Welcome to advanced business strategy, module three. Competing across industries. In this module we're gonna talk about the idea of corporate strategy how businesses position themselves, in multiple markets. And the value by being in different markets, that they can contribute to individual lines of the business. We'll also talk about some interesting topics, about the theory of the firm and the boundaries of the firm. And try to understand, once again, the strategic reasons why a company might be competing across multiple markets. So let's start with the example of GE, better known as General Electric. General Electric is a venerable firm, been around for over a 100 years, and over that history they've been involved in a number of different businesses. Washing machines, light bulbs, wind turbines, locomotives, entertainment and media. Financial services, health care. Now the portfolio businesses that GE is in seems to constantly be influxed. They're buying new businesses, developing new, selling off old businesses. At the end of the day, they seem to maintain a diverse collection of businesses under one company. Why? What are the reasons that these businesses might hold together under one corporate entity? Well this is ultimately a question of firm scope. What are the businesses that a firm operates, and how they govern those operations, is our question about firm scope. Why maintain this diverse portfolio at the end of the day? This is sometimes referred to as corporate strategy, as opposed to business strategy. So business strategy would be our thinking about how do we compete in individual lines of business? Corporate strategy refers to how we compete across lines of business. My own personal feeling corporate strategy at the end of the day is just an extension of business strategy. We still need to apply all the tools and frameworks we had in the past about how to analyze a business strategy, but now we want to add in this additional length of maintaining a portfolio businesses within the same organization. So ultimately scope is a question about diversification. How can a firm leverage it's position in one market to garner economic rents in another business? And what's the potential of this diversification to generate value as opposed to the cost associated with operating in multiple businesses? So let's start with some definitions here. There are many different types of diversification here. And here's just a little schema to think more broadly about different diversification types. So let's start with low types of diversification. This would refer to companies that are predominately in one business. Though they might hold a few others. In this case here, a firm that maybe has over 90% of their revenues coming from a single line of business. Again, despite having other businesses as well. Google is a good example of a business that has numerous businesses they are entering in to but the vast majority of their revenue, at least right now come from search and from their AdWords advertising strategy. Coca-Cola is another good example of a very large business, but its single dominant business is the cola and beverage business, though they do have some other businesses they hold. Contrast that to another low diversification type, but one that is not quite as dominated as a single business as the examples I gave before. This might be someone like Pepsi. Now Pepsi differs in Coke in that they have businesses like Frito-Lay and Quaker Foods as part of their portfolio. So while beverages make up a significant portion of their business, they still have other businesses as well that contribute to their revenues. Now on the opposite end of the spectrum we have those that are highly diversified firms. And there we'd like to make a distinction between two different types. Those that have what we call related diversification, those are businesses that are operating in multiple businesses, but there's some shared value chain at the end of the day. Think of Disney here. Disney has multiple lines of business but one could argue that there are some synergy, some relatedness between them. This might be Disney's theme parks feeding into their movies, their movie characters. The movie characters then being used for merchandise and the like. And there are some inter-relatedness between what might otherwise look like very diverse businesses. Compare and contrast that to unrelated diversification where we have a holding of very distinct businesses where it's not quite as clear where the value sharing is occurring across those businesses. GE comes as an example. More generally we refer to this type of organizational structure as a conglomerate. Conglomerates were very popular in the 1970s. We saw a number of large companies exist holding very diverse holdings. I would have to say over the last few decades, the conglomerate idea has fallen a little more into disfavor, the thinking being that there's no reason to hold these diverse businesses together. Or at least there needs to be some reason to hold them together. And we're gonna discuss in a little while here, some of those reasons why you might want to be diversified in this way.
