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Corporate-LevelStrategy: Related and

Unrelated Diversification1

0

Chapter

2013 Cengage Learning. ll Rig!ts Reserved. "ay not #e copied$ scanned$ or d%plicated$ in &!ole or in part$ e'cept for %se as

per(itted in a license distri#%ted &it! a certain prod%ct or service or ot!er&ise on a pass&ord-protected &e#site for classroo( %se.

CHARLES W. L. HILL / GARETH R. JONESCHARLES W. L. HILL / GARETH R. JONES

Strategic ManagementStrategic Management An Integrated Approach 10th ed.An Integrated Approach 10th ed.

Student Version

Prepared by C. Douga! Coud " Pro#e!!or E$er%&u! o# A''ou(&%(g" Pepperd%(e )(%*er!%&y

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2013 Cengage Learning. ll Rig!ts Reserved. "ay not #e copied$ scanned$ or d%plicated$ in &!ole or in part$ e'cept for %se asper(itted in a license distri#%ted &it! a certain prod%ct or service or ot!er&ise on a pass&ord-protected &e#site for classroo( %se.

INCREASING PROITA2ILIT3INCREASING PROITA2ILIT3

THRO)GH DI4ERSIICATIONTHRO)GH DI4ERSIICATION

Diversification is the process of entering new

industries, distinct from a companys core or

original industry, to make new kinds of products

that can be sold profitable.

A diversified company is one that makes and

sells in two or more distinct industries.

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10-3

INCREASING PROITA2ILIT3INCREASING PROITA2ILIT3

THRO)GH DI4ERSIICATIONTHRO)GH DI4ERSIICATION

The managers of most companies oftenconsider diversification when they are

generating free cash flow, that is, cash in

excess of that required:

to fund new investments in the companys

current business and

to meet debt commitments.

n theory, any free cash flow belongs to theshareholders! thus, a diversification strategy is

notconsistent with maximi"ing returns to

shareholders. 2013 Cengage Learning. ll Rig!ts Reserved. "ay not #e copied$ scanned$ or d%plicated$ in &!ole or in part$ e'cept for %se asper(itted in a license distri#%ted &it! a certain prod%ct or service or ot!er&ise on a pass&ord-protected &e#site for classroo( %se.

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10-4

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pro&ab%%&y.pro&ab%%&y.


Transferring competenciesinvolves taking adistinctive competency developed by a new

business unit in one industry and implanting it in

a business unit operating in another industry.

#ompanies that base their diversificationstrategy on transferring competencies tend to

acquire new business relatedto their existing

business activities.

TRANSERRING CO6PETENCIESTRANSERRING CO6PETENCIES

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10-5

A commonalityis some kind of skill or attribute,

which, when it is shared or used by two or more

business units:

allows both businesses to operate more

effectively and efficiently,

and create more value for customers.


To increase profitability, the competencies

transferred must involve value$chain activitiesthat gives the business unit competitive

advantage in the future.

TRANSERRING CO6PETENCIES7TRANSERRING CO6PETENCIES7

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10-6

Leveraging competencies involves taking a

distinctive competency developed by a business

unit in one industry and using it to create a new

business unit or division of a different industry.

The difference between leveraging competenciesand transferring competencies is that leveraging

competencies means a newbusiness is being

created.

Transferring competencies involves the sharing

of competencies between two existing

businesses.

LE4ERAGING CO6PETENCIESLE4ERAGING CO6PETENCIES


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10-7

Economies of scope arise when one or more of

a diversified companys business units are able

to reali"e cost$saving or differentiation synergies.

#ompanies can more effectively pool, share, and

utili"e expensive resources or capabilities.

%haring resources or capabilities across

business units lowers a companys cost structure

compared to companies that operate in only oneindustry.

SHARING RESO)RCES AND CAPA2ILITIESSHARING RESO)RCES AND CAPA2ILITIES


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n search of new ways to differentiate products,

more and more companies are entering into

industries that provide customers with new

products connected or related to existing products.

Thisproduct bundling allows a company toexpand the range of products it produces to

provide customers a complete package of related

products.

The goal is to bundle products to offer customers

lower prices and&or a superior product or service.

)SING PROD)CT 2)NDLING)SING PROD)CT 2)NDLING


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General organizational competencies are the

result of the skills of a companys top managers

and functional experts.

