1. CORPORATE LEVEL STRATEGY & DIVERSIFICATION
Dr. Payne
(8)

2. Diversification and Corporate Strategy
A company is diversified when it is in two or more lines of business
Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business
A diversified company needs a multi-industry, multi-business strategy
A strategic action plan must be developed for several different businesses competing in diverse industry environments
Main Tasks in Corporate Strategy:
Make moves to enter new businesses
Initiate actions to boost combined performance of businesses
Find ways to capture synergy among related business units
Establish investment priorities, steering resources into most attractive business units

3. Corporate Strategy for a Diversified Company
Kind of Diversification
How Much
Diversification
Responses to
Changing Conditions
Corporate
Strategy
Efforts to Build
Competitive
Advantage Via
Diversification
Approach to
Capital Allocation
Moves to Divest
Weak Units
Moves to Strengthen
Positions and Profits
in Present Businesses
Moves to
Add New Businesses

4. The Decision Logic of Strategy Formulation
May be Corporate or Business
Strategic Decisions
Establishment of mission, vision, values, objectives
-- the Directional Strategies
Identification, evaluation, and selection of
-- the Adaptive Strategies
Identification, evaluation, and selection of
-- the Market Entry Strategies
Identification, evaluation, and selection of
-- the Positioning Strategies
Implementation through development of
-- the Functional & Operational Strategies

5. Adaptive Strategies
Delineate how the organization will adapt to changes in the environment or competitive landscape:
Expansion
Diversification
Vertical Integration
Market Development
Product Development
Penetration
Contraction
Divestiture
Liquidation
Harvesting
Retrenchment
Outsourcing
Stabilization
Enhancement
Status Quo
Corporate Strategy Decisions Only

6. Adaptive: Expansion-Diversification
When markets outside the organizations core business offer potential for substantial growth.
Considered risky, because entering an unfamiliar market or offering a product/service that is different.
Related Diversification (related-constrained, related-linked) is when the organization chooses a market to enter that is similar to its present operations.
Clothing manufacture entering into the shoe market.
Hospital buying a physician practice.
Unrelated Diversification is when the market chosen to enter is dissimilar, sometimes intended to create a portfolio of separate products/service.
Clothing manufacturer entering into the electronics market.
Hospital building an office building for rental space.

7. Levels and Types of Diversification
Low
Single Business
> 95% of business from a single business unit
Dominant Business
Between 70 and 95% of business from a single business unit
Related Constrained
<70% of revenues from dominant business; all businesses share product, technological and distribution linkages
Related Linked (Mixed Related and Unrelated)
< 70% of revenues from dominant business and only limited links exist
Levels and Types of Diversification
Low Levels of Diversification (p. 205)
A single business diversification strategy generates 95% or more of a firm’s sales revenue
from its core business area. Take the chewing gum market, for example. Wm. Wrigley
Jr. Company uses a single business strategy while operating in relatively few product
markets. Wrigley’s brands include Spearmint, Doublemint, and Juicy Fruit, and in the
1990s the company added sugar-free gums Hubba Bubba, Orbit, and Ice White. Collaboration
with Procter & Gamble (P&G) to produce a dental chewing gum—marketed under
P&G’s Crest brand—causes Wrigley to become slightly more diversified than it has been
historically.
`A dominant business diversification strategy generates between 70% and 95% of a
firm’s total revenue within a single business area. Smithfield Foods uses the dominant
business diversification strategy; the majority of its sales are generated from raising and
butchering hogs. Recently, however, Smithfield diversified into beef packing by acquiring
a smaller beef processor. Smithfield also attempted to acquire IBP, the largest beef
packer, but was outbid by Tyson Foods. Although it still uses the dominant business diversification
strategy, Smithfield’s addition of beef packing operations suggests that its
portfolio of businesses is becoming more diversified.
Very
High
Unrelated
< 70% of revenue comes from the dominant business, and there are no common links between businesses

8. Motives for Diversification
GROWTH -- The desire to escape stagnant or declining industries a powerful motives for diversification (e.g. tobacco,
oil, newspapers).
-- But, growth satisfies managers not shareholders.
-- Growth strategies (esp. by acquisition), tend to
destroy shareholder value
RISK Diversification reduces variance of profit flows
SPREADING But, doesn’t create value for shareholders—they can
hold diversified portfolios of securities.
-- Capital Asset Pricing Model shows that diversification
lowers unsystematic risk not systematic risk.
PROFIT For diversification to create shareholder value, then
bringing together of different businesses under
common ownership & must somehow increase
their profitability.

