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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) Provides branded consumer goods products worldwide 3 GBUs

Beauty GBU Beauty segment Grooming segment

Health and Well-Being GBU Health Care segment Snacks, Coffee, and Pet Care segment

Household Care GBU Fabric Care and Home Care segment Baby Care and Family Care segment

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Examples of Related Diversification?

Johnson and Johnson Engages in the research and development, manufacture, and sale of various

products in the health care field worldwide 3 segments

Consumer segment Products for baby care, skin care, oral care, wound care, and women’s

health care fields, as well as nutritional and over-the-counter pharmaceutical products

Pharmaceutical segment Products for anti-infective, antipsychotic, cardiovascular, contraceptive,

dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology, and virology

Medical Devices and Diagnostics segment Products for circulatory disease management, orthopaedic joint

reconstruction and spinal care, wound care and women’s health, minimally invasive surgical, blood glucose monitoring and insulin delivery, and diagnostic products, as well as disposable contact lenses

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Examples of Related Diversification?

Campbell Soup Company Engages in the manufacture and marketing of branded

convenience food products worldwide 4 segments

U.S. Soup, Sauces, and Beverages Baking and Snacking International Soup, Sauces, and Beverages North America Foodservice

Upjohn (R&D/product) Human and Agricultural

Laser Company (technology) Defense, Health Care, Manufacturing

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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?

W. R. Grace Chemicals Coal Mining Oil and Gas Extraction Food Manufacturing Paper Products Health Services

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Example of Unrelated Diversification?

United Technologies Corporation Provides technology products and services to the building

systems and aerospace industries worldwide Otis segment – elevators and escalators Carrier segment – air conditioning and refrigeration UTC Fire and Security segment. Pratt and Whitney segment - aircraft engines; parts

and services Hamilton Sundstrand segment - aerospace products

and aftermarket services Sikorsky segment – helicopters UTC also engages in the development and marketing

of distributed generation power systems and fuel cell power plants for stationary, transportation, space, and defense applications

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Example of Unrelated Diversification?

Textron, Inc. Operates in the aircraft, industrial, and finance

industries worldwide. 4 segments

Bell – helicopters plus parts and service Cessna – general aviation aircraft Industrial – auto parts, food containers,

hydrolics, golf carts Finance – aircraft finance, asset-based

lending, distribution finance, golf finance, resort finance

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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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Fig. 9.4: Identifying a Diversified Company’s Strategy

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Strategies for EnteringNew Businesses

Acquire existing company

Internal start-up

Joint venture/strategic partnerships

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Evaluating the Strategy of a Diversified Company

Step 1: Assess long-term attractiveness of each industry firm is 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 determine priority for resource allocation

Step 6: Craft new strategic moves to improve overall company performance

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Strategic Options for Firms 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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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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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-country

Competition

Global

Competition

Two Primary Patternsof International Competition

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Strategy 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

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Strategy Options for International Markets

Strategic Alliances and Joint Ventures Combine resources with foreign

partner(s) Multicountry

Think-local, act-local Tailor strategy to each country

Global Think-global, act-global Pursue same basic strategy worldwide

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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