Diversification and Corporate Strategy Corporate Level Strategy – the strategy for a company and all of its business units as a whole Diversification – the primary approach to corporate level strategy Diversified firms vary according to Level of diversification Degree of relatedness

Four Main Tasks in Crafting Corporate Strategy Pick new industries to enter and decide on means of entry Initiate actions to boost combined performance of businesses Pursue opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantage Establish investment priorities, steering resources into most attractive business units

Why do Firms Diversify? When they have excess resources, capabilities, and core competencies that have multiple uses Diminishing growth prospects in present industry Cost saving opportunities Capture strategic fits Capture financial economies Spread business risk Leverage brand name

Building Shareholder Value Ultimate justification for diversifying A diversification move must pass three tests The industry attractiveness test The cost-of-entry test The better-off test

Making the Diversification Decision Decision to Diversify Requires Two Additional Decisions: Level and Degree of Diversification Number and Relatedness Mode of Diversification Acquisition, Internal Development, Joint Venture

Major Corporate Level Strategies Single Business Dominant Business Related Diversification Unrelated Diversification

What is Related Diversification? Involves diversifying into businesses whose value chains possess competitively valuable “strategic fits” with the value chain(s) of the present business(es) Capturing the “strategic fits” makes related diversification a 1 + 1 = 3 phenomenon

Examples of Related Diversification? Proctor and Gamble (distribution/marketing) Provides branded consumer goods products worldwide 3 GBUs Beauty GBU Beauty segment Grooming segment Health and Well-Being GBU Health Care segment Snacks, Coffee, and Pet Care segment Household Care GBU Fabric Care and Home Care segment Baby Care and Family Care segment

Examples of Related Diversification? Johnson and Johnson Engages in the research and development, manufacture, and sale of various products in the health care field worldwide 3 segments Consumer segment Products for baby care, skin care, oral care, wound care, and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products Pharmaceutical segment Products for anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology, and virology Medical Devices and Diagnostics segment Products for circulatory disease management, orthopaedic joint reconstruction and spinal care, wound care and women’s health, minimally invasive surgical, blood glucose monitoring and insulin delivery, and diagnostic products, as well as disposable contact lenses

Examples of Related Diversification? Campbell Soup Company Engages in the manufacture and marketing of branded convenience food products worldwide 4 segments U.S. Soup, Sauces, and Beverages Baking and Snacking International Soup, Sauces, and Beverages North America Foodservice Upjohn (R&D/product) Human and Agricultural Laser Company (technology) Defense, Health Care, Manufacturing

Strategic Appeal of Related Diversification Capture Strategic Fits/Synergies/Scope Economies Strategic fits along value chain Cost reductions Spread investor risks over a broader base Preserves strategic unity in its business activities Achieve consolidated performance greater than the sum of what individual businesses can earn operating independently

What is Unrelated Diversification? Involves diversifying into businesses with No strategic fit No meaningful value chain relationships No unifying strategic theme Approach is to venture into “any business in which we think we can make a profit” Firms pursuing unrelated diversification are often referred to as conglomerates

Example of Unrelated Diversification? W. R. Grace Chemicals Coal Mining Oil and Gas Extraction Food Manufacturing Paper Products Health Services

Example of Unrelated Diversification? United Technologies Corporation Provides technology products and services to the building systems and aerospace industries worldwide Otis segment – elevators and escalators Carrier segment – air conditioning and refrigeration UTC Fire and Security segment. Pratt and Whitney segment - aircraft engines; parts and services Hamilton Sundstrand segment - aerospace products and aftermarket services Sikorsky segment – helicopters UTC also engages in the development and marketing of distributed generation power systems and fuel cell power plants for stationary, transportation, space, and defense applications

Example of Unrelated Diversification? Textron, Inc. Operates in the aircraft, industrial, and finance industries worldwide. 4 segments Bell – helicopters plus parts and service Cessna – general aviation aircraft Industrial – auto parts, food containers, hydrolics, golf carts Finance – aircraft finance, asset-based lending, distribution finance, golf finance, resort finance

Diversification and Shareholder Value Related Diversification A strategy-driven approach to creating shareholder value Unrelated Diversification A finance-driven approach to creating shareholder value

Combination Related-Unrelated Diversification Strategies Dominant-business firms One major core business accounting for 50 - 80 percent of revenues, with several small related or unrelated businesses accounting for remainder Narrowly diversified firms Diversification includes a few (2 - 5) related or unrelated businesses Broadly diversified firms Diversification includes a wide collection of either related or unrelated businesses or a mixture Multibusiness firms Diversification portfolio includes several unrelated groups of related businesses

STRATEGIES FOR ENTERING NEW BUSINESSES Diversifying into New Businesses Acquisition Internal new venture (start-up) Joint venture

Evaluating the Strategy of a Diversified Company Step 1: Assess attractiveness of each industry firm competes in Step 2: Assess competitive strength of firm’s business units Step 3: Check competitive advantage potential of cross-business strategic fits among business units Step 4: Check whether firm’s resources fit requirements of present businesses Step 5: Rank performance prospects of businesses and assign a priority for resource allocation Step 6: Craft new strategic moves to improve overall company performance

Figure 8.6 Strategy Options for a Firm That Is Already Diversified Stick with the Existing Business Lineup Broaden the Diversification Base with New Acquisitions Divest and Retrench to a Narrower Diversification Base Restructure through Divestitures and Acquisitions

Why Firms Expand Globally Gain access to new customers Achieve lower costs and enhance competitiveness Capitalize on core competencies Spread business risk across wider market base Access to raw materials Exchange rate fluctuations Trade policies – tariffs

Cross Country Differences Cultures and lifestyles Market demographics Market conditions Growth rate Distribution systems Need for responsiveness Location advantages Exchange rates Host government restrictions

Two Primary Patterns of International Competition Multi-domestic Competition Global Competition

Strategy (Mode) Options for International Markets Exporting Maintain national production and export goods to foreign markets Licensing Allow foreign firms to produce and distribute your product or use your technology Franchising Similar to licensing More suited to services and retailers

Strategy (Mode) Options for International Markets Acquisition / Merger Acquire or merge with company competing in foreign market Greenfield Venture / Internal Development Start up new business unit and use it to enter in to foreign market Strategic Alliances and Joint Ventures Combine resources with foreign partner(s)

Strategy Options for International Markets Multicountry Think-local, act-local Tailor strategy to each country Global Think-global, act-global Pursue same basic strategy worldwide Transnational Think-global, act-local Combination global-local strategy

Building Competitive Advantage in Foreign Markets Locating activities Transferring of competencies to foreign markets Coordinating cross-border activities Profit sanctuaries Cross-market subsidization

Competing Internationally Versus Competing Globally Compete in a select few foreign markets Global Has or pursue a market presence on most continents and in all major countries