Module 8

Corporate-Level
Strategy: Related and
Unrelated
Diversification
 Housekeeping Items Short Term
• Presentation PPT due 13 March at 9 AM
• Submit one copy (one student) in the Blackboard submission folder
• Do you know when you’re presenting?
• Final examination scheduled
• 28 April 9 AM
• 72-hours to complete
• 4 essay questions
• Will utilize Turn-it-in to check originality (Submit MS WORD format file)
 Housekeeping Items – Long Term
• Group Project Written Report Due
ü 01-APR-2023 11:59 pm

• 4-APR-2023: NO CLASS! Ching Ming Festival

• Module 12 (12-APR-2023)
ü Exam Review
2 Points Extra Credit:
• 1 Photo
• 1 Paragraph* (What you did at the fair, what you liked, what you’d
improve)
• Submit via Blackboard by 26 March 11:59pm

*4-6 sentences
 Learning Objectives
• Differentiate between multibusiness models based on diversification

• Explain the primary ways in which diversification can increase

company profitability

Business Matured
Initial Stage Saturated

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Diversification

• Diversification - Entering new industries, distinct from a company’s

core or original industry, to make new kinds of products for customers
in new markets
• Diversified company - A company that makes and sells products in
two or more different or distinct industries
• Diversification strategy “better off” test: The firm must be more
valuable than it was before the diversification, and that value
must not be fully capitalized by the cost of the diversification
move
• Can be related or unrelated

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Vertical Integration vs Diversification

Related
Diversification

Backward Forward
Integration
Starbuck Integration

Unrelated
Diversification
Increasing Profitability Through Diversification

• Ways in which profitability can be increased

• Transfer competencies between business units in different industries
• Leverage competencies to create business units in new industries
• Share resources between business units to realize synergies or
economies of scope
• Utilize general organizational competencies that increase the
performance

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Transferring Competencies
• Transferring competencies - Taking a distinctive competency
developed by a business unit in one industry and implanting it in a
business unit operating in another industry
• Commonality - Skill or competency that, when shared by two or
more business units, allows them to operate more effectively and
create more value for customers
• Increases profitability when they: economies of scale
• lower the cost structure of one or more of a diversified company’s business
units.
• enable one or more of its business units to better differentiate their products
• Distinctive competency being transferred must have real strategic
value

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Transferring Competencies: Phillip Morris & Miller Lite

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Transferring Competencies: What McD could Do?

Supply Quality Customer

R&D Brand
Chain Control Loyalty
Leveraging Competencies
• Leveraging competencies -
Taking a distinctive competency
developed by a business unit in one
industry and using it to create a
new business unit in a different
industry
• Basis of the model
• Company’s competitive
advantage in one industry is
applied to create a differentiation
or cost-based competitive
advantage for a new business unit
in a different industry

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Leveraging Competencies: Amazon

Customer Loyalty

Fast Delivery

Customer Service

Delivery Channels

Brand Reputation

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Sharing Resources and Capabilities: Nike

• Economies of scope - Synergies that arise when one or more of a

diversified company’s business units are able to lower costs or
increase differentiation
• More effectively pool, share, and utilize expensive resources or
capabilities
• Sources of cost reductions
• Sharing resources lowers the cost structure
• Marketing function creates the differentiation of products leading to a
higher ROIC

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Product Bundling: Travel Agencies; Cruise (Air, Hotel, and Transport)

• Product bundling - Providing products that are related to each other.

• Allows companies to expand their range providing customers a
complete package of related products
• Goal: Bundling products offers customers:
• Lower prices
• Convenience of a single supplier
• Does not always require joint ownership
• Can be achieved through market contracts
• Should you bundle, or just form an alliance/joint venture?

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Product Bundling
Product Bundling
General Organizational Competencies

• General organizational competencies - Help business units within a

company perform at a higher level than it could if it operated as a
separate or independent company
• Results from the skills of a company’s top managers
• Types
• Entrepreneurial capabilities
• Organizational design capabilities
• Strategic capabilities

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Entrepreneurial Capabilities

• Required to take advantage of the free cash flow

• To promote entrepreneurship, a company must:
• encourage managers to take risks
• give managers the time and resources to pursue novel ideas
• not punish managers when a new idea fails: Leadership
• make sure that the company’s free cash flow is not wasted in risky ventures that
would generate a low return on investment

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Capabilities in Organizational Design

• Organizational design skills - Ability of the managers to create a

structure, culture, and control systems that motivate and coordinate
employees to perform at a high level
• Major factors:
• Influences a company’s entrepreneurial capabilities
• Determines a company’s ability to create functional competencies
• Determines a diversified company’s ability to profit from its
multibusiness model

[Link] (google)
[Link] (Starbucks)
[Link] (Marriott)

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Superior Strategic Management Capabilities

• Required to manage different business units to perform better than

they would if they were independent companies
• Ability to diagnose the underlying source of the problems of a poorly
performing business unit
• Turnaround strategy - Managers of a diversified company identify
inefficient, poorly managed companies in other industries they acquire
and restructure them to improve their performance and the profitability
of the total corporation.

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Disadvantages of Diversification
• Changes in the industry or company
• Management
• Technology
• Diversification for the wrong reasons
• Entry into a wrong business or at the wrong time or for the wrong
reasons
• Bureaucratic costs - Costs associated with solving the transaction
difficulties between business units and corporate headquarters.
• Factors responsible
• Number of business units in a company’s portfolio
• Degree to which coordination is required to realize the advantages
of diversification

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