1 diversification and corporate strategy corporate level strategy – the strategy for a company...
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Diversification and Corporate Strategy
Corporate Level Strategy – the strategy for a company and all of its business units as a whole
Diversification – the primary approach to corporate level strategy
Diversified firms vary according to
Level of diversification
Degree of relatedness
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Four Main Tasks inCrafting 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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Why do Firms Diversify?
When they have excess resources, capabilities, and core competencies that have multiple uses
Diminishing growth prospects in present industry
Cost saving opportunities Capture strategic fits Capture financial economies Spread business risk Leverage brand name
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Building Shareholder Value
Ultimate justification for diversifying
A diversification move must pass three tests
The industry attractiveness test
The cost-of-entry test
The better-off test
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Making the Diversification Decision
Decision to Diversify Requires Two Additional Decisions:
Level and Degree of Diversification Number and Relatedness
Mode of Diversification Acquisition, Internal Development, Joint
Venture
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Major Corporate Level Strategies
Single Business
Dominant Business
Related Diversification
Unrelated Diversification
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What is Related Diversification?
Involves diversifying into businesses whose value chains possess competitively valuable “strategic fits” with the value chain(s) of the present business(es)
Capturing the “strategic fits” makes related diversification a 1 + 1 = 3 phenomenon
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Examples of Related Diversification?
Proctor and Gamble (distribution/marketing) Manufactures and sells branded consumer packaged goods 5 Segments
Beauty - antiperspirants and deodorants, cosmetics, personal cleansing, skin care, hair care and color, prestige, and professional salon products
Grooming - blades and razors, epilators, pre- and post-shave products, and electronic hair removal devices
Health Care - toothbrush, toothpaste, and other oral care products; and gastrointestinal, rapid diagnostics, respiratory, vitamins/minerals/supplements, and other personal health care products
Fabric Care and Home Care - laundry additives, fabric enhancers, and laundry detergents; air care, dish care, and surface care products; batteries; and professional products.
Baby, Feminine and Family Care - feminine care and adult incontinence products; baby wipes, diapers, and pants; paper towels, tissues, and toilet papers
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Examples of Related Diversification?
Johnson and Johnson (marketing/scientific expertise) Engages in the research and development, manufacture, and sale of
various products in the health care field worldwide 3 segments
Consumer Products for baby care, skin care, oral care, wound care, women’s
health products, nutritional products, and over-the-counter pharmaceutical products
Pharmaceutical Products in the areas of immunology, infectious diseases,
neuroscience, oncology, and cardiovascular and metabolic diseases Medical Devices
Orthopaedic, and trauma and neurological products; general surgery, and biosurgical and energy products; products to treat cardiovascular disease; infection prevention products; diagnostics products; blood glucose monitoring and insulin delivery products; and disposable contact lenses
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Examples of Related Diversification?
Campbell Soup Company (products) Engages in the manufacture and marketing of branded
convenience food products worldwide 5 segments
U.S. Simple Meals Global Baking and Snacking International Simple Meals and Beverages U.S. Beverages Bolthouse and Foodservice
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Examples of Related Diversification?
Apple Inc. (product/technology) Designs, manufactures, and markets mobile
communication and media devices, personal computers, watches, and portable digital music players worldwide.
The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications
Major Products iPhone, iPad, iPod, Mac
Other Products Apple Watch, iTunes app and store, Apple Pay,
Apple TV
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Examples of Related Diversification?
Upjohn (R&D/product) Manufactures and sells pharmaceutical products for
Human consumption Agricultural uses
Coherent Inc. (technology) Provides photonics-based solutions for a range of
commercial and scientific research applications in the United States and internationally.
2 segments: Specialty Lasers and Systems Commercial Lasers and Components
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Strategic Appeal of Related Diversification
Capture Strategic Fits/Synergies/Scope Economies
Strategic fits along value chain Cost reductions Spread investor risks over a broader base Preserves strategic unity in its business
activities Achieve consolidated performance greater than
the sum of what individual businesses can earn operating independently
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Involves diversifying into businesses with
No strategic fit
No meaningful value chainrelationships
No unifying strategic theme
Approach is to venture into “any businessin which we think we can make a profit”
Firms pursuing unrelated diversification are often referred to as conglomerates
What is Unrelated Diversification?
