1. 10
Corporate Strategy: Diversification, Acquisitions, and Internal New Ventures

2. Overview Diversification Vehicles for diversification Restructuring
The process of adding new businesses to the company that are distinct from its established operations
Vehicles for diversification
Internal new venturing
Starting a new business from scratch
Acquisitions
Joint ventures
Restructuring
Reducing the scope of diversified operations by exiting from business areas
Copyright © Houghton Mifflin Company. All rights reserved.

3. Expanding Beyond a Single Industry
Advantages of staying in a single industry
Focus resources and capabilities on competing successfully in one area
Focus on what the company knows and does best
Disadvantages of being in a single industry
Danger of the industry declining
Missing the opportunity to leverage resources and capabilities to other activities
Resting on laurels and not continually learning
Copyright © Houghton Mifflin Company. All rights reserved.

4. A Company as a Portfolio of Distinctive Competencies
Reconceptualize the company as a portfolio of distinctive competencies rather than a portfolio of products
Consider how those competencies might be leveraged to create opportunities in new industries
Existing vs. competencies
Existing industries in which a company competes vs. new industries
Copyright © Houghton Mifflin Company. All rights reserved.

5. Establishing a Competency Agenda
Source: Reprinted by permission of Harvard Business School Press. From Competing for the Future: Breakthrough Strategies for Seizing Control of Your Industry and Creating the Markets of Tomorrow by Gary Hamel and C. K. Prahalad, Boston, MA. Copyright © 1994 by Gary Hamel and C. K. Prahalad. All rights reserved.
Copyright © Houghton Mifflin Company. All rights reserved.

6. The Multibusiness Model
Develop a business model for each industry in which the company competes
Develop a higher-level multibusiness model that justifies entry into different industries in terms of profitability
Copyright © Houghton Mifflin Company. All rights reserved.

7. Increasing Profitability Through Diversification
Transferring competencies
Taking a distinctive competence developed in one industry and applying it to an existing business in another industry
The competencies transferred must involve activities that are important for establishing competitive advantage
Copyright © Houghton Mifflin Company. All rights reserved.

8. Transfer of Competencies at Philip Morris
Copyright © Houghton Mifflin Company. All rights reserved.

9. Increasing Profitability Through Diversification (cont’d)
Leveraging competencies
Taking a distinctive competency developed by a business in one industry and using it to create a new business in a different industry
Sharing resources: economies of scope
Cost reductions associated with sharing resources across businesses
Copyright © Houghton Mifflin Company. All rights reserved.

10. Sharing Resources at Proctor & Gamble
Copyright © Houghton Mifflin Company. All rights reserved.

11. Increasing Profitability Through Diversification (cont’d)
Managing rivalry: multipoint competition
Diversifying into an industry in order to hold a competitor in check that has either entered its industry or has the potential to do so
Multipoint competition: companies competing against each other in different industries
Copyright © Houghton Mifflin Company. All rights reserved.

12. Increasing Profitability Through Diversification (cont’d)
Exploiting general organizational competencies
Competencies that transcend individual functions or businesses and reside at the corporate level in the multibusiness enterprise
Entrepreneurial capabilities
Effective organization structure and controls
Superior strategic capabilities
Copyright © Houghton Mifflin Company. All rights reserved.

13. Types of Diversification
Related diversification
Entry into a new business activity in a different industry that is related to a company’s existing business activity, or activities, by commonalities between one or more components of each activity’s value chain
Unrelated diversification
Entry into industries that have no obvious connection to any of a company’s value chain activities in its present industry or industries
Copyright © Houghton Mifflin Company. All rights reserved.

14. The Limits of Diversification
Related diversification is only marginally more profitable than unrelated diversification
Extensive diversification tends to depress rather than improve profitability
Copyright © Houghton Mifflin Company. All rights reserved.

15. Bureaucratic Costs and Diversification Strategy
The costs increases that arise in large, complex organizations due to managerial inefficiencies
Number of businesses in a company’s portfolio
Information overload
Coordination among businesses
Inability to identify the unique profit contribution of a business unit that shares resources with another unit
Copyright © Houghton Mifflin Company. All rights reserved.

