CHAPTER 9
STRATEGY AND
COMPETITIVE ADVANTAGE
IN DIVERSIFIED
COMPANIES
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“. . .to acquire or not to acquire: that is
the question.”
Robert J. Terry
“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, and Marcus Alexander
“Quote”
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Diversification and Corporate Strategy
 What does it mean when a company is
diversified?
 Does a firm that is diversified use only one of the
five generic business strategies?
 What are the types of diversification strategies?
 Does a diversified firm compete in similar or
different industry environments?
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Four Main Tasks in
Crafting 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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Single Business Strategy vs.
Diversification Strategy
 What are some of the advantages of
pursuing a single business?
 What are some of the risks associated with
pursuing one business?
 When should firms consider
diversification?
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Why Diversify?
 To build shareholder value
 1+1=3
To create shareholder value, a diversifying firm
must get into businesses that can perform
better under common management than they
could perform operating as independent standalone enterprises!
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Diversification
A Diversification strategy is guided by a vision of
how “the firm as a whole can create economic
value.”
Kraft Foods
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Philip Morris
(Cigarettes)
Miller Brewing
P.M. Capital
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Philip Morris Corporation (Altria)
Kraft Foods
Miller
Brewing
P.M.
Capital
Philip Morris
(Cigarettes)
The corporation is seen as a system of interdependent parts.
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What is Related Diversification?
 Define “strategic fit”
 What are the different types of “strategic fits”?
 Which of the “strategic fits” has the greatest
potential impact on time-to-market?
 Which of the has the greatest potential impact on
volume discounts for incoming parts?
 How can firms achieve a “strategic fit” through
manufacturing? Distribution?
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Figure 9.2: Value Chains
for Related Businesses
Business A
Representative Value Chain Activities
Support Activities
Supply
Chain
Activities
Technology
Operations
Sales and
Marketing
Distribution
Customer
Service
Business B
Competitively valuable opportunities for technology or skills transfer, cost
reduction, common brand name usage, and cross-business collaboration exist
at one or more points along the value chains of A and B
Supply
Chain
Activities
Technology
Operations
Sales and
Marketing
Distribution
Customer
Service
Support Activities
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Capturing Benefits of Strategic Fit
 Benefits don’t occur just because a company
has diversified into related businesses !
 Businesses with sharing potential must be
reorganized to coordinate activities
 Means must be found to make skills transfer effective
 Benefits of some strategic coordination must exist
to justify sacrificing business-unit autonomy
 Competitive advantage potential exists to
 Expand resources and strategic assets and
 Create new ones faster and cheaper than rivals
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Capturing Benefits of Strategic Fit
 Stem from cross-business cost-saving
opportunities
 Arise from ability to eliminate costs by operating
two or more businesses under same corporate
umbrella
 Exist when it is less costly for two or more
businesses to operate under centralized
management than to function independently
 Cost saving opportunities can stem from
interrelationships anywhere along businesses’
value chains
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What is Unrelated Diversification?
 What is the difference between related and
unrelated diversification?
 What are some reasons that firms pursue
unrelated diversification?
 What are some of the risks associated with an
unrelated diversification strategy?
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Acquisition Criteria For Unrelated
Diversification Strategies
 Can business meet corporate targets





for profitability and ROI?
Will business require substantial
infusions of capital?
Is business in an industry with growth potential?
Is business big enough to contribute to the parent
firm’s bottom line?
Is there potential for union difficulties or adverse
government regulations?
Is industry vulnerable to recession, inflation, high
interest rates, or shifts in government policy?
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Diversification Strategy
 Which of the diversification strategies (related or
unrelated) relies more heavily on financial vs.
strategic measures to create shareholder value?
 What is the difference between economies of
scale and economies of scope?
 Economies of scale can be
True False
achieved due to a related
diversification strategy.
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Determining the Type of Diversification
 Example General Electric and Walt Disney
General Electric
Business
Units
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Aircraft Engines
Capital Services
Lighting
Medical Systems
NBC
Applicances
Power Systems
Plastics
Walt Disney
Media Networks - ABC
Parks and Resorts
Studio and
Entertainment
Consumer Products
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Determining the Type of Diversification
Necessary Questions
 Are there opportunities to share Value Chain
activities and achieve strategic fits?
 Are there similarities in the business units’
products?
 Are there similarities in the business units’
customers?
 Are there similarities in the business units’
distribution channels?
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Determining the Type of Diversification
Walt Disney’s opportunities to share Value Chain
activities and achieve strategic fits
 Supply Chain – Media Networks and Studio Entertainment
 Manufacturing/Operations – Media Networks and Studio
Entertainment
 Distribution – 1) Parks and Resorts and Consumer
Products and 2) ABC Television and Studio Entertainment
 Sales and Marketing – Media Networks, Parks and Resorts,
Studio Entertainment, and Consumer Products
 Managerial and administrative support – Media Networks,
Parks and Resorts, Studio Entertainment, and Consumer
Products
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Determining the Type of Diversification
GE’s opportunities to share Value Chain activities and
achieve strategic fits
 Relatively few opportunities to share activities
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Determining the Type of Diversification
Walt Disney versus General Electric
 Walt Disney has several activities that can be shared
across business units (BUs). GE has relatively few
opportunities to share activities across the BUs
 There are many similarities in the Disney BUs’ products.
Few similarities in the GE BUs’ products.
 The Disney BUs’ major customers are families. GE BUs
customers vary from large corporations for Aircraft Engines
and Power Systems to the general public for Appliances.
 The Disney BUs’ can use the same distribution channel in
most cases whereas the GE BUs’ can not.
 What type of diversification strategy does each of these
firms pursue?
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Combination Related-Unrelated
Diversification Strategies
 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 ranging collection of
either related or unrelated businesses or a mixture
 Multibusiness firms
 Diversification portfolio includes several unrelated
groups of related businesses
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Strategies for Entering New Businesses
 What are some possible strategies for broadening
diversification or entering a new business?
 What are some possible strategies for narrow the
diversification?
 When is it attractive to narrow the collection of
businesses a firm has?
 What are some options firms have to increase the
financial health of their portfolio of businesses?
 When should a firm decide to follow a turnaround
rather than a restructure strategy?
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Comment: Trend in Diversification
The present trend toward narrower
diversification has been driven by a
growing preference to gear
diversification around creating strong
competitive positions in a few, wellselected industries as opposed to
scattering corporate investments
across many industries!
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Multinational Diversification Strategies
 What does it mean to have a multinational
diversification strategy?
 Why do firms decide to follow a multinational
diversification strategy?
 Which of the diversification strategies seem
to have the most advantages for DMNC?
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Summary
 Understand what is a Diversification strategy
 Understand why firms diversify
 Know the types of diversification, advantages and
disadvantages of each.
 Know how related and unrelated diversification differ
 Understand what it means to have strategic fit, the different
types of fit and how to utilize a particular type of fit
 Know how to determine the type of diversification strategy a
firm is pursuing
 Understand the different options for entering new, exiting,
and restoring businesses
 Know what the advantages are of a multinational strategy
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