CHAPTER 10
CORPORATE-LEVEL STRATEGY: RELATED AND
UNRELATED DIVERSIFICATION
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LEARNING OBJECTIVES
Differentiate between multibusiness models
based on related and unrelated diversification
Explain the five primary ways in which
diversification can increase company profitability
Discuss the conditions that lead managers to
pursue related diversification versus unrelated
diversification and explain why some companies
pursue both strategies
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LEARNING OBJECTIVES
Describe the three methods companies use to
enter new industries—internal new venturing,
acquisitions, and joint ventures—and discuss the
advantages and disadvantages associated with
each of these methods
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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
Use product bundling
Utilize general organizational competencies that
increase the performance
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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
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TRANSFERRING COMPETENCIES
Increase profitability when they:
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
Should involve value-chain activities to increases
profitability
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FIGURE 10.1 - TRANSFER OF
COMPETENCIES AT PHILIP MORRIS
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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 be
applied to create a differentiation
Cost-based competitive advantage for a new business
unit in a different industry
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SHARING RESOURCES AND
CAPABILITIES
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 lowers the cost structure
Marketing function does the differentiation of products
leading to a higher ROI
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PRODUCT BUNDLING
Providing products that are connected to each
other
Allows companies to expand their range providing
customers a complete package
Goal - Bundle products to offer customers:
Lower prices
Superior set of services
Does not always require joint ownership
Can be achieved through market contracts
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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
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 factor that:
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
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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 and poorly managed
companies in other industries
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SUPERIOR STRATEGIC MANAGEMENT
CAPABILITIES
Ways to improve the performance of the
acquired company
Top managers of the acquired company are replaced
with a more aggressive team
New top-management team sells off expensive assets
New management team works to devise new strategies
to improve the performance
Introducing company-wide pay-for-performance bonus
system
Establishing stretch goals for employees at all levels
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RELATED DIVERSIFICATION
Corporate-level strategy based on the goal of
establishing a business unit in a new industry
related to a company’s existing business units
By some form of commonality or linkage between their
value-chain functions
Basis of multibusiness model
Taking advantage of strong commonalities that can be
modified to increase the competitive advantage
Allowing a company to use any general organizational
competency it possesses
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UNRELATED DIVERSIFICATION
Corporate-level strategy that uses general
organizational competencies to increase the
performance of all the company’s business units
Companies pursuing this are called conglomerates
Internal capital market: Corporate-level strategy
whereby the firm’s headquarters assesses the
performance of business units and allocates
money across them
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UNRELATED DIVERSIFICATION
Benefits of an internal capital market are limited
by the efficiency of the external capital market
Reasons for efficiency of capital markets
Reporting requirements mandated by the Securities
and Exchange Commission (SEC)
Large numbers of research analysts
Extremely large and active investment community
Strong communication systems
Strong contract law
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DISADVANTAGES OF DIVERSIFICATION
Changes in the industry or company
Management
Technology
Diversification for the wrong reasons
Pooling risks
Entry into a wrong business or at wrong time or for
wrong reasons
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DISADVANTAGES OF DIVERSIFICATION
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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FIGURE 10.4 - COORDINATION AMONG
RELATED BUSINESS UNITS
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RELATED VERSUS UNRELATED
DIVERSIFICATION
Related diversification Unrelated diversification
• Company’s competencies can • Company’s top managers are
be applied across a greater skilled at raising the
number of industries profitability of poorly run
businesses
• Company has superior
strategic capabilities that • Company’s managers use
allow it to keep bureaucratic their strategic management
costs under close control competencies to:
• Improve the competitive
advantage of their business
units
• Keep bureaucratic costs
under control
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FIGURE 10.5 - SONY’S WEB OF
CORPORATE-LEVEL STRATEGY
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INTERNAL NEW VENTURING
Transferring resources and creating a new
business unit in a new industry to innovate new
kinds of products
Used by companies that are:
Technology-based and pursue related diversification
Venturing to enter a newly emerging industry
Pitfalls
Market entry on too small a scale
Poor commercialization of the new-venture product
Poor corporate management of new-venture division
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FIGURE 10.6 - SCALE OF ENTRY AND
PROFITABILITY
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GUIDELINES FOR SUCCESSFUL
INTERNAL NEW VENTURING
Understanding and basing new ventures on R&D
Giving funding for research to business unit managers
who can narrow down and then select the best set of
research projects
Work with R&D scientists to continually develop and
improve the business model and strategies
Fostering links between R&D and marketing to the
commercial success of the new product will
Fostering links between R&D and manufacturing to
ensure cost-effective manufacturing of the product
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GUIDELINES FOR SUCCESSFUL
INTERNAL NEW VENTURING
Construct efficient-scale manufacturing facilities
and give marketing a large budget
To develop a future product campaign that will build
market presence and brand loyalty quickly
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ACQUISITIONS
Principal way companies enter new industries to
pursue horizontal integration and diversification
Used by companies to move fast to establish a presence
in an industry
Less risky than internal new ventures
Easy way to enter an industry that is protected by
high barriers to entry
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ACQUISITION
Pitfalls
• Integrating the acquired company
• Overestimating economic benefits
• Expense of acquisitions
• Inadequate pre-acquisition screening
Guidelines for success
• Target identification and pre-acquisition screening
• Bidding strategy
• Integration
• Learning from experience
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JOINT VENTURES
Two or more companies agree to pool their
resources to create new business
Allows a company to share the risks and costs
associated with establishing a business unit
Resulting problems
Partner with superior skills will have to give away
profits
Different business models or time horizons leading to a
conflict about how to run the joint venture
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RESTRUCTURING
Reorganizing and divesting business units and
exiting industries
To refocus upon a company’s core business and rebuild
its distinctive competencies
Reasons
Investors feel these companies no longer have
multibusiness models
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RESTRUCTURING
Complexity of the financial statements of highly
diversified enterprises disguises the performance of
individual business units
Response to declining financial performance brought
about by over-diversification
Diminished advantages of vertical integration or
diversification from innovations in strategic
management
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