Corporate Strategy: Plants and actions that firms need to formulate and implement when managing a portfolio of businesses;

an especially critical issue when firms seek to diversify from their initial activities or operations into new areas. Corporate strategy issues are key to extending the firms competitive advantage from one business to another.

Resource-based view of the firm:

An evolving set of strategic management ideas that place considerable emphasis on the firms ability to distinguish itself from its rivals by means of investing in imitate and specific resources.

Scope of Operations:
The extent of a firms involvement in different activities, products, and markets.

Common Avenues to Enlarging the Firms Scope of Operations

Vertical Integration: The expansion of the firms value chain to include activities performed by suppliers and buyers; the degree of control that a firm exerts over the supply of its inputs and the purchase of its outputs. Vertical integration strategies and decisions enlarge the scope of the firms activities in one industry. Backward Integration: A strategy that moves the firm upstream into an activity currently conducted by a supplier. Forward Integration: A strategy that moves the firm downstream into an activity currently performed by a buyer.

Diversification: A strategy that takes the firm into new industries and markets. Related Diversification: A strategy that expands the firms operations into similar industries and markets; extends the firms distinctive competence to other lines of business that are similar to the firms initial base. Unrelated Diversification: A strategy that expands the firms operations into industries and markets that are not similar or related to the firms initial base; does not involve sharing the firms distinctive competence across different lines of business. Full Integration: Vertical integration that seeks to control every activity in the value chain. IN full integration, firms bring all activities required to design, develop, produce, and market a product in-house.

Partial Integration: Vertical integration that is selective about which areas of activity the firm will choose to undertake. In partial integration, firms do not control every activity required to design, develop, produce, and market a product. Synergy: An economic effect in which the different parts of the company contribute a unique source of heightened value to the firm when managed as a single, unified entity. Conglomerates:

Firms that practice unrelated diversification.

Exhibit 6-2: Benefits of Diversification A. More attractive terrain Faster growth Higher profitability Greater stability

B. Access to resources Physical assets and access to markets Technologies and skills Experience
C. Sharing of activities

(any business system activity)

Exhibit 6-3 : Sharing Expertise Among Businesses

Company
Hewklett-Packard

Partial List of businesses

Computers/ workstations Laser printers Digital imaging Engineering systems Microprocessors LCD Technology Office Equipment Flat Screen Technology Calculators

Shared Expertise
Engineering skills Rapid product development Distinctive manufacturing quality Leverage design skills Precision manufacturing Flat-screen technology Miniaturization Fast innovation

Sharp Corp.

PepsiCo

Soft drinks (Pepsi, Mountain Dew) Snaks Distribution systems food (frito-Lay) Gatorade (Quaker Oats) Marketing research Tropicana juices Segmentation skills Consumer advertising Brand development Advertising
Heart devices Insulin pumps Spinal Surgery Nervous system disorders Shared R&D skills Wireless initiatives Advanced technologies for less invasive treatments

Medtronic

Exhibit 6-4 : Sharing Activities Among Businesses

Firm
3M

Partial List of businesses

Sandpaper, tapes, fabric treatments, sealants, weather, stripping, Post-It Notes, medical patches, signs Cigarettes, packaged foods, consumer nondurables

Key Shared Activity

Technology development coatings adhesives, thin-film substrates, advanced membranes Marketing: distribution, advertising market research, promotion Technology: silicon etching systems integration, advanced materials, miniaturization. Marketing distribution, Interest, salesforce, consulting Operations: network management telecommunications, internal logistics Marketing: distribution, sales service, internet, e-commerce

Altria.

IBM

Semiconductors, computers, network systems, disk drives, software, electronic commerce

Fidelity Investments

Mutual funds, brokerage, securities, annuities, institutional services, retirement plans.

Exhibit 6-5: Costs of Diversification

Ignorance (about newly entered fields) Neglect (of core business) Coordination communication compromise accountability

Exhibit 6-6: Balancing the Benefits and Costs of Diversification

Diversification Benefits Diversification Costs

More attractive terrain

Access to key resources Sharing resources

Ignorance
Neglect Coordination

Exhibit 6-7: Conditions Leading to Powerful Diversification Benefits

A. Achieving more attractive terrain
(This is rarely a source of powerful benefits for all stakeholders.)

B. Transferring resources which are

Competitively important to receiving businesses

Difficult for receiving businesses to duplicate on their own Hard for competitors to irritate

C. Shared activities must be.

large in dollar terms Susceptible to economies of scale and experience

Exhibit 6-8: Limiting Diversification Costs

Limit Costs of Ignorance by
entering familiar fields Centering new areas internally rather than by acquisition

Limit Costs of Neglect by

ensuring new business fit easily with existing ones

leveraging a distinctive competence system wide carefully managing the sharing of activities designing organizational support systems that promote interrelationships Steps designed to change the corporate portfolio of business to achieve greater focus and efficiency among businesses; often involve selling off businesses that do not fit a core technology or are a drag on earnings.

Limit Cots of Cooperation by

Corporate restructurings:

Exhibit 6-9: Steps in Corporate Restructuring:

Selective focus on carefully chosen activities or niches Divestitures and spin-offs A form of corporate restructuring that sells businesses or parts of a company that no longer contribute to the firms earnings or distinctive competence.

Spinning off:

Exhibit 6-10 : Key Corporate Spin-offs in Recent Years

Firm
Baxter Healthcare AT&T PepsiCo Ralston-Purina Ford

Spun-off Unit
Allegiance Lucent Technologies Tricon Global Restaurants Yum! Brands Ralston Ralcorp. Associates First Capital

Industry/Intent
Divest low margin, mature medical supply unit Separate telecom equipment Free up KFC, Raco Bell, Pizza Hut into new unit Separate animal feed business cereals business Divest commercial lending unit to focus on automobile business

Visteon Corp.
Monsanto DuPont ICI Solutia Conoco Zeneca

Divest of part-making unit

Frees up Monsanto to focus on biotechnology Use cash from spin-off to focus on life sciences Separation of commodity chemical and agribusiness units Separation of chip-making unit from cell phone manufacturing

Motorola

Freescale

Firm
Motorola

Spun-off Unit
Freescale

Industry/Intent
Separation of chip-making unit from cell phone manufacturing unit
Separation of hotel management and real estate businesses Divest restaurant unit to focus on core foods business Divest four financial services units to focus on retailing

Marriott International General Mills Sears

Host Marriott

Darden Group Allstate Insurance Coldwell Banker Dean Witter Discover Lehman Brothers

American Express

Separation of brokerage/ underwriting unit from travel services Focus on digital photography and imaging Renew focus to become a pure play media company Focus on core long-distance business

Eastman Kodak CBS AT&T

Eastman Chemical Westinghouse industrial businesses AT&T Broadband

Firm
Tyco International Citigroup Lucent Technologies
Merck H.J. Heinz Hewlett-Packard

Spun-off Unit
Four business units Travelers unit Agere Systems

Industry/Intent
Increase transparency to shareholders Divest of some noncore property/casualty business Divest of chipmaking unit to focus on wireless and optical segments
Focus on core drug development activities Focus on condiment and flavorings business Focus on printing, digital imaging, and computing systems Divest of software and reservations systems Unlock food value unit Divest of auto part-making unit

Medco Containment Weight Watchers unit Agilent Technologies

AMR Corp. Altria General Motors

The Sabre Group Kraft Foods Delphi Automotive Systems