16. Coordination Among Related Business Units
Copyright © Houghton Mifflin Company. All rights reserved.

17. Bureaucratic Costs and Diversification Strategy (cont’d)
Limits of diversification
Bureaucratic costs place a limit on the amount of diversification that can profitably be pursued
Related or unrelated diversification?
Related diversified companies can create value in more ways than unrelated companies, but they have to bear higher bureaucratic costs
Copyright © Houghton Mifflin Company. All rights reserved.

18. Diversification That Dissipates Value
Diversifying to pool risks
Stockholders can diversify their own portfolios at lower costs than the company can
Research suggests that corporate diversification is not an effective way to pool risks
Diversifying to achieve greater growth
Growth on its own does not create value
Copyright © Houghton Mifflin Company. All rights reserved.

19. Entry Strategy: Internal New Ventures—Attractions
To execute corporate-level strategies when a company has a set of valuable competencies in its existing businesses that can be leveraged to enter the new business area
When entering a newly emerging or embryonic industry
Copyright © Houghton Mifflin Company. All rights reserved.

20. Entry Strategy: Internal New Ventures—Pitfalls
Scale of entry
Large-scale entry is initially more expensive than small-scale entry, but it brings higher returns in the long run
Copyright © Houghton Mifflin Company. All rights reserved.

21. Scale of Entry, Profitability, and Cash Flow
Copyright © Houghton Mifflin Company. All rights reserved.

22. Entry Strategy: Internal New Ventures—Pitfalls (cont’d)
Commercialization
Technological possibilities should not overshadow market needs and opportunities
Poor implementation
Demands on cash flow
Clear strategic objectives are needed
Anticipating time and costs
Copyright © Houghton Mifflin Company. All rights reserved.

23. Guidelines for Successful Internal New Venturing
Structured approach to managing internal new venturing
Research research aimed at advancing basic science and technology
Development research aimed at finding and refining commercial applications for the technology
Foster close links between R&D and marketing; between R&D and manufacturing
Selection process for choosing ventures
Monitor progress
Copyright © Houghton Mifflin Company. All rights reserved.

24. Entry Strategy: Acquisitions—Attractions
To achieve horizontal integration
To achieve diversification when the company lacks important competencies
To move quickly
Perceived as less risky than internal new ventures
When the new industry is well established and enterprises enjoy protection from barriers to entry
Copyright © Houghton Mifflin Company. All rights reserved.

25. Entry Strategy: Acquisitions—Pitfalls
Difficulty with postacquisition integration
Overestimating economic benefits
The expense of acquisitions
Inadequate preacquisition screening
Copyright © Houghton Mifflin Company. All rights reserved.

26. Guidelines for Successful Acquisition
Target identification and preacquisition screening
Bidding strategy
Hostile vs. friendly takeover
Integration
Learning from experience
Copyright © Houghton Mifflin Company. All rights reserved.

27. Entry Strategy: Joint Ventures—Attractions
Helps avoid the risks and costs of building a new operation up from the ground floor
Teaming with another company that has complementary skills and assets may increase the probability of success
Copyright © Houghton Mifflin Company. All rights reserved.

28. Entry Strategy: Joint Ventures—Pitfalls
Requires the sharing of profits if the new business succeeds
Venture partners must share control; conflicts on how to run the joint venture can cause failure
Runs the risk of giving critical know-how away to joint venture partner
Copyright © Houghton Mifflin Company. All rights reserved.

29. Restructuring
Reducing the scope of the company by exiting business areas
Why restructure?
Diversification discount: investors see highly diversified companies as less attractive
Complexity and lack of transparency in financial statements
Too much diversification or for the wrong reasons
Response to failed acquisitions
Innovations have diminished the advantages of vertical integration or diversification
Copyright © Houghton Mifflin Company. All rights reserved.

30. Restructuring Strategies
Exit strategies
Divestment
Spinoff
Selling to another company
Management buyout (MBO)
Harvest
Liquidation
Copyright © Houghton Mifflin Company. All rights reserved.