DIVERSIFICATION:
Horizontal Expansion
Three Dimensions of Corporate Strategy
Business Diversification
Vertical Integration
Geographic/global Expansion
Diversification 2
Extent of Corporate Diversification:
Firms vary by Degree of Diversification
Low Levels of Diversification
Single-Business - > 95% of revenues from a singles business unit
Dominant-Business - 70-95% from a single business unit
Vertically-integrated Businesses - 70% of sales in value chain
Moderate to High Levels of Diversification
Related-Diversified - 70% or more from businesses that are related.
Businesses must share product, technological or distribution linkages.
Businesses may be related-linked or related constrained
High Levels of Diversification
Unrelated-Diversified - <70% in related business units
Diversification 3
Motives for Diversification
Operational economies of scope and scale (Strategic
Competitiveness)
• shared and transferred activities
• leveraging core competencies
Financial economies of scope (Internal Capital Market)
• internal capital allocation
• risk reduction
• tax advantages
Anticompetitive economies of scope (Market Power)
• multipoint competition
• exploiting market power
Employee Incentives (Growth Motive)
• diversifying employees’ risk and improving promotion chances
• maximizing management compensation
• Avoid declining industries
Diversification
4
Corporate Advantages from
Diversification
(1) Sharing Linkages Between Businesses
Bus.
B
Bus.
A
Bus.
C
Bus.
D
(2) Sharing Core Competence
Bus.
B
Bus.
A
Core
Competence
Bus.
C
Bus.
D
Diversification 5
Corporate Advantages from
Diversification
•
•
•
•
•
Market Power
Economies of Scope
Economies of Internalizing Transactions
Internal Market System
Information Advantages
Diversification 6
Scope Advantages from Diversification
Economies of scope
-- cost reduction from achieving minimum scale in
an input factor, derived from producing multiple
products
* tangible assets, e.g., distribution and service
networks, R&D
* intangible assets, e.g., brand names, corporate
reputations, technology
* organizational capabilities, e.g., management
capabilities, marketing skills
Diversification 7
Scale Advantages from Diversification
Economies of Scale in Administration,
Financing and Control
=
cost advantages from reaching minimum efficient scale in
administrative and control activities by centralizing similar
activities at the corporate HQ, and by operating an
internal capital market
* Administration, e.g. centralized strategic planning,
centralized legal functions, etc.
* Control, e.g. centralized accounting and financial
functions
* Financing, e.g. centralized internal capital allocation
function
Diversification 8
Information Advantages of the
Diversified Corporation
* About capabilities and characteristics of
employees
* Established firms are the most successful in
commercial development of new businesses
* Agency problems
need to create disciplines
of the capital market within the diversified
corporation
Diversification 9
Diversification and Performance
Diversification into related industries
may be more profitable than into
unrelated industries
Source: Rumelt (1974)
Diversification 10
Approaches to
Corporate Strategy
Related Diversification Strategies
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
Efficient internal capital market
allocation
Diversification 11
Sharing Activities
Sharing Activities
Key Characteristics
Sharing Activities often lowers costs or raises differentiation
Example: Using a common physical distribution system and sales
force such as Procter & Gamble’s disposable diaper and paper
towel divisions
Sharing Activities can lower costs if it:
*
*
*
Achieves economies of scale
Boosts efficiency of utilization
Helps move more rapidly down Learning Curve
Example: General Electric’s costs to advertise, sell and service
major appliances are spread over many different products
Diversification 12
High
Low
Annual real rate of market growth %
BCG Growth-Share Matrix
Earnings:
high stable, growing
Earnings:
Cash flow:
neutral
Cash flow: negative
Strategy:
invest for growth
Strategy:
Earnings:
high stable
Earnings:
low, unstable
Cash flow:
high stable
Cash flow:
neutral or negative
Strategy:
milk
Strategy:
divest
High
low, unstable, growing
analyze to determine
whether business can
be grown into a
star, or
will degenerate
into a dog
Relative Market Share
Low
Diversification 13