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

2. Review Chapter 8
Location economies – economic benefits that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that might be.
Can lower cost of value creation, helping the company achieve a low-cost position.
Can enable a company to differentiate its product offering, which gives it the option of charging a premium price or keeping price low and using differentiation as a means of increasing sales volume. P. 261
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3. W. Chan Kim and Renee Mauborgne
“Before executives can chart a new strategy, they must reach common understanding of the company’s current position.”
W. Chan Kim and Renee Mauborgne
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4. Overview/Review Chapter 9
Chapter focuses on three corporate-level strategies
Horizontal integration
The process of acquiring or merging with industry competitors
Acquisition and merger
Vertical integration
Expanding operations backward into an industry that produces inputs for the company or forward into an industry that distributes the company’s products
Strategic outsourcing
Letting some value creation activities within a business be performed by an independent entity
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5. Chapter 9 - Drawbacks and Limits of Horizontal Integration
Majority of mergers and acquisitions do not create value
Data suggests that the majority of mergers and acquisitions do not create value and that many actually destroy value. P. 304
Implementing a horizontal integration strategy is not easy
Mergers and acquisitions often fail to produce the anticipated gains
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6. Acquisitions, Ethics and Stockholders?
The return on investment related to an acquisition must exceed the return that stockholders could get by investing that capital in a diversified portfolio of stocks and bonds
Enron collapse – stockholder value evaporated and thousands of employees lost their jobs.
The collapse raises troubling questions about corporate performance, corporate governance, and business ethics. P 367
Losers were key Enron stakeholders: stockholders, creditors, and employees.
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7. Chapter 10 - Overview Opening Case – Tyco International
Finally recognized that their growth had been bought at the price of accumulating tremendous debt.
Growth on its own does not create value. Growth should be the byproduct, not the objective, of a diversification strategy. P. 346
Diversification
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
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8. Competencies vs. Core Competencies vs. Distinctive Competencies
A company competence is the product of organizational learning and experience and represents real proficiency in performing an internal activity
A core competence is a well-performed internal activity that is central (not peripheral or incidental) to a company’s competitiveness and profitability
A distinctive competence is a competitively valuable activity that a company performs better than its rivals
How to achieve competencies?
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9. Types of Core Competencies
Expertise in building networks and systems to enable e-commerce
Speeding new/next-generation products to market
Better after-sale service capability
Skills in manufacturing a high quality product
Innovativeness in developing popular product features
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10. Types of Core Competencies
Innovativeness in developing popular product features
Speed/agility in responding to new market trends
System to fill customer orders accurately and swiftly
Expertise in integrating multiple technologies to create families of new products
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11. What Are Your Strengths?
You don’t have to be good at everything, but what you are good at, use it.
Ask yourself now, “what am I good at”?
Important to know who you are, “Do you know who you are”?
Ask yourself now, “Who am I”?
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12. Your Core Skills Define for me now the following:
Ability
Skill
Can you have an abilities that have not yet become skills?
What are your “core” skills
Give me now, three (3) examples of your core skills.
What skills do you need that you feel you don’t already have?
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13. Core Competence – Corporation Can be Viewed as a Large Tree
Trunk and major limbs are core products
Smaller branches are business units
Leaves, flowers, and fruit are end products
Root system that provides nourishment, sustenance, and stability is the core competence
Can miss strength of competitors by looking only at their end products
Same way can miss strength of a tree if look only at its leaves
Important point to remember: “Don’t judge a firm’s competitiveness primarily in terms of the price and the performance of end products.”
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14. Microsoft – Core Competencies
Microsoft’s core competencies:
Creating high-volume software products, working with other software companies, and providing customer service and support.
Important re-engineering principle:
A firm should focus on its core competencies and outsource everything else. Why?
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15. Examples: Distinctive Competencies
Sharp Corporation
Expertise in flat-panel display technology
Toyota, Honda, Nissan
Low-cost, high-quality manufacturing capability and short design-to-market cycles
Intel
Ability to design and manufacture ever more powerful microprocessors for PCs
Motorola
Defect-free manufacture (six-sigma quality) of cell phones
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16. 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
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17. A Company as a Portfolio of Distinctive Competencies
Re-conceptualize 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
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18. 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.
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19. 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
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20. 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
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21. Transfer of Competencies at Philip Morris
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22. 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
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23. Sharing Resources at Proctor & Gamble
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24. 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
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25. 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
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26. 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
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27. The Limits of Diversification
Related diversification is only marginally more profitable than unrelated diversification
Extensive diversification tends to depress rather than improve profitability
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28. 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
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29. Coordination Among Related Business Units
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30. 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
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31. 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
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32. 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
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33. 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
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34. Scale of Entry, Profitability, and Cash Flow
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35. 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
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36. 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
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37. 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
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38. Entry Strategy: Acquisitions—Pitfalls
Difficulty with postacquisition integration
Overestimating economic benefits
The expense of acquisitions
Inadequate preacquisition screening
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39. Guidelines for Successful Acquisition
Target identification and preacquisition screening
Bidding strategy
Hostile vs. friendly takeover
Integration
Learning from experience
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40. 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
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41. 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
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42. 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
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43. Restructuring Strategies
Exit strategies
Divestment
Spinoff
Selling to another company
Management buyout (MBO)
Harvest
Liquidation
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44. The End
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