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The Multi-Business, Diversified Firm. MANEC 387 Economics of Strategy. David J. Bryce. Corporate vs. Business Unit Strategy. Business Unit Strategy To whom will we sell, for what price? How will we source, manufacture, distribute, etc. our product? Corporate Strategy - PowerPoint PPT Presentation
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David J. Bryce © 2002David J. Bryce © 2002
The Multi-Business, Diversified FirmThe Multi-Business, Diversified Firm
MANEC 387Economics of Strategy
MANEC 387Economics of Strategy
David J. BryceDavid J. Bryce
David J. Bryce © 2002David J. Bryce © 2002
Corporate vs. Business Unit StrategyCorporate vs. Business Unit Strategy
• Business Unit Strategy– To whom will we sell, for what price?
– How will we source, manufacture, distribute, etc. our product?
• Corporate Strategy– What business(es) should we be in?
– How will we get in (or out) of them?
– How will we coordinate or integrate businesses to create value?
• Business Unit Strategy– To whom will we sell, for what price?
– How will we source, manufacture, distribute, etc. our product?
• Corporate Strategy– What business(es) should we be in?
– How will we get in (or out) of them?
– How will we coordinate or integrate businesses to create value?
Adapted from M. Porter, 2001, HBR
David J. Bryce © 2002David J. Bryce © 2002
Corporate-Level Strategy and the Multi-business FirmCorporate-Level Strategy and the Multi-business Firm
• Corporate strategy is action taken to gain competitive advantage through multiple business units
• Value is created through the configuration and coordination of multi-business activities
• Corporate strategy is action taken to gain competitive advantage through multiple business units
• Value is created through the configuration and coordination of multi-business activities
David J. Bryce © 2002David J. Bryce © 2002
Scope of the FirmScope of the FirmHorizontal Scope
Ver
tical
Sco
pe
Manuf.
Distrib
Sales
Prod./Ind. A
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales
outp
ut-p
rodu
cts
Prod./Ind. B Prod./Ind. C
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales. . .
Inpu
t-pr
oduc
ts
. . .“Vertical
Integration”
“Horizontal Integration”
David J. Bryce © 2002David J. Bryce © 2002
Wal-martWal-martHorizontal Scope
Ver
tical
Sco
pe
Manuf.
Distrib
Sales
Prod./Ind. A
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales
outp
ut-p
rodu
cts
Prod./Ind. B Prod./Ind. C
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales. . .
Inpu
t-pr
oduc
ts
. . .
David J. Bryce © 2002David J. Bryce © 2002
GEGEHorizontal Scope
Ver
tical
Sco
pe
Manuf.
Distrib
Sales
Refrigerators
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales
outp
ut-p
rodu
cts
Aircraft Engines Prod./Ind. C
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales
Manuf.
Distrib
Sales. . .
Inpu
t-pr
oduc
ts
. . .Compressors
David J. Bryce © 2002David J. Bryce © 2002
Why Diversify? Why Diversify?
• Secure Market Power– Cross-subsidization, mutual forbearance,
reciprocal buying
– Shown to be an incomplete, if not an incorrect view
• Mitigate Business (Cycle) Risk– Perspective from finance
– Few firms are just “portfolio” investors
• Secure Market Power– Cross-subsidization, mutual forbearance,
reciprocal buying
– Shown to be an incomplete, if not an incorrect view
• Mitigate Business (Cycle) Risk– Perspective from finance
– Few firms are just “portfolio” investors
David J. Bryce © 2002David J. Bryce © 2002
Why Diversify?Why Diversify?
• Achieve Efficiency (or “Synergy”)– Pursue related or complementary activities
– Most common type of diversification
– Associated with higher levels of performance than previous two types
• Dynamic Learning– Related to the efficiency motivation
– Firms invest in activities that leverage existing skills and knowledge
– Firms introduce new activities to build skills and knowledge
– Objective is to develop a “capabilities portfolio” that is ready for new opportunities when they emerge
• Achieve Efficiency (or “Synergy”)– Pursue related or complementary activities
– Most common type of diversification
– Associated with higher levels of performance than previous two types
• Dynamic Learning– Related to the efficiency motivation
– Firms invest in activities that leverage existing skills and knowledge
– Firms introduce new activities to build skills and knowledge
– Objective is to develop a “capabilities portfolio” that is ready for new opportunities when they emerge
David J. Bryce © 2002David J. Bryce © 2002
How to Choose Industries/Products for ExpansionHow to Choose Industries/Products for Expansion
1. Strategically Important 2. Strategically Related; i.e.
commonality in one of the following:1. Customers2. Channels3. Inputs4. Processes5. Market Knowledge
