Transcript Diversification and Corporate Strategy

Diversification and Corporate Strategy
 Corporate Level Strategy – the strategy for a
company and all of its business units as a whole
 Diversification – the primary approach to
corporate level strategy
 Diversified firms vary according to
 Level of diversification
 Degree of relatedness
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Four Main Tasks in
Crafting Corporate Strategy
 Pick new industries to enter and decide on
means of entry
 Initiate actions to boost combined
performance of businesses
 Pursue opportunities to leverage cross-
business value chain relationships and
strategic fits into competitive advantage
 Establish investment priorities, steering
resources into most attractive business units
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Why do Firms Diversify?
 When they have excess resources, capabilities,
and core competencies that have multiple uses
 Diminishing growth prospects in present
industry
 Cost saving opportunities
 Capture strategic fits
 Capture financial economies
 Spread business risk
 Leverage brand name
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Building Shareholder Value
 Ultimate justification for diversifying
 A diversification move must pass three tests
The industry attractiveness test
The cost-of-entry test
The better-off test
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Making the Diversification Decision
Decision to Diversify Requires Two Additional
Decisions:
 Level and Degree of Diversification
 Number and Relatedness
 Mode of Diversification
 Acquisition, Internal Development, Joint
Venture
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Major Corporate Level Strategies
 Single Business
 Dominant Business
 Related Diversification
 Unrelated Diversification
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What is Related Diversification?
 Involves diversifying into businesses whose
value chains possess competitively
valuable “strategic fits” with the value
chain(s) of the present business(es)
 Capturing the “strategic fits” makes
related diversification a 1 + 1 = 3
phenomenon
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Examples of Related Diversification?
Proctor and Gamble (distribution/marketing)
 Manufactures and sells branded consumer packaged goods
 5 Segments
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Beauty - antiperspirants and deodorants, cosmetics, personal cleansing,
skin care, hair care and color, prestige, and professional salon products
Grooming - blades and razors, epilators, pre- and post-shave products,
and electronic hair removal devices
Health Care - toothbrush, toothpaste, and other oral care products; and
gastrointestinal, rapid diagnostics, respiratory,
vitamins/minerals/supplements, and other personal health care products
Fabric Care and Home Care - laundry additives, fabric enhancers, and
laundry detergents; air care, dish care, and surface care products;
batteries; and professional products.
Baby, Feminine and Family Care - feminine care and adult
incontinence products; baby wipes, diapers, and pants; paper towels,
tissues, and toilet papers
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Examples of Related Diversification?
Johnson and Johnson (marketing/scientific expertise)
 Engages in the research and development, manufacture, and sale of
various products in the health care field worldwide
 3 segments
 Consumer
Products for baby care, skin care, oral care, wound care, women’s
health products, nutritional products, and over-the-counter
pharmaceutical products
 Pharmaceutical
 Products in the areas of immunology, infectious diseases,
neuroscience, oncology, and cardiovascular and metabolic diseases
 Medical Devices
 Orthopaedic, and trauma and neurological products; general
surgery, and biosurgical and energy products; products to treat
cardiovascular disease; infection prevention products; diagnostics
products; blood glucose monitoring and insulin delivery products;
and disposable contact lenses

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Examples of Related Diversification?
Campbell Soup Company (products)
 Engages in the manufacture and marketing of branded
convenience food products worldwide
 5 segments
 U.S. Simple Meals
 Global Baking and Snacking
 International Simple Meals and Beverages
 U.S. Beverages
 Bolthouse and Foodservice
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Examples of Related Diversification?
Apple Inc. (product/technology)
 Designs, manufactures, and markets mobile
communication and media devices, personal computers,
watches, and portable digital music players worldwide.
 The company also sells related software, services,
accessories, networking solutions, and third-party digital
content and applications
 Major Products
 iPhone, iPad, iPod, Mac
 Other Products
 Apple Watch, iTunes app and store, Apple Pay,
Apple TV
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Examples of Related Diversification?
Upjohn (R&D/product)
 Manufactures and sells pharmaceutical products for
 Human consumption
 Agricultural uses
Coherent Inc. (technology)
 Provides photonics-based solutions for a range of
commercial and scientific research applications in the
United States and internationally.
 2 segments:
 Specialty Lasers and Systems
 Commercial Lasers and Components
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Strategic Appeal of Related Diversification
 Capture Strategic Fits/Synergies/Scope
Economies
 Strategic fits along value chain
 Cost reductions
 Spread investor risks over a broader base
 Preserves strategic unity in its business activities
 Achieve consolidated performance greater than
the sum of what individual businesses can earn
operating independently
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What is Unrelated Diversification?
 Involves diversifying into businesses with
 No strategic fit
 No meaningful value chain
relationships
 No unifying strategic theme
 Approach is to venture into “any business
in which we think we can make a profit”
 Firms pursuing unrelated diversification are
often referred to as conglomerates
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Example of Unrelated Diversification?
