Module 14: Corporate Strategy Flashcards
Logic of Diversification - Independent
Business X + Business Y + Business Z = Performance A
Independent: equity holder can buy shares of each firm
Logic of Diversification - combined
Focal firm, economies of scope
(Business X, Business Y, Business Z) -> Performance B
B> A -> Good diversification
Combined: equity holder buys shares in one firm
Combined businesses generate better performance than the sum of independent businesses
Does Diversification always make sense? Strange combinations? Good combinations?
Why does Disney own hotels?
- Control experience, financial
- Immersive experience
- Location
- Target a broad array of customers
- Drive demand to park
- Sell packages with theme parks
- Customers might stay longer
- Sell more merchandise
- Entertainment (connect to core of Disney)
- Exclusive access to Disney products/ services
Why does Disney own hotels - Professor
- The “better off” test: Is the hotel better off by being owned by Disney? What can the Disney hotel achieve?
- The “ownership test” Does Disney need to own the hotel? What is they franchise (through a contractual agreement?)
Why does Disney own cruises?
- Customers that might not otherwise go on a cruise but like Disney may now go on a cruise
- Does company need to own or is it enough to have contractual agreement?
Value Creating Strategies of Diversification
Related Constrained Diversification
Firm builds upon or extends its resources or capabilities to build competitive advantage by creating value for customers. Company wants to develop and exploit economies of scope between its businesses.
Procter & Gamble
Operational Relatedness: Sharing of activities
Sharing primary activity (ex: inventory delivery system) or secondary activity (purchasing practices)
Can create value but also be risky because ties among a firms businesses create links between outcomes
Corporate Relatedness: Transferring of core competencies
Intangible resources (know-how)
Related Linked Diversification
Create value through corporate relatedness
1. Expense of developing core competency has already been incurred
2. Resource intangibility
Virgin Group
Unrelated diversification strategy
Low sharing of activities and low transfer of core competencies
Value through financial economies
Both Operational and Corporate Relatedness
High sharing of activities and high transfer of core competencies
Disney
Related Diversification
Value created from economies of scope
Related Diversification
Operational Relatedness - class
sharing activities across businesses
- sharing activities such as inventory delivery systems or purchasing
- May create risk because business-unit ties create links between outcomes
Related Diversification
Corporate Relatedness - class
Transferring skills or corporate core competencies among units
- Using complex sets of resources and capabilities to link different businesses through managerial and technological knowledge, experience, and expertise
Related Diversification
Other
Simultaneous operational relatedness and corporate relatedness
Disney
Unrelated Diversification
Financial Economies - class
- Cost savings realized through improved allocations of financial resources
- Create value through 2 types of financial economies:
1. Efficient internal capital allocations: corporate office distributes capital to business divisions to create value for overall company
2. Purchase of other corporations and the restructuring of their assets
Value of unrelated diversification
Case of GE
- Deconglomeration: diversifies businesses were not doing well when not related to each other -> spin offs
- Business units are more profitable stand-alone than as a conglomerate (under-managed as a conglomerate) -> wasn’t creating synergies
- New goal: one-stop shop for developing world -> just keep businesses that align with new goal/ focus
- GE is still divesting businesses (focus on spinning tech)
- Focused strategy within common goal: providing infrastructure for developing countries
- GE Capital: internal bank
LOOK AT ARTICLE
External incentives to diversify
- Antitrust regulation
- Tax laws
Internal incentives to diversify
- Low performance
- Uncertain future cash flows
- Balance synergy and firm risk
Value-Reducing Diversification
Managerial motives to diversify (driven by CEOs personal motives)
- Managerial risk reduction
- Desire for increased compensation
- Build personal performance reputation
Example of Diversification
Arm & Hammer - personal incentive
Stove top??
Samsung car - bad decision to enter market - look up
Ikea - task rabbit
Why does Disney own ESPN?
Expand into a different audience
Disney and Twitter
Look into this
