Module 14: Corporate Strategy

Question 1

Logic of Diversification - Independent

Answer 1

Business X + Business Y + Business Z = Performance A
Independent: equity holder can buy shares of each firm

Question 2

Logic of Diversification - combined

Answer 2

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

Question 3

Does Diversification always make sense? Strange combinations? Good combinations?

Question 4

Why does Disney own hotels?

Answer 4

• 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

Question 5

Why does Disney own hotels - Professor

Answer 5

1. The “better off” test: Is the hotel better off by being owned by Disney? What can the Disney hotel achieve?
2. The “ownership test” Does Disney need to own the hotel? What is they franchise (through a contractual agreement?)

Question 6

Why does Disney own cruises?

Answer 6

• 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?

Question 7

Value Creating Strategies of Diversification
Related Constrained Diversification

Answer 7

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

Question 8

Operational Relatedness: Sharing of activities

Answer 8

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

Question 9

Corporate Relatedness: Transferring of core competencies

Answer 9

Intangible resources (know-how)

Question 10

Related Linked Diversification

Answer 10

Create value through corporate relatedness
1. Expense of developing core competency has already been incurred
2. Resource intangibility
Virgin Group

Question 11

Unrelated diversification strategy

Answer 11

Low sharing of activities and low transfer of core competencies
Value through financial economies

Question 12

Both Operational and Corporate Relatedness

Answer 12

High sharing of activities and high transfer of core competencies
Disney

Question 13

Related Diversification

Answer 13

Value created from economies of scope

Question 14

Related Diversification
Operational Relatedness - class

Answer 14

sharing activities across businesses
- sharing activities such as inventory delivery systems or purchasing
- May create risk because business-unit ties create links between outcomes

Question 15

Related Diversification
Corporate Relatedness - class

Answer 15

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

Question 16

Related Diversification
Other

Answer 16

Simultaneous operational relatedness and corporate relatedness
Disney

Question 17

Unrelated Diversification
Financial Economies - class

Answer 17

• 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

Question 18

Value of unrelated diversification

Answer 18

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

Question 19

External incentives to diversify

Answer 19

• Antitrust regulation
• Tax laws

Question 20

Internal incentives to diversify

Answer 20

• Low performance
• Uncertain future cash flows
• Balance synergy and firm risk

Question 21

Value-Reducing Diversification
Managerial motives to diversify (driven by CEOs personal motives)

Answer 21

• Managerial risk reduction
• Desire for increased compensation
• Build personal performance reputation

Question 22

Example of Diversification

Answer 22

Arm & Hammer - personal incentive
Stove top??
Samsung car - bad decision to enter market - look up
Ikea - task rabbit

Question 23

Why does Disney own ESPN?

Answer 23

Expand into a different audience

Question 24

Disney and Twitter

Answer 24

Look into this

Question 25

Limits of diversification

Answer 25

Median total annual return: 7.5% (conglomerate) vs 11.8% (focused)

Question 26

Disney: The entertainment king

Answer 26

• Evolution of a diversified firm
• Understanding synergies between businesses
• Understanding the core business and how that connects other businesses

Question 27

Diversification Takeaway

Answer 27

Basic logic: Businesses combined should be more than simple sum of individual parts; Corporation should create value
Value is created through economies of scope: Operational relatedness and Corporate relatedness
“Better Off” and “Ownership” tests