CORPORATE-LEVEL
STRATEGY: RELATED AND
UNRELATED DIVERSIFICATION
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• Differentiate between models based on related/unrelated diversification
• Explain ways diversification can create profitability
• Discuss conditions that lead managers to pursue related/unrelated diversification & why
• Describe methods used to enter new industries
• Discuss advantages/disadvantages of each method
10-2

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1-4

When company is generating free cash flow with resources in excess of those needed to maintain competitive advantage.
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10-5

Allow company to perform value creation functions at lower cost or in way allowing differentiation & premium price.
Used to identify:
1.
Businesses/industries in which company should compete
2.
Value creation activities company should perform in those businesses
3.
Method to enter or leave businesses or industries in order to maximize its long-run profitability
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Types of diversification:
• Related diversification
• Unrelated diversification
Methods to implement diversification strategy:
• Internal new ventures
• Acquisitions
• Joint ventures
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10-7

Enables Company to Perform
1) At lower cost
2) In way that allows differentiation & gives pricing options
3) Helps manage industry rivalry better
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Ways to Diversify
= Increase Profitability
 Transfer competencies
 Product bundling
 General organizational competencies  Leverage competencies
 Share Resources
& Capabilities
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Taking a distinctive competency developed in one industry and implanting it in
EXISTING business unit in another industry
Competencies transferred must involve activities important to establish competitive advantage
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For strategy to work, the distinctive competency being transferred must have real strategic value.
Increase profitability when:
1)Lowers cost structure of one or more business units
2)Enables one or more business units to better differentiate products
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10-11

Transfer of
Competencies at Philip Morris
Figure 10.1
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10-12

Taking a distinctive competency developed by a business in one industry and using it to create a NEW business unit in a different industry
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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 effectively pool, share,
& utilize expensive resources or capabilities = possible only when significant commonalities between one or more value-chain functions.
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10-14

Sharing Resources at Procter & Gamble
Figure 10.2
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Differentiate products/expand product lines to satisfy customers’ needs for package of related products.
• Allows customers to reduce suppliers for convenience & cost savings
• Examples
 Telecommunications
 Medical equipment
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General Organizational
Competencies
Skills transcend individual functions or business units.
Capabilities help business unit perform at higher level than operated as individual:
1) Entrepreneurial – encourage risk taking
2) Organizational design – create structure, culture, & control systems
3) Superior strategic management – effectively manage managers of business units
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 Related entry into new business in different industry:
• Related to company’s existing business/activities
• Has commonalities between one or more components of each activity’s value chain
Based on transferring/leveraging competencies, sharing resources, & bundling products
 Unrelated entry into industries with no connection to any of company’s activities in present industry or industries
Based on only general organizational competencies to increase profitability of all business units
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Commonalities Between Value
Chains of 3 Business Units
Figure 10.3
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Disadvantages/Limits of Diversification
Conditions = diversification disadvantageous:
1.
Changes in Industry/Company
• Unpredictable future
• Willing to divest business units
2.
Diversification for the Wrong Reasons
• Clear vision of how value will be created.
• Extensive diversification can reduce profitability.
3.
Bureaucratic Costs of Diversification
• Costs are function of number of business units portfolio
• Extent coordination is required to gain benefits.
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Factors Ignored in
Pooling Diversification Risk
 Stockholders can diversify own portfolio
 Business cycles of different industries are difficult to predict – economic downturn affects all
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Coordination Among
Related Business Units
Figure 10.4
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o o
Depends on comparison of benefits of each strategy versus cost of pursuing it:
Related
• Competencies can be applied across greater number of industries
• Superior capabilities to control bureaucratic costs
Unrelated
• Functional competencies have few uses across industries
• Organizational design skills to build competencies
May pursue both strategies simultaneously
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Sony’s Web of
Corporate-Level Strategy
Figure 10.5
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Process of transferring/creating new business unit/division in new industry.
Pitfalls:
 Scale of Entry
 Commercialization
 Poor Implementation
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Scale of Entry Versus Profitability
Figure 10.6
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Successful Internal New Venturing
 Place funding for research in hand of business unit managers
 Effective use of R & D competency
 Foster close links between R & D and marketing
 Large-scale entry leads to greater longterm profits
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10-27

Principle strategy to start horizontal integration: o Lack of distinctive competencies o Need to move quickly o Perceived as less risky than internal new ventures o Attractive way to enter new industry protected by high barriers to entry
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o Integrating the acquired company o Overestimating economic benefits o Expense of acquisitions o Inadequate preacquisition screening
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10-29

Guidelines for
Successful Acquisition
 Identification and screening
 Bidding strategy
 Integration
 Learning from experience
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Attractions: o Avoid risks/costs of building new operation o Sharing complementary skills/assets increase probability of success
Pitfalls: o Sharing profits if new business succeeds o Venture partners must share control – conflicts can cause failure o Risk of giving know-how away to joint venture partner
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10-31

Process of divesting businesses and exiting industries to focus on core distinctive competencies to increase company profitability.
Why Restructure?
• Diversification discount- investors see highly diversified companies as less attractive
• Response to failed acquisitions
• Innovations in strategic management have diminished 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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