corporate strategy: diversification, acquisitions, and internal new ventures lecture 10
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Corporate Strategy: Diversification, Acquisitions, and Internal New Ventures
Lecture 10
Overview Diversification
The process of adding new businesses to the company that are distinct from its established operations
Vehicles for diversification Internal new venturing
Starting a new business from scratch Acquisitions Joint ventures
Restructuring Reducing the scope of diversified operations by
exiting from business areas
Expanding Beyond a Single Industry Advantages of staying in a single industry
Focus resources and capabilities on competing successfully in one area
Focus on what the company knows and does best Disadvantages of being in a single industry
Danger of the industry declining Missing the opportunity to leverage resources and
capabilities to other activities Resting on laurels and not continually learning
The Multibusiness Model
Develop a business model for each industry in which the company competes
Develop a higher-level multibusiness model that justifies entry into different industries in terms of profitability
The BCG Matrix
Source: Perspectives, No. 66, “The Product Portfolio.” Adapted by permission from The Boston Consulting Group, Inc., 1970.
The Strategic Implications of the BCG Matrix Stars
Aggressive investments to support continued growth and consolidate competitive position of firms.
Question marks Selective investments; divestiture for weak firms or
those with uncertain prospects and lack of strategic fit.
Cash cows Investments sufficient to maintain competitive
position. Cash surpluses used in developing and nurturing stars and selected question mark firms.
Dogs Divestiture, harvesting, or liquidation and industry
exit.
The McKinsey/GE Matrix
Scoring the Matrix
Industry AttractivenessWt Biz 1 Biz 2 Biz 3
Growth 10 7 2 9Buyers 10 0 9 5Barriers 10 8 8 1Rivalry 10 5 9 5Suppliers 10 10 8 2Subs 10 1 5 2Overall 60 30 41 23
Medium High Medium
Limitations on Portfolio Planning Flaws in portfolio planning:
The BCG model is simplistic; considers only two competitive environment factors– relative market share and industry growth rate.
High relative market share is no guarantee of a cost savings or competitive advantage.
Low relative market share is not always an indicator of competitive failure or lack of profitability.
Multifactor models such as McKinsey/GE matrix are better though imperfect.
A Company as a Portfolio of Distinctive Competencies Reconceptualize the company as a
portfolio of distinctive competencies rather than a portfolio of products
Consider how those competencies might be leveraged to create opportunities in new industries
Existing vs. new competencies Existing industries in which a company
competes vs. new industries
Establishing a Competency Agenda
Increasing Profitability Through Diversification
Transferring competencies Taking a distinctive competence developed in one
industry and applying it to an existing business in another industry
The competencies transferred must involve activities that are important for establishing competitive advantage (Phillip Morris tobacco & beer)
Leveraging competencies (Microsoft iPod clone) Taking a distinctive competency developed by a
business in one industry and using it to create a new business in a different industry
Sharing resources: economies of scope Cost reductions associated with sharing resources
across businesses (Coles Myer)
Increasing Profitability Through Diversification (cont’d) Exploiting general organizational
competencies Competencies that transcend individual
functions or businesses and reside at the corporate level in the multibusiness enterprise
Entrepreneurial capabilities Effective organization structure and
controls Superior strategic capabilities (e.g. Tyco)
Types of Diversification Related diversification
Entry into a new business activity in a different industry that is related to a company’s existing business activity, or activities, by commonalities between one or more components of each activity’s value chain
Unrelated diversification Entry into industries that have no obvious
connection to any of a company’s value chain activities in its present industry or industries
The Limits of Diversification
Related diversification is only marginally more profitable than unrelated diversification
Extensive diversification tends to depress rather than improve profitability
Bureaucratic Costs and Diversification Strategy The costs increases that arise in large, complex
organizations due to managerial inefficiencies Number of businesses in a company’s portfolio
Information problems Monitoring, lost opportunities
Dominant logic Inability to identify the unique profit contribution of a
business unit that shares resources with another unit Sends poor signals – leads to bad decisions Imputation problem, transfer pricing
Limits of diversification Bureaucratic costs place a limit on the amount of
diversification that can profitably be pursued Costs are higher in related diversifications
Guidelines for successful acquisitions
Properly identify acquisition targets and conduct a thorough pre-acquisition screening of the target firm.
Use a bidding strategy with proper timing to avoid overpaying for an acquisition. Hostile or voluntary?
Follow through on post-acquisition integration synergy-producing activities of the acquired firm.
Dispose of unwanted residual acquisition assets.
VALUE ENHANCING!!!
Diversification That Dissipates Value Diversifying to pool risks
Stockholders can diversify their own portfolios at lower costs than the company can
Research suggests that corporate diversification is not an effective way to pool risks
Diversifying to achieve greater growth Growth on its own does not create value
Turnaround Strategy
The causes of corporate decline Poor management– incompetence, neglect Overexpansion– empire-building CEO’s Inadequate financial controls– no profit
responsibility High costs– low labor productivity New competition– powerful emerging
competitors Unforeseen demand shifts– major market
changes Organizational inertia– slow to respond to new
competitive conditions
The Main Steps of Turnaround
Changing the leadership Replace entrenched management with new managers.
Redefining strategic focus Evaluate and reconstitute the organization’s strategy.
Asset sales and closures Divest unwanted assets for investment resources.
Improving profitability Reduce costs, tighten finance and performance
controls. Acquisitions
Make acquisitions of skills and competencies to strengthen core businesses.
Guidelines for Successful Internal New Venturing Structured approach to managing internal
new venturing Research research aimed at advancing basic
science and technology Development research aimed at finding and
refining commercial applications for the technology
Foster close links between R&D and marketing; between R&D and manufacturing
Selection process for choosing ventures Monitor progress
Create a new venture culture (e.g. 3M)
Exercises
Dun & Bradstreet AT&T