1. Corporate Strategy: Diversification, Acquisitions, and Internal New Ventures10

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

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

4. Previous Approach to Diversification
A corporation as a portfolio of businesses
Each industry has its own cycles of ups and downs
Similar to a strategy to improve one’s investment portfolio
Diversify to reduce business cycle risks
Sometimes a function of what discipline dominates at a particular point in time
Finance: portfolio approach
Marketing: opportunities to bundle, synergy, etc.

5. Concept of Free or Investible Funds
Profits before dividends and taxes
Less amounts necessary to service debts
Less amounts necessary to maintain existing business, i.e. reinvest to upgrade equipment, etc.
If debt is used to acquire, then the amounts necessary to service that debt should be added, with the expectation (hope) that earnings from investments will cover this portion of the corporate debt

6. 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 competencies might be leveraged to create opportunities in new industries
Existing vs. new competencies
Existing industries in which a company competes vs. new industries

7. 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.

8. 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

9. 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

10. Tale of Two Companies
Coca Cola acquiring Taylor Wines (New York-based winery)
Consumer products
Taste tests?
United acquired Marriott and Hertz
Complementary businesses
Bundled products for traveller

11. 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

12. 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

13. Transfer of Competencies at Philip Morris

14. Sharing Resources at Proctor & Gamble

15. 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

16. 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

17. The Limits of Diversification
Related diversification is only marginally more profitable than unrelated diversification
Extensive diversification tends to depress rather than improve profitability

18. 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

19. Coordination Among Related Business Units

20. 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

21. 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

22. 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

23. 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

24. Scale of Entry, Profitability, and Cash Flow

25. 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

26. 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

27. Innovation to Commercialization
Basic research
Product research
Development of prototypes for testing
Product launch commercialization
Production
Marketing
After sales support

28. 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

29. Entry Strategy: Acquisitions—Pitfalls
Difficulty with postacquisition integration
Overestimating economic benefits
The expense of acquisitions
Inadequate preacquisition screening

30. Guidelines for Successful Acquisition
Target identification and preacquisition screening
Bidding strategy
Hostile vs. friendly takeover
Integration
Learning from experience

31. 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

32. 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

33. GM and Toyota Joint Venture mid ’80s
Based on an old GM plant in California
Manufacture cars based on the Toyota Corolla platform
For Toyota, access to US production
For GM, learn production techniques from Toyota
Other, newer ones: Toyota Matrix and Pontiac Vibe

34. 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

35. Restructuring Strategies
Exit strategies
Divestment
Spinoff
Selling to another company
Management buyout (MBO)
Harvest
Liquidation