)TILI8ING GENERAL ORGANI7)TILI8ING GENERAL ORGANI7

8ATIONAL CO6PETENCIES8ATIONAL CO6PETENCIES


E(&repre(eur%aE(&repre(eur%a

Capab%%&%e!Capab%%&%e!x To promote entrepreneurship, a company must:

'( )ncourage managers to take risks.

*( +ive them the time and resources to pursue novel

ideas.( -ot punish managers when a new idea fails.

( -ot pursue too many risky new ventures that have

a low probability of generating a profit.

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Capab%%&%e! o# Orga(%9a&%o(aCapab%%&%e! o# Orga(%9a&%o(aDe!%g(De!%g(

Organizational design skills are a result of a

managers ability to create a structure, culture,

and control systems. )ffective organi"ational structure and controls

create incentives that encourage business unit

managers to maximi"e efficiency and

effectiveness of their units. +ood organi"ational design helps prevent

missing out on profitable new opportunities.

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Super%or S&ra&eg%' 6a(age$e(&Super%or S&ra&eg%' 6a(age$e(&Capab%%&%e!Capab%%&%e!

x

/or diversification to increase profitability, a

companys top managers must have superior

capabilities in strategic management. They must possess the intangible skills that are

required to manage different business units in a

way that enables these units to perform better

than they would if they were independentcompanies.

These skills are a rare and valuable capability.

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10-1"




Super%or S&ra&eg%' 6a(age$e(&Super%or S&ra&eg%' 6a(age$e(&Capab%%&%e!Capab%%&%e!

x

There are several ways to improve the

performance of an acquired company:

'( 0eplace top managers of the acquired company with a

more aggressive top management team.

*( %ell off expensive assets and terminates managers and

employees to reduce the cost structure.

( The new management team works to devise new

strategies to improve performance of the operations ofthe acquired company.

( 1ffer bonuses to motivate managers and employees.

2( %et challenging goals at all levels 3stretchgoals(.

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RELATED DI4ERSIICATIONRELATED DI4ERSIICATION Related diversification is a corporate$level

strategy that is based on the goal of establishing a

business unit in a new industry that is relatedto a

companys existing business units by: some form of commonality or linkage between value$

chain functions of the existing and new business

units.

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10-14

The greater the number of linkages that can be

formed among business units, the greater the

potential to reali"e the profit$enhancing benefits

of diversifying.

4iversification allows a company to use anygeneral organi"ational competency it possesses

to increase the overall performance of allits

different industry divisions.

%trategic managers may strive to create a

structure and culture that encourages

entrepreneurship across divisions.

RELATED DI4ERSIICATIONRELATED DI4ERSIICATION


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10-15 2013 Cengage Learning. ll Rig!ts Reserved. "ay not #e copied$ scanned$ or d%plicated$ in &!ole or in part$ e'cept for %se asper(itted in a license distri#%ted &it! a certain prod%ct or service or ot!er&ise on a pass&ord-protected &e#site for classroo( %se.

Unrelated diversification is a corporate$level

strategy based on a multibusiness model with a

goal to increase profitability through:

the use of general organi"ational

competencies, and increase the performance of allthe companys

business units.

)NRELATED DI4ERSIICATION)NRELATED DI4ERSIICATION

#ompanies pursuing this strategy are often called

conglomerates! that is, business organi"ations

that operate in many diverse industries.

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5hen the managers who possess hard$to$define

skills leave, they often take their visions with them.

A companys new leader may lack the competency

or commitment necessary to pursue diversification

successfully over time.

The environment often changes rapidly andunpredictably over time.

The future success of any business is hard to

predict when using diversification.

THE LI6ITS ANDTHE LI6ITS AND

DISAD4ANTAGES ODISAD4ANTAGES O

DI4ERSIICATIONDI4ERSIICATIONC-a(ge! %( &-e I(du!&ry orCo$pa(y

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Although they know they should divest unprofitable

businesses, managers 6make up7 reasons why they

should keep their businesses together.

n the past, one widely used 3and false( 8ustification

for diversification was that the strategy would allow

a company to obtain the benefits of risk pooling.

5hen a companys core business is in trouble,

some think diversification will rescue it and lead to

long$term growth and profitability.



DI4ERSIICATIONDI4ERSIICATIOND%*er!%'a&%o( #or &-e Wro(gRea!o(!

