The Multi-Business, Diversified
Firm
MANEC 387
Economics of Strategy
David J. Bryce
David J. Bryce © 2002
Corporate vs. Business Unit
Strategy
• Business Unit Strategy
– To whom will we sell, for what price?
– How will we source, manufacture, distribute, etc.
our product?
• Corporate Strategy
– What business(es) should we be in?
– How will we get in (or out) of them?
– How will we coordinate or integrate businesses to
create value?
David J. Bryce © 2002
Adapted from M. Porter, 2001, HBR
Corporate-Level Strategy and the
Multi-business Firm
• Corporate strategy is action taken to gain competitive
advantage through multiple business units
• Value is created through the configuration and
coordination of multi-business activities
David J. Bryce © 2002
Scope of the Firm
“Horizontal Integration”
output-products
Prod./Ind. A
Prod./Ind. B
Prod./Ind. C
Sales
Sales
Sales
Distrib
Distrib
Distrib
Manuf.
Manuf.
Manuf.
...
Input-products
“Vertical
Integration”
Vertical Scope
Horizontal Scope
Sales
Sales
Distrib
Distrib
Distrib
Manuf.
Manuf.
Manuf.
...
David J. Bryce © 2002
Sales
Wal-mart
Prod./Ind. A
Prod./Ind. B
Prod./Ind. C
Sales
Sales
Sales
Distrib
Distrib
Distrib
Manuf.
Manuf.
Manuf.
...
Input-products
Vertical Scope
output-products
Horizontal Scope
Sales
Sales
Sales
Distrib
Distrib
Distrib
Manuf.
Manuf.
Manuf.
...
David J. Bryce © 2002
GE
Horizontal Scope
Aircraft Engines
Prod./Ind. C
Sales
Sales
Sales
Distrib
Distrib
Distrib
Manuf.
Compressors
Sales
Manuf.
Manuf.
Sales
Sales
Distrib
Distrib
Distrib
Manuf.
Manuf.
Manuf.
Input-products
Vertical Scope
output-products
Refrigerators
...
...
David J. Bryce © 2002
Why Diversify?
• Secure Market Power
– Cross-subsidization, mutual forbearance, reciprocal
buying
– Shown to be an incomplete, if not an incorrect
view
• Mitigate Business (Cycle) Risk
– Perspective from finance
– Few firms are just “portfolio” investors
David J. Bryce © 2002
Why Diversify?
• Achieve Efficiency (or “Synergy”)
– Pursue related or complementary activities
– Most common type of diversification
– Associated with higher levels of performance than previous two
types
• Dynamic Learning
– Related to the efficiency motivation
– Firms invest in activities that leverage existing skills and
knowledge
– Firms introduce new activities to build skills and knowledge
– Objective is to develop a “capabilities portfolio” that is ready for
new opportunities when they emerge
David J. Bryce © 2002
How to Choose Industries/Products for
Expansion
1. Strategically Important
2. Strategically Related; i.e. commonality
in one of the following:
1.
2.
3.
4.
5.
Customers
Channels
Inputs
Processes
Market Knowledge
David J. Bryce © 2002
Sequential Entry and Dynamic
Learning: Example
Texas
Texas Instruments
Instruments
Semiconductors
(3674)
Electronic
Computers (3571)
Software (7372)
Search &
Navigation (3812)
Electronic
Computers (3571)
IBM
IBM
Computer
Storage
Devices (3572)
Computer
Terminals (3575)
Computer
Peripherals (3577)
Source: COMPUSTAT Business Segment Files, 1977-1996
David J. Bryce © 2002
Software (7372)
Semi-conductors
(3674)
Patterns of Historic Entry in Industries
Related to Semiconductors, 1977-1996
Process Control
Instruments
(3823)
Search & Navigation
Equip.
(3812)
*
Radio/TV
Communication
Equip
(3663)
Electronic
Capacitors
(3675)
Printed Circuit Boards
(3672)
David J. Bryce © 2002
Computer
Peripherals
(3577)
*
Semiconductors
(3674)
*
Engineering Services
(8711)
* p<0.10
*
Electronic
Components
(3679)
Computer Storage
Devices
(3572)
Special Industries
Machinery
(3559)
Patent Owners &
Lessors
(6794)
A General Inter-industry Relatedness Index
Index available for download at http://msm.byu.edu/strategy/bryce/
David J. Bryce © 2002
Examples of the Measure at Work
• Two most related industries (z = 3.51):
– SIC 2131, “Tobacco, Chewing and Smoking”
– SIC 2141, “Tobacco Stemming and Redrying”
• Two most unrelated industries (z = -7.0):
– SIC 2097 “Ice”
– SIC 2397 “Schiffli Machine Embroidery”
David J. Bryce © 2002
Examples of the Measure at Work
• Industries that don’t share same 1-digit class
(percentile: 100, z = 3.07)
– SIC 2951, “Paving Mixtures and Blocks”
– SIC 3273, “Concrete, Ready-Mixed”
• A more interesting example (percentile:
100, z = 3.04)
– SIC 2542, “Metal Partitions and Fixtures”
– SIC 3581, “Automatic Vending Machines.”
David J. Bryce © 2002
So what is related to Schiffli?
• SIC 2397 Schiffli Machine Embroidery”
– (91) SIC 3582, “Commercial Laundry
Equipment”
– (89) SIC 3961, “Costume Jewelry”
– (78) SIC 2512, “Upholstered Furniture”
David J. Bryce © 2002
Examples of the Measure at Work
• Energizer bought Schick in 2003 : Razors
and Batteries
– SIC 3691, “Storage Batteries”
– SIC 3421, “Cutlery”
Percentile: 62 (z = 0.31)
A stronger relatedness than average, and
stronger than one might expect a priori.
David J. Bryce © 2002
Research questions that can now be tackled – Which markets does a firm enter as a function of its
knowledge?
– How do a corporation’s capabilities evolve over time?
Does the speed of this evolution affect performance, how?
– Under what conditions are long-leaps successful?
Relatedness
Centroid
+0.2
+0.1
0
-0.1
-0.2
time
David J. Bryce © 2002
Summary and Takeaways
• Corporate Strategy is about structuring a
portfolio of businesses that hang together
and make strategic sense
• It is sometimes motivated by economizing on
transaction costs
• Other (strategic) motivations include dynamic
learning, efficiency, or sometimes market
power and risk management
• New tools are emerging for examining
relatedness that will help in determining
optimal corporate diversification trajectories
David J. Bryce © 2002