9. Competitive Advantage from Diversification
Predatory pricing Evidence
Reciprocal buying of these
Mutual forbearance is sparse
MARKET
POWER
Sharing tangible resources (research labs, distribution
systems) across multiple businesses
Sharing intangible resources (brands, technology) across
multiple businesses
Transferring functional capabilities (marketing, product
development) across businesses
Applying general management capabilities to multiple
businesses
ECONOMIES OF
SCOPE
Economies of scope not a sufficient basis for diversification—must be supported by transaction costs
Diversification firm can avoid transaction costs by operating internal capital and labor markets
Key advantage of diversified firm over external markets--- superior access to information
ECONOMIES
FROM
INTERNALIZING
TRANSACTIONS

10. Value-Creating Strategies of Diversification
Related Constrained
Diversification
Vertical Integration
(Market Power)
Both Operational and
Corporate Relatedness
--Accomplishing both is
difficult and often fails
to add value.
Low
High
Operational Relatedness Between Businesses
Unrelated
Diversification
(Financial Economies)
Related Linked
Diversification
(Economies of
Scope)
Low
High
Transferring Skills into Businesses Through Corporate Headquarters

11. Cooperative Form of Multidivisional Structure:
Related-Constrained Strategy
Headquarters Office
President
Government
Affairs
Legal
Affairs
Corporate
R&D Lab
Strategic
Planning
Corporate
Human
Resources
Corporate
Marketing
Corporate
Finance
Product
Division
Product
Division
Product
Division
Product
Division
Product
Division

12. Cooperative Form of Multidivisional Structure:
Related-Constrained Strategy
Structural integration devices create tight links among all divisions
Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions
R&D is likely to be centralized
Rewards are subjective and tend to emphasize overall corporate performance, in addition to divisional performance
Culture emphasizes cooperative sharing

13. SBU Form of Multidivisional Structure:
Related-Linked Strategy
Headquarters Office
President
Corporate
R&D Lab
Strategic
Planning
Corporate
HRM
Corporate
Marketing
Corporate
Finance
SBU
SBU
SBU
SBU Form of Multidivisional Structure
Using the Strategic Business-Unit Form of the Multidivisional
Structure to Implement the Related Linked Strategy (p. 215)
Complexity is reflected by the organization’s size and product and market diversity. Related
linked firm GE, for example, has 28 strategic business units (SBUs), each with multiple
divisions. GE Aircraft Engines, Appliances, Power Systems, NBC, and GE Capital
are a few of the firm’s SBUs.
The scale of GE’s business units is striking. GE Aircraft Engines is the world’s leading
manufacturer of jet engines. With almost 30 divisions, GE Capital is a diversified financial
services company creating comprehensive solutions to increase client productivity
and efficiency. The GE Power Systems business unit has 21 divisions including GE
Energy Rentals, GE Distributed Power, and GE Water Technologies.
GE SBUs are making efforts to form competencies in services and technology as a
source of competitive advantage. Recently, technology was identified as an advantage for
the GE Medical Systems SBU, as that unit’s divisions share technological competencies
to produce equipment, including computed tomography (CT) scanners, MRI systems, nuclear
medicine cameras, and ultrasound systems. Once a competence is developed in one
of GE Medical Systems’ divisions, it is quickly transferred to the other divisions in that
SBU so that the competence can be leveraged to increase the unit’s overall performance.
Division
Division
Division

14. SBU Form of Multidivisional Structure:
Related-Linked Strategy
Structural integration among divisions within SBUS, but independents across SBUs
Strategic planning may be the most prominent function in headquarters for managing the strategic planning approval process of SBUs for the president.
Each SBU may have its own budget for staff to foster integration.
Corporate headquarters staff serve as consultants to SBUs and divisions, rather than having direct input to product strategy, as in the cooperative form.

