Corporate Strategy

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MGMT611: Strategy
Natalya Vinokurova
Corporate Strategy Session 15

1

Corporate Scope
Corporate center
Division A in industry a Division B in industry 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 parts 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 offer from Zapata, a Texas-based group with holdings in marine protein and food packaging companies. Citing the “excellent fit with Zapata’s new strategic direction,” Avram Glazer, Zapata’s chief executive officer, said the proposed transaction “makes sense for Excite’s shareholders because of the capital resources that Zapata can bring to Excite.”

Financial Times, May 22, 1998

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What diversified corporation did this become?

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Decomposition of Variance in Profitability: 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 units must be competitive on their own merits – …in attractive industries • But the icing can make the decisive difference between a good cake and a bad one

Business segment 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

4

Decomposition of Variance in Profitability: Evidence from 14 Emerging Economies • In much of the rest of the world, corporate strategy is more prominent • Membership in a diversified entity has a larger effect on profitability • The effect on profitability is more likely to be positive

Source: Tarun Khanna and Jan W. Rivkin, “Estimating the Performance Effects 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

5

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 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 have a competitive advantage running that business – AND how it will contribute to the fit among the other 6 businesses you are running

Acrobat Document

7

The Walt Disney Company: Stock Price vs. S&P 500, 1984-1994

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The Walt Disney Company: Stock Price vs. S&P 500, 1995-2005

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Two big problems
1. Growth at all costs:
• This is an example of what happens when a solid corporate strategy meets 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 together 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 doesn’t really exist…then you get into trouble.

– In 2005, ABC President Robert Iger replaces Eisner

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The Walt Disney Company: Stock Price vs. S&P 500, 2005-2012

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The Walt Disney Company: Take-aways
– Core lessons of corporate-level strategy
• Competition occurs at the level of the business unit • Corporate strategy...
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