Prem Ppt Ch10 Strategy

Chapter Ten

Corporate-Level Strategy:

Formulating and

Implementing Related and Unrelated

Diversification

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 2

“The very best takeovers are thoroughly hostile. I’ve never seen a really good company taken over.

I’ve only seen bad ones.”

- James Goldsmith

© RoyaltyFree/ Stockdisc/ Getty Images


Corporate-Level Strategy should allow a company, or one of its business units, to perform the value-creation functions at lower cost or in a way that allows for differentiation and premium price.

Companies must adopt a long-term perspectiveConsider how changes in the industry and its products, technology, customers, and competitors will affect its

current business model and future strategies.

Corporate-Level Strategy

Corporate strategy is used to identify: 1. Businesses or industries that the company should

compete in2. Value creation activities which the company should

perform in those businesses 3. Method to enter or leave businesses or industries

in order to maximize its long-run profitability


Diversification Strategy is the company’s decision to enter one or more new industries (that are distinct from its established operations) to take advantage of its existing distinctive competencies and business model.

Corporate-Level Strategy of Diversification

Types of diversification: Related diversification Unrelated diversification Methods to implement a

diversification strategy:

Internal new ventures Acquisitions Joint ventures


Expanding Beyond a Single Industry

BUT a company’s fortunes are tied closely to the profitability of its original industry:

Can be dangerous if the industry matures and goes into decline

May be missing the opportunity to leverage their distinctive competencies in new industries

Tendency to rest on their laurels and not engage in constant learning

Staying inside a single industry allows a company to:• Focus its resources ‘Stick to its knitting’

To stay agile, companies must leverage –find new ways to take advantage of their distinctive

competencies and core business model in new markets and industries.


A Company as a Portfolio of Distinctive Competencies

Consider how those competencies might be leveraged to create opportunities in new industries

Existing competencies versus new competencies that would need to be developed

Existing industries in which a company competes versus new industries

Reconceptualize the company as a portfolio of distinctive competencies . . . rather than a portfolio of products:


Establishing a Competency Agenda

Source: Reprinted by permission of Harvard Business School Press. From Competing for the Future: Breakthrough Strategies for Seizing Control of Your Industry and Creating the Markets of Tomorrow by Gary Hamel and C. K. Prahalad, Boston, MA. Copyright ©

1994 by Gary Hamel and C. K. Prahalad. All rights reserved.

Figure 10.1


Increasing ProfitabilityThrough Diversification

Transferring competencies among existing businesses

Leveraging competencies to create new businesses

Sharing resources to realize economies of scope

Using product bundling Managing rivalry by

using diversification as a means in one or more industries Exploiting general organizational competencies that

enhance performance within all business units

A diversified company can create value by:

Managers often consider diversification when their company is generating free cash flow – with resources in excess of those needed to maintain competitive advantage.


Transferring Competencies

• The competencies transferred must involve activities that are important for establishing competitive advantage

• Tend to acquire businesses related to their existing activities because of the commonality between one or more value-chain functions

Transferring competencies across industries: taking a distinctive competency developed in one industry and implanting it in an EXISTING business unit in another industry

For such a strategy to work, the distinctive competency being

transferred must have real strategic value.


Transfer of Competencies at Philip Morris

Figure 10.2


• The difference between leveraging and transferring competencies is that an entirely NEW business is created

• Different managerial processes are involved

• Tend to use R&D competencies to create new business opportunities in diverse areas

Leveraging competencies: taking a distinctive competency developed by a business in one industry and using it to create a NEW business unit in a different industry

Leveraging Competencies


Economies of scope arise when business units are able to effectively able to pool, share, and utilize expensive resources or capabilities:1. Companies that can share resources

have to invest proportionately less than companies that cannot share.

2. Resource sharing can result in economies of scale.

Sharing resources and capabilities across two or more business units in different industries to realize economies of scope.

Economies of scope are possible only when there are significant commonalities between

one or more value-chain functions.

Sharing Resources


Sharing Resources at Procter & Gamble

Figure 10.3


• Allows customers to reduce their number of suppliers for convenience and cost savings.

• Increased value of orders gives customers increased commitment and bargaining power with suppliers.

Use product bundling to differentiate products and expand products lines in order to satisfy customers’ needs for a package of related products.

Using Product Bundling


• Multipoint competition is when companies compete with each other in different industries.

• Companies can manage rivalry by signaling that competitive attacks in one industry will be met by retaliatory attacks in the aggressor’s home industry.

• Mutual forbearance from signaling may result in less intense rivalry and higher industry profits.

Manage rivalry by holding a competitor in check that has either entered its industry or has the potential to do so.

Managing Rivalry


These capabilities help each business unit perform at a higher level than if it operated as an individual company:1. Entrepreneurial capabilities – encourage risk taking while

managing & limiting the amount of risk undertaken 2. Organizational design – create structure, culture, and

control systems that motivate and coordinate employees3. Superstrategic capabilities – effectively manage the

managers of the business units and helping them think through strategic problems

General organizational competencies are skills of a company’s top managers and functional experts that transcend individual functions or business units.

These managerial skills are often not present, as they are rare and difficult to develop and put into action.