15. Competitive Form of Multidivisional Structure:
Unrelated Diversification Strategy
Headquarters Office
President
Legal
Affairs
Finance
Auditing
Competitive Form of Multidivisional Structure
Using the Competitive Form of the Multidivisional Structure to
Implement the Unrelated Diversification Strategy (p. 223)
Started as a small textile company in 1923, Textron Inc. is an industrial conglomerate using
the unrelated diversification strategy. It has grown through volume, geography, vertical
or horizontal integration, and diversification. Its growth started when the firm vertically
integrated in 1943 to gain control of declining revenues and underutilized production
capacity. Facing another revenue decline in 1952, the company diversified by acquiring
businesses in unrelated industries. Today, Textron has five divisions: aircraft, automotive,
industrial products, fastening systems, and finance. Return on invested capital is
the financial control Textron uses as the primary measure of divisional performance. According
to the firm, “return on invested capital serves as both a compass to guide every
investment decision and a measurement of Textron’s success.”
Division
Division
Division
Division
Division
Division

16. Competitive Form of Multidivisional Structure:
Unrelated Diversification Strategy
Corporate headquarters has a small staff
Finance and auditing are the most prominent functions in the headquarters to manage cash flow and ensure the accuracy of performance data coming from divisions
The legal affairs function becomes important when the firm acquires or divests assets
Divisions are independent and separate for financial evaluation purposes
Divisions retain strategic control, but cash is managed by the corporate office
Divisions compete for corporate resources

17. Appeal / Drawbacks of Unrelated Diversification
Business risk scattered over different industries
Capital resources can be directed to those industries offering best profit prospects
Stability of profits -- Hard times in one industry may be offset by good times in another industry
If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced
Drawbacks:
Difficulties of competently managing many diverse businesses
There are typically no strategic fits which can be leveraged into competitive advantage
Consolidated performance of unrelated businesses tends to be no better than sum of individual businesses on their own (and it may be worse)
Promise of greater sales-profit stability over business cycles seldom realized

18. Related Diversification
Competitive advantage can result from related diversification if opportunities exist to:
Transfer expertise/capabilities/technology
Combine related activities into a single operation and reduce costs
Leverage use of firm’s brand name reputation
Conduct related value chain activities in a collaborative fashion to create valuable competitive capabilities
Approaches:
Sharing of sales force, advertising, or distribution activities
Exploiting closely related technologies
Transferring know-how / expertise from one business to another
Transferring brand name and reputation to a new product/service
Acquiring new businesses to uniquely help firm’s position in existing businesses

19. J&J: Related Diversification
Advanced Sterilization Products Advanced Sterilization Products develops, manufactures and markets a range of sterilization systems based on a patented low temperature hydrogen peroxide gas plasma process, as well as sterilizing/disinfecting solutions.
BabyCenter, L.L.C. BabyCenter, L.L.C., is an Internet information and commerce company specifically serving the needs of parents and parents-to-be. The BabyCenter family of websites provide thousands of on-line articles and interactive tools, an on-line baby store featuring thousands of products for purchase, and the largest on-line community for parents and parents-to-be.
Cordis Corporation Cordis Corporation is a global leader in developing and marketing devices for circulatory disease management, including stents, balloons and catheters used in treating cardiovascular disease and related conditions.
LifeScan, Inc. LifeScan, Inc., develops, manufactures & markets glucose monitoring products for people with diabetes.
Neutrogena Corporation Neutrogena Corporation develops, manufactures and markets premium, high quality skin and hair care products that are sold worldwide and recommended by medical professionals. The product line includes bar and liquid cleansers, shampoo, hand cream, body lotion, facial moisturizers, bath preparations and cosmetics for men and women, as well as other hair and skin care products.
Just a few examples of J&J companies…

20. 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
Attractive Targets:
Companies with undervalued assets
Capital gains may be realized
Companies in financial distress
May be purchased at bargain prices and turned around
Companies with bright prospects but limited capital
Any company that can be acquired on good financial terms and offers good prospects for profitability is a good business to diversify into!

