Chapter Ten
Corporate-Level
Strategy:
Formulating
and
Implementing
Related and
Unrelated
Diversification
“The very best takeovers are
thoroughly hostile. I’ve never
seen a really good company
taken over.
I’ve only
seen bad ones.”
- James Goldsmith
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© RoyaltyFree/ Stockdisc/ Getty Images
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Corporate-Level Strategy
Corporate-Level Strategy should allow a company, or one of
its business units, to perform the value-creation functions at lower
cost or in a way that allows for differentiation and premium price.
Corporate strategy is used to identify:
1. Businesses or industries that the company should
compete in
2. Value creation activities which the company should
perform in those businesses
3. Method to enter or leave businesses or industries
in order to maximize its long-run profitability
Companies must adopt a long-term perspective
Consider how changes in the industry and its products,
technology, customers, and competitors will affect its
current business model and future strategies.
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Corporate-Level Strategy
of Diversification
Diversification Strategy is the company’s decision to
enter one or more new industries (that are distinct from
its established operations) to take advantage of its
existing distinctive competencies and business model.
Types of diversification:
 Related diversification
 Unrelated diversification
Methods to implement a
diversification strategy:
 Internal new ventures
 Acquisitions
 Joint ventures
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Expanding
Beyond a Single Industry
Staying inside a single industry allows a company to:
• Focus its resources
 ‘Stick to its knitting’
BUT a company’s fortunes are tied closely to
the profitability of its original industry:



Can be dangerous if the industry matures and goes
into decline
May be missing the opportunity to leverage their
distinctive competencies in new industries
Tendency to rest on their laurels and not engage in
constant learning
To stay agile, companies must leverage –
find new ways to take advantage of their distinctive
competencies and core business model
in new markets and industries.
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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 competencies versus new
competencies that would need to
be developed
 Existing industries in which a
company competes versus new
industries
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Establishing a
Competency Agenda
Figure 10.1
Source: Reprinted by permission of Harvard Business School Press. From Competing for the Future: Breakthrough Strategies for
Seizing Control of Your Industry and Creating the Markets of Tomorrow by Gary Hamel and C. K. Prahalad, Boston, MA. Copyright ©
1994 by Gary Hamel and C. K. Prahalad. All rights reserved.
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Increasing Profitability
Through Diversification
A diversified company can create value by:
 Transferring competencies