1. Strategically Important 2. Strategically Related; i.e.
commonality in one of the following:1. Customers2. Channels3. Inputs4. Processes5. Market Knowledge
David J. Bryce © 2002David J. Bryce © 2002
Sequential Entry and Dynamic Learning: ExampleSequential Entry and Dynamic Learning: Example
Texas InstrumentsTexas Instruments
IBMIBMComputer Storage
Devices (3572)
Electronic Computers (3571)
Computer Terminals (3575)
Computer Peripherals (3577)
Software (7372)Semi-conductors
(3674)
Semi-conductors
(3674)
Electronic Computers (3571)
Search & Navigation (3812)
Software (7372)Texas InstrumentsTexas Instruments
IBMIBMComputer Storage
Devices (3572)
Electronic Computers (3571)
Computer Terminals (3575)
Computer Peripherals (3577)
Software (7372)Semi-conductors
(3674)
Semi-conductors
(3674)
Electronic Computers (3571)
Search & Navigation (3812)
Software (7372)
Source: COMPUSTAT Business Segment Files, 1977-1996
David J. Bryce © 2002David J. Bryce © 2002
Patterns of Historic Entry in Industries Related to Semiconductors, 1977-1996
Patterns of Historic Entry in Industries Related to Semiconductors, 1977-1996
Semiconductors(3674)
Engineering Services(8711)
Computer Storage Devices(3572)
Radio/ TV Communication
Equip(3663)
Computer Peripherals
(3577)
Electronic Components
(3679)
Patent Owners & Lessors(6794)
Search & Navigation Equip.(3812)
Process Control Instruments
(3823)
Electronic Capacitors
(3675)
Printed Circuit Boards(3672)
Special Industries Machinery
(3559)
*
*
*
*
* p<0.10
Semiconductors(3674)
Engineering Services(8711)
Computer Storage Devices(3572)
Radio/ TV Communication
Equip(3663)
Computer Peripherals
(3577)
Electronic Components
(3679)
Patent Owners & Lessors(6794)
Search & Navigation Equip.(3812)
Process Control Instruments
(3823)
Electronic Capacitors
(3675)
Printed Circuit Boards(3672)
Special Industries Machinery
(3559)
*
*
*
*
* p<0.10
David J. Bryce © 2002David J. Bryce © 2002
A General Inter-industry Relatedness IndexA General Inter-industry Relatedness Index
Index available for download at http://msm.byu.edu/strategy/bryce/
David J. Bryce © 2002David J. Bryce © 2002
Examples of the Measure at WorkExamples of the Measure at Work
• Two most related industries (z = 3.51):– SIC 2131, “Tobacco, Chewing and Smoking”– SIC 2141, “Tobacco Stemming and Redrying”
• Two most unrelated industries (z = -7.0):– SIC 2097 “Ice” – SIC 2397 “Schiffli Machine Embroidery”
• Two most related industries (z = 3.51):– SIC 2131, “Tobacco, Chewing and Smoking”– SIC 2141, “Tobacco Stemming and Redrying”
• Two most unrelated industries (z = -7.0):– SIC 2097 “Ice” – SIC 2397 “Schiffli Machine Embroidery”
David J. Bryce © 2002David J. Bryce © 2002
Examples of the Measure at WorkExamples of the Measure at Work
• Industries that don’t share same 1-digit class (percentile: 100, z = 3.07) – SIC 2951, “Paving Mixtures and Blocks” – SIC 3273, “Concrete, Ready-Mixed”
• A more interesting example (percentile: 100, z = 3.04)– SIC 2542, “Metal Partitions and Fixtures”– SIC 3581, “Automatic Vending Machines.”
• Industries that don’t share same 1-digit class (percentile: 100, z = 3.07) – SIC 2951, “Paving Mixtures and Blocks” – SIC 3273, “Concrete, Ready-Mixed”
• A more interesting example (percentile: 100, z = 3.04)– SIC 2542, “Metal Partitions and Fixtures”– SIC 3581, “Automatic Vending Machines.”
David J. Bryce © 2002David J. Bryce © 2002
So what is related to Schiffli?So what is related to Schiffli?
• SIC 2397 Schiffli Machine Embroidery”– (91) SIC 3582, “Commercial Laundry
Equipment”– (89) SIC 3961, “Costume Jewelry”– (78) SIC 2512, “Upholstered Furniture”
• SIC 2397 Schiffli Machine Embroidery”– (91) SIC 3582, “Commercial Laundry
Equipment”– (89) SIC 3961, “Costume Jewelry”– (78) SIC 2512, “Upholstered Furniture”
David J. Bryce © 2002David J. Bryce © 2002
Examples of the Measure at WorkExamples of the Measure at Work
• Energizer bought Schick in 2003 : Razors and Batteries– SIC 3691, “Storage Batteries” – SIC 3421, “Cutlery”
• Energizer bought Schick in 2003 : Razors and Batteries– SIC 3691, “Storage Batteries” – SIC 3421, “Cutlery”
Percentile: 62 (z = 0.31)
A stronger relatedness than average, and stronger than one might expect a priori.
David J. Bryce © 2002David J. Bryce © 2002
Research questions that can now be tackled - Research questions that can now be tackled -
– Which markets does a firm enter as a function of its knowledge?
– How do a corporation’s capabilities evolve over time? Does the speed of this evolution affect performance, how?
– Under what conditions are long-leaps successful?
– Which markets does a firm enter as a function of its knowledge?
– How do a corporation’s capabilities evolve over time? Does the speed of this evolution affect performance, how?
– Under what conditions are long-leaps successful?
time
Relatedness Centroid
+0.2
+0.1
0
-0.1
-0.2
David J. Bryce © 2002David J. Bryce © 2002
Summary and TakeawaysSummary and Takeaways
• Corporate Strategy is about structuring a portfolio of businesses that hang together and make strategic sense
• It is sometimes motivated by economizing on transaction costs
• Other (strategic) motivations include dynamic learning, efficiency, or sometimes market power and risk management
• New tools are emerging for examining relatedness that will help in determining optimal corporate diversification trajectories
• Corporate Strategy is about structuring a portfolio of businesses that hang together and make strategic sense
• It is sometimes motivated by economizing on transaction costs
• Other (strategic) motivations include dynamic learning, efficiency, or sometimes market power and risk management
• New tools are emerging for examining relatedness that will help in determining optimal corporate diversification trajectories