21. Appeal / Drawbacks of Unrelated Diversification
Business risk scattered over different industries
Capital resources can be directed to those industries offering best profit prospects
Stability of profits -- Hard times in one industry may be offset by good times in another industry
If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced
Drawbacks:
Difficulties of competently managing many diverse businesses
There are typically no strategic fits which can be leveraged into competitive advantage
Consolidated performance of unrelated businesses tends to be no better than sum of individual businesses on their own (and it may be worse)
Promise of greater sales-profit stability over business cycles seldom realized

22. Entering New Industries
Acquisition - Most popular approach to diversification
Advantages:
Quicker entry into target market
Easier to hurdle certain entry barriers
Technological inexperience
Gaining access to reliable suppliers
Size to match rivals in terms of efficiency and costs
Getting adequate distribution access
New Internal Business
More attractive when:
Ample time exists to create new business from ground up
Incumbents slow in responding to new entry
Less expensive than acquiring an existing firm
Company already has most of needed skills
Additional capacity will not adversely impact supply-demand balance in industry
New start-up does not have to go head-to-head against powerful rivals
Joint Venture
Good way to diversify when:
Uneconomical or risky to go it alone
Pooling competencies of two partners provides more competitive strength
Foreign partners are needed to surmount
Import quotas
Tariffs
Nationalistic political interests
Cultural roadblocks

23. Entry Modes for Expansion
Low
Degree of Ownership and Control
High
Extent of Investment and Risk
Exporting
Licensing
Franchising
Strategic Alliance
Joint Venture
Wholly Owned Subsidiary

24. Diversification and Corporate Performance: A Disappointing History
Attaining the intended payoffs from diversification efforts is hard:
The diversification records of 33 large, prestigious U.S. companies over the period showed that most of them have divested many more acquisitions than they had kept. The corporate strategies of most companies had dissipated rather than enhanced shareholder value—by taking over companies and breaking them up, corporate raiders had thrived on failed corporate strategies.
Another study evaluated the stock market reaction to 600 acquisitions over a period between 1975 and The results indicate that acquiring firms suffered an average 4 percent drop in market value (after adjusting for market movements) in the three months following the acquisition announcement.
A study analyzed 150 acquisitions worth more than $500 million that took place between July 1990 and July Based on total stock returns from 3 months before the announcement and up to 3 years after the announcement:
30 percent substantially eroded shareholder returns.
20 percent eroded some returns.
33 percent created only marginal returns.
17 percent created substantial returns.
A study since 1997 in deals for $15 billion or more, showed the stocks of the acquiring firms have, on average, under-performed the S&P stock index by 14 percentage points and under-performed their peer group by four percentage points after the deals were announced.
Business Week 2002 Merger Maniacs

26. Adaptive: Expansion-Vertical Integration
Vertical integration extends a firm’s competitive scope within same industry
Backward (upstream) into sources of supply
Forward (downstream) toward end-users of final product/service
Can aim at either full or partial integration
Plastics Producer / Machinery Provider
Medical Device Manufacturer
Device Marketer or Distributor
Retail Store (e.g., Walgreens)
Vertical
Integration
Backward
Forward
Internally
Performed
Activities,
Costs, &
Margins
Margins of
Suppliers
Buyer/User
Value
Chains
Activities, Costs,
& Margins of
Forward Channel
Allies &
Strategic Partners

27. Benefits and Cost of VI Benefits Costs
Technical economies from integrating processes e.g. iron and steel production
Superior coordination
Avoids transactions costs of market contracts in situations where there are:
-- small numbers of firms
-- transaction-specific investments
-- opportunism and strategic misrepresentation
-- taxes and regulations on market transactions
Differences in optimal scale of operation between different stages prevents balanced VI
Strategic differences between different vertical stages creates management difficulties
Inhibits development and exploitation of core competencies
Limits flexibility
-- in responding to demand cycles
-- in responding to changes in technology, customer preferences, etc.