among
existing businesses
Leveraging competencies
to create new businesses
Sharing resources
to realize economies of scope
Using product bundling
Managing rivalry
by using diversification as a means in one or more industries
Exploiting general organizational competencies
that enhance performance within all business units
Managers often consider diversification when their
company is generating free cash flow – with resources in
excess of those needed to maintain competitive advantage.
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 Transferring Competencies
Transferring competencies across industries:
taking a distinctive competency developed in one
industry and implanting it in an EXISTING business
unit in another industry
• The competencies transferred must involve
activities that are important for establishing
competitive advantage
• Tend to acquire businesses related to their
existing activities because of the commonality
between one or more value-chain functions
For such a strategy to work,
the distinctive competency being transferred
must have real strategic value.
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Transfer of Competencies
at Philip Morris
Figure 10.2
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 Leveraging Competencies
Leveraging competencies: taking a
distinctive competency developed by a business
in one industry and using it to create a NEW
business unit in a different industry
• The difference between
leveraging and transferring
competencies is that an entirely
NEW business is created
• Different managerial processes
are involved
• Tend to use R&D competencies
to create new business
opportunities in diverse areas
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 Sharing Resources
Sharing resources and capabilities
across two or more business units in different
industries to realize economies of scope.
Economies of scope arise when
business units are able to effectively
able to pool, share, and utilize
expensive resources or capabilities:
1. Companies that can share resources
have to invest proportionately less
than companies that cannot share.
2. Resource sharing can result in economies of scale.
Economies of scope are possible only when
there are significant commonalities between
one or more value-chain functions.
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Sharing Resources
at Procter & Gamble
Figure 10.3
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 Using Product Bundling
Use product bundling to differentiate
products and expand products lines in order to
satisfy customers’ needs for a package of related
products.
•
•
Allows customers to reduce
their number of suppliers for
convenience and cost
savings.
Increased value of orders
gives customers increased
commitment and bargaining
power with suppliers.
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 Managing Rivalry
Manage rivalry by holding a competitor in
check that has either entered its industry or
has the potential to do so.
• Multipoint competition is when
companies compete with each
other in different industries.
• Companies can manage rivalry
by signaling that competitive
attacks in one industry will
be met by retaliatory attacks in
the aggressor’s home industry.
• Mutual forbearance from
signaling may result in less
intense rivalry and higher industry profits.
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 Exploiting General
Organizational Competencies
General organizational competencies are skills of a
company’s top managers and functional experts that
transcend individual functions or business units.
These capabilities help each business unit perform
at a higher level than if it operated as an individual
company:
1. Entrepreneurial capabilities – encourage risk taking while
managing & limiting the amount of risk undertaken
2. Organizational design – create structure, culture, and
control systems that motivate and coordinate employees
3. Superstrategic capabilities – effectively manage the
managers of the business units and helping them think through
strategic problems
These managerial skills are often not present,
as
they are rare and difficult to develop and put into action.
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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 and
• Has commonalities between one or more components of
each activity’s value chain
Based on transferring and leveraging competencies, sharing
resources, and bundling products
 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
Based on using only general organizational competencies to
increase profitability of each business unit
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“Fit between a parent and its
businesses is a two-edged sword:
a good fit can create value,
a bad one can destroy it.”
- Andrew Campbell,
Michael Gould &
Marcus Alexander
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Commonalities Between Value
Chains of Three Business Units
Figure 10.4
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Disadvantages and
Limits of Diversification
Conditions that can make diversification
disadvantageous:
1.
Changing Industry and Firm-Specific Conditions
•
•
2.
Future success of this strategy is hard to predict.
Over time, changing situations may require businesses
to be divested.
Diversification for the Wrong Reasons
•
•
3.
Must have clear vision as to how value will be created.
Extensive diversification tends to reduce rather than improve
profitability.
Bureaucratic Costs of Diversification
•
•
Costs are a function of the number of business units in a
company’s portfolio, and the
Extent to which coordination is required to gain the benefits.
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Coordination Among
Related Business Units
Figure 10.5
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Choosing a Strategy
The choice of strategy depends on a comparison of the
benefits of each strategy versus the cost of pursuing it:
 Related diversification
• When company’s competencies can be applied across a
greater number of industries and
• Company has superior capabilities to keep bureaucratic
costs under control
 Unrelated diversification
• When functional competencies have few useful applications
across industries and
• Company has good organizational design skills to build
distinctive competencies
 Web of corporate level strategy
• May pursue both related and unrelated diversification
• As well as other strategies that improve long-term profitability
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Sony’s Web of
Corporate-Level Strategy
Figure 10.6
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Diversification That
Dissipates Value
 Diversifying to pool risks
• Stockholders can diversify their own portfolios at lower costs
than the company can.
• This represents an unproductive use of resources as profits
can be returned to shareholders as dividends.
• 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.
• Business cycles of different industries are inherently difficult
to predict.
Based on a large number of academic studies:
Extensive diversification tends to reduce,
rather than improve, company profitability.
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Entry Strategies to
Implement Multibusiness Model
Various entry strategies may be employed based on
the company’s competencies and capabilities:
 Internal New Ventures
• Company has a set of valuable competencies in its existing
•
businesses.
Competences leveraged or recombined to enter new business
areas.
 Acquisitions
• Company lacks important competencies to compete in an area.
• Company can purchase an incumbent company that has those
competencies at a reasonable price.
 Joint Ventures
• Company can increase the probability of success by teaming
•
up with another company with complementary skills.
Joint ventures are preferred when risks and costs of setting up
a new business unit are more than company can assume.
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 Pitfalls of New Ventures
 Scale of entry
• Large-scale entry is initially
more expensive than smallscale entry, but it brings
higher returns in the long run.
 Commercialization
• Technological possibilities
should not overshadow
market needs and opportunities.
 Poor implementation
• Demands on cash flow
• Need clear strategic objectives
• Anticipate time and costs
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Scale of Entry and Profitability
Figure 10.7
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 Guidelines for Successful
Internal New Venturing
Structured approach to managing internal
new venturing:
 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
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 The Attractions of Acquisition
Acquisitions are the principle strategy
used to implement horizontal integration:
 Used to achieve diversification when the
company lacks important competencies
 Enable a company to move quickly
 Perceived as less risky than internal new
ventures
 An attractive way to enter a new industry
that is protected by high barriers to entry
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 Acquisition Pitfalls
There is ample evidence that many acquisitions fail to
create value or to realize their anticipated benefits:
 Integrating the acquired company
• Difficulty in integrating value-chain and management activities
• High management and employee turnover in acquired company
 Overestimating the economic benefits
• Overestimate the competitive advantages and value-added that
can be derived from the acquisition
• Pay too much for the target company
 The expense of acquisitions
• Premium paid for publicly traded companies
• Premium cancels out the prospective value-creating gains
 Inadequate preacquisition screening
• Weaknesses of acquisitions’ business model are not clear
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 Guidelines for
Successful Acquisition
 Target identification and preacquisition
screening for:
1.
2.
3.
4.
5.
Financial position
Distinctive competencies and competitive advantage
Changing industry boundaries
Management capabilities
Corporate culture
 Bidding strategy
• Avoid hostile takeovers and speculative bidding.
• Encourage friendly takeover with amicable merger.
 Integration
• Eliminate duplication of facilities and functions.
• Divest unwanted business units included in acquisition.
 Learning from experience
• Conduct post-acquisition audits.
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 Joint Ventures
Attractions:


Helps avoid the risks and costs of building a new
operation from the ground floor
Teaming with another company that has
complementary skills and assets may increase the
probability of success
Pitfalls:



Requires the sharing of profits if the new business
succeeds
Venture partners must share control – conflicts on
how to run the joint venture can cause failure
Run the risk of giving critical know-how away to
joint venture partner
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Restructuring
Restructuring is the process of divesting businesses and
exiting industries to focus on core distinctive competencies
in order to increase company profitability.
Why restructure?
• Diversification discount: investors see highly
diversified companies as less attractive
» Complexity and lack of transparency in financial
statements
» Too much diversification
» Diversification for the wrong reasons
• Response to failed acquisitions
• Innovations in strategic management have
diminished the advantages of vertical integration
or diversification
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“Growth does not always lead a
business to build on success.
All too often it converts a highly
successful business into a
mediocre large business.”
- Richard Branson
“The corporate strategies of
most companies have
dissipated instead of created
shareholder value.” - Michael Porter
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