1 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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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
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,