28. When to Diversify Competitive Position Market Growth
Strong
Weak
Strong competitive position, rapid market growth -- Not a good time to diversify
Weak competitive position, rapid market growth -- Not a good time to diversify
Rapid
Market Growth
Strong competitive position, slow market growth -- Diversification is top priority consideration
Weak competitive position, slow market growth -- Diversification merits consideration
Slow

29. Adaptive: Contraction Strategies
Decrease the size & scope of operations:
Divestiture - operating strategic unit (or entire business) is sold as a result of a decision to permanently and completely leave the market.
Liquidation - selling the assets of an organization, which cannot be sold as a viable and operational organization (assets still have value, but not the business).
Harvesting - reaping maximum short-term benefits riding a long-term decline in the market.
Retrenchment - response to declining profitability usually brought about by increasing costs - needs redefinition of target market, selective cost elimination, and asset reduction.
Outsourcing - Involves not performing certain value chain activities internally and relying on outside vendors to perform needed activities and services.

31. Decision Tool 1: Evaluating Competitive Strength Different Business Units
Objectives:
Determine how well each business is positioned in its industry relative to rivals
Evaluate whether it is or can be competitively strong enough to contend for market leadership
Competitive Strength Factors:
Relative market share
Ability to compete on cost
Ability to match rivals on quality and/or service
Ability to exercise bargaining leverage with suppliers or customers
Technology and innovation capabilities
How well business unit’s competitive assets and competencies match industry KSFs
Brand name recognition and reputation
Profitability relative to competitors

32. Constructing an Attractiveness / Strength Matrix
Use quantitative measures of industry attractiveness and business strength (remember the weighted vs. unweighted attractiveness matrices?) to plot location of each business in matrix
Each business unit appears as a circle:
Area of circle is proportional to size of business as a percent of company revenues
(Or area of circle can represent relative size of industry with pie slice showing the company’s market share)
Large portion of total revenue for company
Company holds ~ 25% of total market share available in large industry
25%
Small portion of total revenue for company

33. Medium Priority - Maintain
Representative Nine-Cell Industry Attractiveness-Business Strength Matrix
Business Strength
Relative Market Share
Reputation/ Image
Bargaining Leverage
Ability to Match Quality/Service
Relative Costs
Profit Margins
Fit with KSFs
Industry
Attractiveness
10.0
Strong
6.7
Average
3.3
Weak
1.0
Market Size
Growth Rate
Profit Margin
Intensity of Competition
Seasonality
Cyclicality
Resource Requirements
Social Impact
Regulation
Environment
Opportunities & Threats
High
6.7
Medium
3.3
Low
1.0
High Priority - Grow
Medium Priority - Maintain
Low Priority - Divest

34. Decision Tool 2: Assessing Strategic Fit
Objective
Determine competitive advantage potential of value chain relationships and strategic fits among current businesses
Examine fit needs from two angles:
Whether one or more businesses have valuable strategic fit with other businesses in portfolio
Whether each business meshes well with firm’s long-term strategic direction

35. Identifying Strategic Fits Among a Diversified Firm’s Business Units
Business A
Inbound Logistics
Technology
Operations
Sales and Marketing
Distribution
Service
Business B
Business C
Business D
Business E
Opportunity to combine purchasing activities & gain greater leverage with suppliers
Opportunity to share technology, transfer technical skills, combine R&D
Opportunity to combine sales & marketing activities, use common distribution channels, leverage use of a common brand name, and/or combine after-sale service
No strategic fit opportunities
Value Chain Activities

36. Decision Tool 3: Assessing Resources
Objective:
Determine how well firm’s resources match business unit requirements
Good resource fit exists when:
Businesses add to a firm’s resource strengths, either financially or strategically
Firm has (financial) resources to adequately support requirements of its businesses as a group

37. Dogs to Hogs: Assessing Cash Flow between Businesses
Determine cash flow and investment requirements of the business units - Are they cash hogs or cash cows?
A business is a cash hog when its internal cash flows are inadequate to fully fund its need for working capital and new capital investment the parent company has to continually pump in capital to “feed the hog”
Strategic options:
Aggressively invest in
attractive cash hogs (question
marks or stars)
Divest cash hogs (dogs,
maybe question marks)
lacking long-term potential
Star
Question
Mark
Cash
Cow
Dog
High Share
Low Share
High
Growth
Slow ?
Bark!!
Cash Flow
Cash Flow