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Example of Unrelated Diversification?
United Technologies Corporation Provides technology products and services to the building
systems and aerospace industries worldwide 5 segments
Otis – elevators and escalators UTC Climate, Controls & Security - air conditioning and
refrigeration, fire safety, surveillance, and security Pratt and Whitney - aircraft engines; parts and services UTC Aerospace – electric power generation,
aerospace products and aftermarket services Sikorsky – helicopters
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Example of Unrelated Diversification?
Textron, Inc. Operates in the aircraft, defense, industrial, and
finance industries worldwide. 5 segments
Bell – helicopters, parts and services Textron Aviation – aircraft, parts and services Textron Systems - unmanned aircraft systems,
smart weapons, armored vehicles, turrets, marine crafts, flight simulators
Industrial – auto parts, food containers, hydraulics, golf carts
Finance – for aircraft and helicopters
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Example of Unrelated Diversification?
General Electric Operates as an infrastructure and financial
services company worldwide. 8 segments
Power and Water Oil and Gas Energy Management Aviation Healthcare Transportation Appliances and Lighting GE Capital
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Example of Unrelated Diversification?
W. R. Grace Chemicals Coal Mining Oil and Gas Extraction Food Manufacturing Paper Products Health Services
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Diversification and Shareholder Value
Related Diversification
A strategy-driven approach to creating shareholder value
Unrelated Diversification
A finance-driven approach to creating shareholder value
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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 collection of either related or unrelated businesses or a mixture
Multibusiness firms Diversification portfolio includes several unrelated
groups of related businesses
Combination Related-Unrelated Diversification Strategies
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STRATEGIES FOR ENTERING NEW BUSINESSES
AcquisitionInternal new
venture (start-up)Joint venture
Diversifying into New Businesses
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Evaluating the Strategy of a Diversified Company
Step 1: Assess attractiveness of each industry firm competes in
Step 2: Assess competitive strength of firm’s business units
Step 3: Check competitive advantage potential of cross-business strategic fits among business units
Step 4: Check whether firm’s resources fit requirements of present businesses
Step 5: Rank performance prospects of businesses and assign a priority for resource allocation
Step 6: Craft new strategic moves to improve overall company performance
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Figure 8.6 Strategy Options for a Firm That Is Already Diversified
Stick with the Existing Business
Lineup
Broaden the Diversification Base with New Acquisitions
Divest and Retrench to a Narrower
Diversification Base
Restructure through
Divestitures and
Acquisitions
Strategy Options for a Firm That Is Already Diversified
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Why Firms Expand Globally
Gain access to new customers Achieve lower costs and enhance
competitiveness Capitalize on core competencies Spread business risk across wider market
base Access to raw materials Exchange rate fluctuations Trade policies – tariffs
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Cross Country Differences
Cultures and lifestyles Market demographics Market conditions
Growth rate Distribution systems Need for responsiveness
Location advantages Exchange rates Host government restrictions
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Multi-domestic Competition
Global Competition
Two Primary Patternsof International Competition
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Strategy (Mode) Options for International Markets
Exporting Maintain national production and export
goods to foreign markets Licensing
Allow foreign firms to produce and distribute your product or use your technology
Franchising Similar to licensing More suited to services and retailers
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Strategy (Mode) Options for International Markets
Acquisition / Merger Acquire or merge with company
competing in foreign market Greenfield Venture / Internal Development
Start up new business unit and use it to enter in to foreign market
Strategic Alliances and Joint Ventures Combine resources with foreign
partner(s)
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Strategy Options for International Markets
Multicountry Think-local, act-local Tailor strategy to each country
Global Think-global, act-global Pursue same basic strategy worldwide
Transnational Think-global, act-local Combination global-local strategy
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Building Competitive Advantage in Foreign Markets
Locating activities Transferring of competencies to foreign
markets Coordinating cross-border activities Profit sanctuaries Cross-market subsidization
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Competing Internationally Versus Competing Globally
International Compete in a select few foreign markets
Global Has or pursue a market presence on most
continents and in all major countries
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