1 Diversification and Corporate Strategy Corporate Level Strategy – the strategy for a company and all of its business units as a whole Diversification

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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 inCrafting 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

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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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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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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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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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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Involves diversifying into businesses with

No strategic fit

No meaningful value chainrelationships

No unifying strategic theme

Approach is to venture into “any businessin which we think we can make a profit”

Firms pursuing unrelated diversification are often referred to as conglomerates

What is Unrelated Diversification?

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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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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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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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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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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

Combination Related-Unrelated Diversification Strategies

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STRATEGIES FOR ENTERING NEW BUSINESSES

AcquisitionInternal new

venture (start-up)Joint venture

Diversifying into New Businesses

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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 cross-business 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

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

Strategy Options for a Firm That Is Already Diversified

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Why Firms Expand Globally

Gain access to new customers Achieve lower costs and enhance

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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Multi-domestic Competition

Global Competition

Two Primary Patternsof International 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

Documents

1 Diversification and Corporate Strategy Corporate Level Strategy – the strategy for a company and all of its business units as a whole Diversification