Exploiting General Organizational Competencies


Types of Diversification

Related diversificationEntry into a new business activity in a different industry that:

• Is related to a company’s existing business activity or activities and

• Has commonalities between one or more components of each activity’s value chain

Based on transferring and leveraging competencies, sharing resources, and bundling products

Unrelated diversificationEntry into industries that have no obvious connection to any of a company’s value-chain activities in its present industry or industries

Based on using only general organizational competencies to increase profitability of each business unit


- Andrew Campbell, Michael Gould & Marcus Alexander

“Fit between a parent and its businesses is a two-edged sword: a good fit can create value, a bad one can destroy it.”


Commonalities Between Value Chains of Three Business Units

Figure 10.4


Disadvantages and Limits of Diversification

1. Changing Industry and Firm-Specific Conditions• Future success of this strategy is hard to predict.• Over time, changing situations may require businesses

to be divested.

2. Diversification for the Wrong Reasons• Must have clear vision as to how value will be created.• Extensive diversification tends to reduce rather than improve

profitability.

3. Bureaucratic Costs of Diversification• Costs are a function of the number of business units in a

company’s portfolio, and the• Extent to which coordination is required to gain the benefits.

Conditions that can make diversification disadvantageous:


Coordination Among Related Business Units

Figure 10.5


Choosing a Strategy

Related diversification• When company’s competencies can be applied across a

greater number of industries and• Company has superior capabilities to keep bureaucratic

costs under control

Unrelated diversification• When functional competencies have few useful applications

across industries and• Company has good organizational design skills to build

distinctive competencies Web of corporate level strategy

• May pursue both related and unrelated diversification• As well as other strategies that improve long-term profitability

The choice of strategy depends on a comparison of the benefits of each strategy versus the cost of pursuing it:


Sony’s Web of Corporate-Level Strategy

Figure 10.6


Diversification That Dissipates Value

Diversifying to pool risks• Stockholders can diversify their own portfolios at lower costs

than the company can.• This represents an unproductive use of resources as profits

can be returned to shareholders as dividends.• 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.• Business cycles of different industries are inherently difficult

to predict.

Based on a large number of academic studies:Extensive diversification tends to reduce,

rather than improve, company profitability.


Entry Strategies to Implement Multibusiness Model

Internal New Ventures• Company has a set of valuable competencies in its existing

businesses.• Competences leveraged or recombined to enter new business

areas.

Acquisitions• Company lacks important competencies to compete in an area.• Company can purchase an incumbent company that has those

competencies at a reasonable price.

Joint Ventures• Company can increase the probability of success by teaming

up with another company with complementary skills.• Joint ventures are preferred when risks and costs of setting up

a new business unit are more than company can assume.

Various entry strategies may be employed based on the company’s competencies and capabilities:


Pitfalls of New Ventures

Scale of entry• Large-scale entry is initially

more expensive than small- scale entry, but it brings higher returns in the long run.

Commercialization• Technological possibilities

should not overshadow market needs and opportunities.

Poor implementation• Demands on cash flow• Need clear strategic objectives• Anticipate time and costs


Scale of Entry and Profitability

Figure 10.7


Guidelines for Successful Internal New Venturing

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

Structured approach to managing internal new venturing:


The Attractions of Acquisition

Used to achieve diversification when the company lacks important competencies

Enable a company to move quickly Perceived as less risky than internal new

ventures An attractive way to enter a new industry

that is protected by high barriers to entry

Acquisitions are the principle strategy used to implement horizontal integration:


Acquisition Pitfalls

Integrating the acquired company• Difficulty in integrating value-chain and management activities• High management and employee turnover in acquired

company Overestimating the economic benefits

• Overestimate the competitive advantages and value-added that can be derived from the acquisition

• Pay too much for the target company The expense of acquisitions

• Premium paid for publicly traded companies • Premium cancels out the prospective value-creating gains

Inadequate preacquisition screening• Weaknesses of acquisitions’ business model are not clear

There is ample evidence that many acquisitions fail to create value or to realize their anticipated benefits:


Guidelines for Successful Acquisition

Target identification and preacquisition screening for: 1. Financial position2. Distinctive competencies and competitive advantage3. Changing industry boundaries4. Management capabilities5. Corporate culture

Bidding strategy• Avoid hostile takeovers and speculative bidding.• Encourage friendly takeover with amicable merger.

Integration• Eliminate duplication of facilities and functions.• Divest unwanted business units included in acquisition.

Learning from experience• Conduct post-acquisition audits.


Joint Ventures

Attractions: Helps avoid the risks and costs of building a new

operation from the ground floor Teaming with another company that has

complementary skills and assets may increase the probability of success

Pitfalls: Requires the sharing of profits if the new business

succeeds Venture partners must share control – conflicts on

how to run the joint venture can cause failure Run the risk of giving critical know-how away to

joint venture partner


Restructuring

Why restructure?• Diversification discount: investors see highly

diversified companies as less attractive » Complexity and lack of transparency in financial

statements» Too much diversification » Diversification for the wrong reasons

• Response to failed acquisitions• Innovations in strategic management have

diminished the advantages of vertical integration or diversification

Restructuring is the process of divesting businesses and exiting industries to focus on core distinctive competencies in order to increase company profitability.


“Growth does not always lead a business to build on success. All too often it converts a highly successful business into a mediocre large business.”

- Richard Branson- Richard Branson

“The corporate strategies of most companies have dissipated instead of created shareholder value.” - Michael Porter- Michael Porter

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