient to simply note that you used a source. You must identify which text came from it. Failure to identify the source of your work is a serious breach of academic ethics and will be interact accordingly If in doubt, ask Professor or TAs for guidance (It is generally not a good idea to reproduce whole sentences or paragraphs from other sources without a very good reason anyway) 5 Ne xt Class Firm Scope and Strategy Case supervises Opportunities in India (A), 9708-482 What are the benefits and costs to Monitor of moving each of its back-office functions to India? In light of those benefits and costs, what would you recommend to Mark Fuller, Monitors CEO, about the location of each function? Should Monitor tap into the Indian pool of talent somehow, perhaps by conducting business research there? If so Should it conduct research only for Monitor grimace teams or sell its research services directly to external clients? 16