Strategia di impresa

STRATEGIC MANAGEMENT

SALVATORE TORRISI 2021 2022

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TOPIC 3. CORPORATE STRATEGY: DIVERSIFICATION

(A)

Topics


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Topic Readings

3. Corporate strategy: diversification

• READING PACKAGE, Cap. 3. Corporate Strategy.Why do firms diversify?

Diversification forms: related

and unrelated diversification

The impact of diversification on

performance

Evaluating diversification

strategy: Better-Off Test and

Best-Alternative Test

Cases

AOL-TimeWarner e-Learning-Unimib

Microsoft-Skype e-Learning-Unimib

The context: corporate strategy Mission and Scope

Business Diversification

Vertical integration

Geographical Diversification


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Diversification Types of diversification

Reasons for diversifying

Measures of diversification

The impact of diversification on performance

Evaluating diversification strategy: Better-Off

Test and Best-Alternative Test

SALVATORE TORRISI 2021 2022 4

Business Diversification


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Entry in a new market, product area or line of business

(Ansoff 1957; Ramanujam and Varadarajan 1989)

Main steps:

Choosing the businesses and the entry mode

Exploiting cross-business value chain links and

strategic fit to obtain/increase competitive advantage

Establishing investment priorities and allocating

resources across business units

Ansoff – Mintzberg matrix

Current product New product

Current

mission

Market penetrationUber’s penetration of the US market

Development of

the productSamsung’s Galaxy S11 following Galaxy S10

……

New

mission

Development of the

marketVW in the US

DiversificationGoogle’s glasses and

driverless cars


Diversification optionsSticking with the existing business and pursuing opportunities presented by these businesses

Broadening the current business scope by entering additional industries

Narrowing the business scope by divesting poorly performing businesses

Restructuring the entire firm by divesting some businesses and acquiring others to reshape the firm’s businesses portfolio


Why do firms diversity?

Scarce opportunities to grow ◦ Limited possibility of re-investing in the original business (maturity,

stagnant demand)

◦ Changing industry conditions— technological innovation, substitute products, fast-shifting buyer preferences, or intensifying competition


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Why do firms diversity?Resource sharingPossibility of exploiting excess resources (competencies

and human resources, know-how …) generated in the current businesses in new businesses (Edith Penrose)

Two types of shared resources Shared specialized resources and capabilities across the value-

chain activities of related businesses

Shared generalized resources and capabilities (e.g., finance, corporate parenting) across different businesses



Why do firms grow by adding new units, functions, markets and products?

Economies of scope by sharing resources (e.g. plants) across more than one product or business:

TC(q1, q2) < TC (q1,0) + TC(0, q2)

Difference with Economies of scale: AC reduction from increasing size of single operating units:

AC(q+)<AC(q)

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Other reasonsfinancial economies and risk reduction

managerial reasons ..


Different types of diversificationRelated and unrelated diversification

Different motives


Related diversification

To pursue strategic fit opportunities through:

Transferring specialized expertise, technological know-how, or other resources and capabilities from one business’s value chain to another’s

Sharing costs by combining related value chain activities into a single operation (e.g. manufacturing plant, logistics, distribution channels)

Example:

Google use of software engineers and IT specialists transferred from core business applications to Android mobile OS



Exploiting common use of a well-known brand name

examples

Canon leveraged its brand name in photographic equip in the copyingequipment market;

Sony: from consumer electronics to videogames consoles (Playstation)

Besides brands, sharing other resources (e.g., supply chain management systems) that support corresponding value chain activities across businesses

Example

Dell Computers leveraged its network of PC input suppliers(microprocessors, disk drives, memory chips, flat-panel display) in the the LCD TV products



Engaging in cross-business collaboration and knowledge sharing to create new competitively valuable resources and capabilities

Example

Cable TV firms entered high-speed Internet TV (via cablemodems) and developed new capabilities and new services(e.g. Voice over IP technology, VoP)

A case in point: Kingston Communications (UK)


© McGraw-Hill Education.

Related Businesses and Strategic Fit (FIGURE 8.1, Reading package, p. 59).

Related diversificationOther benefits (besides economies of scope/cost reduction)Product differentiation and greater customer’s

willingness to pay:

example - Google: a bundled offer of ad listings and cloud computing services


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Builds more shareholder value

than owning a stock portfolio

Yields value in the application

of specialized resources and

capabilities

Requires that management take internal

actions to realize them

Capturing the Cross-Business Strategic-Fit Benefits of Related Diversification

Kraft-Heinz merger


Kraft and Heinz merger (2015)

The third largest prepackaged food and beverages firm in North America

Strategic fit

Cross-business value chain activities and resourcesimilarities:Shared ingedients: Milk, sugar, salt …

Shared production and packaging operations

Complete integration of distribution channels and transportation net: Efficiency and speed


Kraft-Heinz mergerKraft could use Heinz’s global distribution network and brand

Greater bargaining power with suppliers

Greater bargaining power with retail stores

Coordinated marketing campaigns

Combined R&D


Unrelated diversification

Businesses are not similar … conglomerates

Unrelated diversification can create value to shareholders by leveraginggeneral resources and capabilities across diverse businesses

Reputation (umbrella brand)

Access to financial markets, governance mechanisms, top management expertise, budgeting and financial control systems, legaland administrative infrastructure, risk management

Business development skills, management development processes, HRM and incentive systems


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Corporate parenting capabilities

nurturing, guiding, governing diverse businesses

sharing or transferring general resources and capabilitiesacross businesses


Examples


GE umbrella brand GE Capital, GE medicaldiagnostics etc.

Virgin: from music to airlines, fitness centers and spacetourism

Unrelated diversification



Corporate parenting

Cross-business allocation of financial

resources

Acquiring and restructuring

undervalued companies

Using an Unrelated Diversification Strategy to Pursue Value

Diversification and restructuringRestructuring

Overhauling and streamlining the activities of a business:

combining plants with excess capacity

selling off underutilized assets

reducing unnecessary expenses, and otherwise improving the productivity and profitability of the firm.


Limits of unrelated diversification


Limited Competitive Advantage Potential

Demanding Managerial

Requirements

Monitoring and maintaining

the parenting advantage

Lack of cross-business

strategic-fit benefits

Unrelated Diversification

Strategy


Financial economies

Risk reduction and

performance stability

Rapid GrowthPersonal

managerial motives

Typical motivations for Unrelated Diversification

Unrelated diversification, financialeconomies and portfolio planning

Firm as a ‘banker’

Internal capital market: financial capital (inefficient external market or credit rationing)

Informational advantage




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