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ureaucratic costs are the costs associated with

solving the transaction difficulties that arise

between a companys business unit and betweenthe business unit and corporate headquarters, as

the company attempts to obtain the benefits from

transferring, sharing, and leveraging competencies.

The greater the number of business units, the more

difficult it is for corporate managers to remain

informed about each business.



DI4ERSIICATIONDI4ERSIICATIONT-e 2ureau'ra&%' Co!&! o#D%*er!%'a&%o(

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10-1! 2013 Cengage Learning. ll Rig!ts Reserved. "ay not #e copied$ scanned$ or d%plicated$ in &!ole or in part$ e'cept for %se asper(itted in a license distri#%ted &it! a certain prod%ct or service or ot!er&ise on a pass&ord-protected &e#site for classroo( %se.

0elated diversification is preferred when 3'( the

companys competencies can be applied across a

greater number of industries, and 3*( the companyhas superior strategic capabilities that allow it to

keep bureaucratic costs under control.

9nrelated diversification is preferred when 3'( topmanagers are skilled at raising the profitability of a

poorly run business, and 3*( superior management

is able to keep costs under control.



DI4ERSIICATIONDI4ERSIICATIONC-oo!%(g a S&ra&egy

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10-"0

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ENTERING NEW IND)STRIES,ENTERING NEW IND)STRIES,INTERNAL NEW 4ENT)RINGINTERNAL NEW 4ENT)RING


!nternal ne" venturing is the process of

transferring resources to and creating a new

business unit or division in a new industry.

A company may use internal venturing to enter a

newly emerging or embryonic industry.

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10-"1 2013 Cengage Learning. ll Rig!ts Reserved. "ay not #e copied$ scanned$ or d%plicated$ in &!ole or in part$ e'cept for %se asper(itted in a license distri#%ted &it! a certain prod%ct or service or ot!er&ise on a pass&ord-protected &e#site for classroo( %se.

0easons given to explain the high failure rate

3 to ;ut research in the hands of skilled managers.

*( )ncourage managers to work with 0?4 scientists.

( /oster a close link between 0?4 and marketing.

ENTERING NEW IND)STRIES,ENTERING NEW IND)STRIES,

INTERNAL NEW 4ENT)RINGINTERNAL NEW 4ENT)RING

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AC;)ISITIONSAC;)ISITIONS


A company is particularly likely to use ac#uisitions

when it needs to move fast to establish a presencein an industry.

)ntering a new industry through internal venturing

is a relatively slow process. Acquisition is a much

quicker way for a company to establish a significantmarket presence.

Acquisitions are often perceived as being less risky

than internal new ventures because they involveless commercial uncertainty.

t is an attractive way to enter an industry that is

protected by high barriers to entry.

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Acquisitions may fail to raise the performance of

the acquiring companies for the following reasons:'( =anagement problems

*( 1verestimating the potential economic benefits

( Acquisitions tend to be expensive 3no profit increases(

( >oor screening results in not seeing ma8or problems

+uidelines for successful acquisition:

'( Target identification and preacquisition screening

*( @idding strategy

( ntegration

( earning from experience


AC;)ISITIONSAC;)ISITIONS

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10-"4

ENTERING NEW IND)STRIES, JOINT 4ENT)RESENTERING NEW IND)STRIES, JOINT 4ENT)RES


$oint venturesinvolve two or more companies

agreeing to pool their resources to create newbusinesses.

t frequently becomes the most appropriate method

to enter a new industry because it allows a

company to share the risks and costs associatedwith establishing a business unit in the new

industry with another company.

The 8oint ventures approach is most appropriatewhen the companies share complementaryskills or

distinctive companies because this increases the

probability of a 8oint ventures success.

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4isadvantages of entering a 8oint venture:

'( 5hile it allows companies to share the risks and costsof developing a new business, it also requires that

they share in the profits if they succeed.

*( f one partners skills are more important than the

other partners skills, the partner with more valuableskills will have to 6give away7 profits to the other party

because of the 2roblems can arise if the partners business models

conflict.( A company runs the risk of giving away important

company$specific knowledge to its partner.

ENTERING NEW IND)STRIES, JOINT 4ENT)RESENTERING NEW IND)STRIES, JOINT 4ENT)RES

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