1. CORPORATE-LEVEL STRATEGY: RELATED AND UNRELATED DIVERSIFICATION
Chapter 10
CORPORATE-LEVEL STRATEGY: RELATED AND UNRELATED DIVERSIFICATION

2. Learning Objectives
Differentiate between models based on related/unrelated diversification
Explain ways diversification can create profitability
Discuss conditions that lead managers to pursue related/unrelated diversification & why
Describe methods used to enter new industries
Discuss advantages/disadvantages of each method
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3. Diversified Company
“...makes and sells products in two or more different or distinct industries…”

4. Free Cash Flow
“...cash in excess of that required to fund investments in the company’s existing industry...”
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5. Why Diversify?
When company is generating free cash flow with resources in excess of those needed to maintain competitive advantage.

6. Corporate-Level Strategy
Allow company to perform value creation functions at lower cost or in way allowing differentiation & premium price.
Used to identify:
Businesses/industries in which company should compete
Value creation activities company should perform in those businesses
Method to enter or leave businesses or industries in order to maximize its long-run profitability

7. Strategy of Diversification
Types of diversification:
Related diversification
Unrelated diversification
Methods to implement diversification strategy:
Internal new ventures
Acquisitions
Joint ventures

8. Enables Company to Perform
Value Chain Functions
Enables Company to Perform
At lower cost
In way that allows differentiation & gives pricing options
Helps manage industry rivalry better

9. Ways to Diversify = Increase Profitability
Transfer competencies
Leverage competencies
Share Resources & Capabilities
Product bundling
General organizational competencies

10. Transferring Competencies
Taking a distinctive competency developed in one industry and implanting it in EXISTING business unit in another industry
Competencies transferred must involve activities important to establish competitive advantage

11. Increase profitability when:
For strategy to work, the distinctive competency being transferred must have real strategic value.
Increase profitability when:
Lowers cost structure of one or more business units
Enables one or more business units to better differentiate products

12. Transfer of Competencies at Philip Morris
Figure 10.1

13. Leveraging Competencies
Taking a distinctive competency developed by a business in one industry and using it to create a NEW business unit in a different industry

14. Sharing resources and capabilities across two or more business units in different industries to realize economies of scope.
Economies of scope arise when business units effectively pool, share, & utilize expensive resources or capabilities = possible only when significant commonalities between one or more value-chain functions.

15. Sharing Resources at Procter & Gamble
Figure 10.2

16. Product Bundling
Differentiate products/expand product lines to satisfy customers’ needs for package of related products.
Allows customers to reduce suppliers for convenience & cost savings
Examples
Telecommunications
Medical equipment

17. General Organizational Competencies
Skills transcend individual functions or business units.
Capabilities help business unit perform at higher level than operated as individual:
Entrepreneurial – encourage risk taking
Organizational design – create structure, culture, & control systems
Superior strategic management – effectively manage managers of business units

18. Types of Diversification
Related - entry into new business in different industry:
Related to company’s existing business/activities
Has commonalities between one or more components of each activity’s value chain
Based on transferring/leveraging competencies, sharing resources, & bundling products
Unrelated - entry into industries with no connection to any of company’s activities in present industry or industries
Based on only general organizational competencies to increase profitability of all business units

19. Commonalities Between Value Chains of 3 Business Units
Figure 10.3

20. Disadvantages/Limits of Diversification
Conditions = diversification disadvantageous:
Changes in Industry/Company
Unpredictable future
Willing to divest business units
Diversification for the Wrong Reasons
Clear vision of how value will be created.
Extensive diversification can reduce profitability.
Bureaucratic Costs of Diversification
Costs are function of number of business units portfolio
Extent coordination is required to gain benefits.

21. Factors Ignored in Pooling Diversification Risk
Stockholders can diversify own portfolio
Business cycles of different industries are difficult to predict – economic downturn affects all

22. Coordination Among Related Business Units
Figure 10.4

23. May pursue both strategies simultaneously
Choosing Strategy
Depends on comparison of benefits of each strategy versus cost of pursuing it:
Related
Competencies can be applied across greater number of industries
Superior capabilities to control bureaucratic costs
Unrelated
Functional competencies have few uses across industries
Organizational design skills to build competencies
May pursue both strategies simultaneously

24. Sony’s Web of Corporate-Level Strategy
Figure 10.5

25. Internal New Ventures Pitfalls: Scale of Entry Commercialization
Process of transferring/creating new business unit/division in new industry.
Pitfalls:
Scale of Entry
Commercialization
Poor Implementation

26. Scale of Entry Versus Profitability
Figure 10.6

27. Successful Internal New Venturing
Place funding for research in hand of business unit managers
Effective use of R & D competency
Foster close links between R & D and marketing
Large-scale entry leads to greater long-term profits

28. Attractions of Acquisitions
Principle strategy to
start horizontal integration:
Lack of distinctive competencies
Need to move quickly
Perceived as less risky than internal new ventures
Attractive way to enter new industry protected by high barriers to entry

29. Acquisition Pitfalls Integrating the acquired company
Overestimating economic benefits
Expense of acquisitions
Inadequate preacquisition screening

30. Guidelines for Successful Acquisition
Identification and screening
Bidding strategy
Integration
Learning from experience

31. Joint Ventures Attractions: Pitfalls:
Avoid risks/costs of building new operation
Sharing complementary skills/assets increase probability of success
Pitfalls:
Sharing profits if new business succeeds
Venture partners must share control – conflicts can cause failure
Risk of giving know-how away to joint venture partner

32. Restructuring Why Restructure?
Process of divesting businesses and exiting industries to focus on core distinctive competencies to increase company profitability.
Why Restructure?
Diversification discount- investors see highly diversified companies as less attractive
Response to failed acquisitions
Innovations in strategic management have diminished advantages of vertical integration or diversification

33. “Growth does not always lead a business to build on success
“Growth does not always lead a business to build on success. All too often it converts a highly successful business into a mediocre large business.”
- Richard Branson
“The corporate strategies of most companies have dissipated instead of created shareholder value.”
- Michael Porter