United Technologies Corporation
 Provides technology products and services to the building
systems and aerospace industries worldwide
 5 segments
 Otis – elevators and escalators
 UTC Climate, Controls & Security - air conditioning and
refrigeration, fire safety, surveillance, and security
 Pratt and Whitney - aircraft engines; parts and services
 UTC Aerospace – electric power generation,
aerospace products and aftermarket services
 Sikorsky – helicopters
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Example of Unrelated Diversification?
Textron, Inc.
 Operates in the aircraft, defense, industrial, and
finance industries worldwide.
 5 segments
 Bell – helicopters, parts and services
 Textron Aviation – aircraft, parts and services
 Textron Systems - unmanned aircraft systems,
smart weapons, armored vehicles, turrets,
marine crafts, flight simulators
 Industrial – auto parts, food containers,
hydraulics, golf carts
 Finance – for aircraft and helicopters
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Example of Unrelated Diversification?
General Electric
 Operates as an infrastructure and financial
services company worldwide.
 8 segments
 Power and Water
 Oil and Gas
 Energy Management
 Aviation
 Healthcare
 Transportation
 Appliances and Lighting
 GE Capital
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Example of Unrelated Diversification?
W. R. Grace
 Chemicals
 Coal Mining
 Oil and Gas Extraction
 Food Manufacturing
 Paper Products
 Health Services
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Diversification and Shareholder Value
 Related Diversification
 A strategy-driven approach to creating
shareholder value
 Unrelated Diversification
 A finance-driven approach to creating
shareholder value
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Combination Related-Unrelated
Diversification Strategies
 Dominant-business firms
 One major core business accounting for 50 - 80 percent
of revenues, with several small related or unrelated
businesses accounting for remainder
 Narrowly diversified firms
 Diversification includes a few (2 - 5) related or
unrelated businesses
 Broadly diversified firms
 Diversification includes a wide collection of either
related or unrelated businesses or a mixture
 Multibusiness firms
 Diversification portfolio includes several unrelated
groups of related businesses
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STRATEGIES FOR ENTERING NEW
BUSINESSES
Diversifying into
New Businesses
Acquisition
Internal new
venture (start-up)
Joint venture
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Evaluating the Strategy of a Diversified
Company
Step 1: Assess attractiveness of each industry firm
competes in
Step 2: Assess competitive strength of firm’s business
units
Step 3: Check competitive advantage potential of crossbusiness strategic fits among business units
Step 4: Check whether firm’s resources fit requirements
of present businesses
Step 5: Rank performance prospects of businesses and
assign a priority for resource allocation
Step 6: Craft new strategic moves to improve overall
company performance
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Figure 8.6 Strategy Options for a
Firm That Is Already Diversified
Strategy Options for a Firm
That Is Already Diversified
Stick with
the Existing
Business
Lineup
Broaden the
Diversification
Base with New
Acquisitions
Divest and
Retrench to
a Narrower
Diversification
Base
Restructure
through
Divestitures
and
Acquisitions
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Why Firms Expand Globally
 Gain access to new customers
 Achieve lower costs and enhance
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competitiveness
Capitalize on core competencies
Spread business risk across wider market
base
Access to raw materials
Exchange rate fluctuations
Trade policies – tariffs
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Cross Country Differences
 Cultures and lifestyles
 Market demographics
 Market conditions
 Growth rate
 Distribution systems
 Need for responsiveness
 Location advantages
 Exchange rates
 Host government restrictions
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Two Primary Patterns
of International Competition
Multi-domestic
Competition
Global
Competition
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Strategy (Mode) Options for International Markets
 Exporting
 Maintain national production and export
goods to foreign markets
 Licensing
 Allow foreign firms to produce and
distribute your product or use your
technology
 Franchising
 Similar to licensing
 More suited to services and retailers
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Strategy (Mode) Options for International Markets
 Acquisition / Merger
 Acquire or merge with company
competing in foreign market
 Greenfield Venture / Internal Development
 Start up new business unit and use it to
enter in to foreign market
 Strategic Alliances and Joint Ventures
 Combine resources with foreign
partner(s)
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Strategy Options for International Markets
 Multicountry
 Think-local, act-local
 Tailor strategy to each country
 Global
 Think-global, act-global
 Pursue same basic strategy worldwide
 Transnational
 Think-global, act-local
 Combination global-local strategy
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Building Competitive Advantage
in Foreign Markets
 Locating activities
 Transferring of competencies to foreign
markets
 Coordinating cross-border activities
 Profit sanctuaries
 Cross-market subsidization
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Competing Internationally Versus
Competing Globally
 International
 Compete in a select few foreign markets
 Global
 Has or pursue a market presence on most
continents and in all major countries
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