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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
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