1. DIVERSIFICATION: Horizontal Expansion

2. Three Dimensions of Corporate Strategy
Business Diversification
Vertical Integration
Geographic/global Expansion

3. Examples Then Now Coca Cola Eli Lily Honda Nintendo Nokia GE Sharp
AT&T
Samsung
Daewoo

4. Extent of Corporate Diversification: Firms vary by Degree of Diversification
Low Levels of Diversification
Single-Business - > 95% of revenues from a singles business unit
Dominant-Business % from a single business unit
Vertically-integrated Businesses - 70% of sales in value chain
Moderate to High Levels of Diversification
Related-Diversified - 70% or more from businesses that are related. Businesses must share product, technological or distribution linkages. Businesses may be related-linked or related constrained
High Levels of Diversification
Unrelated-Diversified - <70% in related business units

5. Motives for Diversification
Operational economies of scope and scale (Strategic Competitiveness)
shared and transferred activities
leveraging core competencies
Financial economies of scope (Internal Capital Market)
internal capital allocation
risk reduction
tax advantages
Anticompetitive economies of scope (Market Power)
multipoint competition
exploiting market power
Employee Incentives (Growth Motive)
diversifying employees’ risk and improving promotion chances
maximizing management compensation
Avoid declining industries

6. Corporate Advantages from Diversification
(1) Sharing Linkages Between Businesses
Bus.
Bus.
Bus.
Bus. A B C D
(2) Sharing Core Competence
Bus.
Bus. A B
Core
Competence
Bus.
Bus. C D

7. Corporate Advantages from Diversification
Market Power
Economies of Scope
Economies of Internalizing Transactions
Internal Market System
Information Advantages

8. Scope Advantages from Diversification
Economies of scope
-- cost reduction from achieving minimum scale in
an input factor, derived from producing multiple
products
* tangible assets, e.g., distribution and service
networks, R&D
* intangible assets, e.g., brand names, corporate reputations, technology
* organizational capabilities, e.g., management capabilities, marketing skills

9. Scale Advantages from Diversification
Economies of Scale in Administration, Financing and Control
= cost advantages from reaching minimum efficient scale in administrative and control activities by centralizing similar activities at the corporate HQ, and by operating an internal capital market
* Administration, e.g. centralized strategic planning, centralized legal functions, etc.
* Control, e.g. centralized accounting and financial functions
* Financing, e.g. centralized internal capital allocation function

10. Diversification and Performance
Diversification into related industries may be more profitable than into unrelated industries
Source: Rumelt (1974)

11. Approaches to Corporate Strategy
Related Diversification Strategies
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
Efficient internal capital market allocation

12. Sharing Activities Sharing Activities Key Characteristics * * *
Sharing Activities often lowers costs or raises differentiation
Example: Using a common physical distribution system and sales force such as Procter & Gamble’s disposable diaper and paper towel divisions
Sharing Activities can lower costs if it: *
Achieves economies of scale *
Boosts efficiency of utilization *
Helps move more rapidly down Learning Curve
Example: General Electric’s costs to advertise, sell and service major appliances are spread over many different products

13. BCG Growth-Share Matrix
Earnings: high stable, growing
Cash flow: neutral
Strategy: invest for growth
Earnings: low, unstable, growing
Cash flow: negative
Strategy: analyze to determine whether business can be grown into a star, or will degenerate into a dog
High
Annual real rate of market growth %
Earnings: high stable
Cash flow: high stable
Strategy: milk
Earnings: low, unstable
Cash flow: neutral or negative
Strategy: divest
Low
High
Low
Relative Market Share