Transcript Corporate Strategy: Diversification, Acquisitions, and Internal New Ventures Lecture 10

Corporate Strategy:
Diversification, Acquisitions,
and Internal New Ventures
Lecture 10
Overview
 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
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
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
The BCG Matrix
Source: Perspectives, No. 66, “The Product Portfolio.” Adapted by
permission from The Boston Consulting Group, Inc., 1970.
The Strategic Implications of the
BCG Matrix
 Stars
 Aggressive investments to support continued growth
and consolidate competitive position of firms.
 Question marks
 Selective investments; divestiture for weak firms or
those with uncertain prospects and lack of strategic
fit.
 Cash cows
 Investments sufficient to maintain competitive
position. Cash surpluses used in developing and
nurturing stars and selected question mark firms.
 Dogs
 Divestiture, harvesting, or liquidation and industry
exit.
The McKinsey/GE Matrix
Scoring the Matrix
Industry Attractiveness
Wt
Growth
10
Buyers
10
Barriers
10
Rivalry
10
Suppliers
10
Subs
10
Overall
60
Biz 1
7
0
8
5
10
1
30
Medium
Biz 2
2
9
8
9
8
5
41
High
Biz 3
9
5
1
5
2
2
23
Medium
Limitations on Portfolio Planning
 Flaws in portfolio planning:
 The BCG model is simplistic; considers only two
competitive environment factors– relative
market share and industry growth rate.
 High relative market share is no guarantee of a
cost savings or competitive advantage.
 Low relative market share is not always an
indicator of competitive failure or lack of
profitability.
 Multifactor models such as McKinsey/GE matrix
are better though imperfect.
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 those competencies
might be leveraged to create
opportunities in new industries
Existing vs. new competencies
Existing industries in which a company
competes vs. new industries
Establishing a Competency
Agenda
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 (Phillip Morris tobacco & beer)
 Leveraging competencies (Microsoft iPod clone)
 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 (Coles Myer)
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 (e.g. Tyco)
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
The Limits of Diversification
 Related diversification is only
marginally more profitable than
unrelated diversification
 Extensive diversification tends to
depress rather than improve
profitability
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 problems
 Monitoring, lost opportunities
 Dominant logic
 Inability to identify the unique profit contribution of a
business unit that shares resources with another unit
 Sends poor signals – leads to bad decisions
 Imputation problem, transfer pricing
 Limits of diversification
 Bureaucratic costs place a limit on the amount of
diversification that can profitably be pursued
 Costs are higher in related diversifications
Guidelines for successful
acquisitions
 Properly identify acquisition targets and
conduct a thorough pre-acquisition screening
of the target firm.
 Use a bidding strategy with proper timing to
avoid overpaying for an acquisition.
 Hostile or voluntary?
 Follow through on post-acquisition
integration synergy-producing activities of
the acquired firm.
 Dispose of unwanted residual acquisition
assets.
 VALUE ENHANCING!!!
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
Turnaround Strategy
 The causes of corporate decline
 Poor management– incompetence, neglect
 Overexpansion– empire-building CEO’s
 Inadequate financial controls– no profit
responsibility
 High costs– low labor productivity
 New competition– powerful emerging
competitors
 Unforeseen demand shifts– major market
changes
 Organizational inertia– slow to respond to new
competitive conditions
The Main Steps of Turnaround
 Changing the leadership
 Replace entrenched management with new managers.
 Redefining strategic focus
 Evaluate and reconstitute the organization’s strategy.
 Asset sales and closures
 Divest unwanted assets for investment resources.
 Improving profitability
 Reduce costs, tighten finance and performance
controls.
 Acquisitions
 Make acquisitions of skills and competencies to
strengthen core businesses.
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
 Create a new venture culture (e.g. 3M)
Exercises
 Dun & Bradstreet
 AT&T