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Chapter Ten
Corporate-Level Strategy:
Formulating and
Implementing Related and Unrelated
Diversification
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Corporate-Level Strategy should allow a company to perform the value creation functions at lower cost or in a way that allows for differentiation and premium price.
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
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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
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Expanding Beyond a Single Industry
BUT staying within a single industry: Can be dangerous if the industry matures and goes into
decline May cause firms to miss the opportunity to leverage their
distinctive competencies in new industries Can cause firms to develop a 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 the 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.
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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:
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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
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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.
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Transferring Competencies
• The competencies transferred must involve activities that are important for establishing competitive advantage
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.
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Transfer of Competencies at Philip Morris
Figure 10.2
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• 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
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• Economies of scope arise when business units are able to effectively able to pool, share, and utilize expensive resources or capabilities:
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
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Sharing Resources at Procter & Gamble
Figure 10.3
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• Allows customers to reduce their number of suppliers for convenience and cost savings.
• Examples: telecommunications and medical equipment industries.
Use product bundling to differentiate products and expand product lines in order to satisfy customers’ needs for a package of related products.
Using Product Bundling
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• 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 in check a competitor that has either entered the industry or has the potential to do so.
Managing Rivalry
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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. Superior strategic capabilities – effectively manage the
managers of the business units and helping them think through strategic problems
General organizational competencies are skills that transcend individual functions or business units.
Utilizing General Organizational Competencies
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Two 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 chainBased 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
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Commonalities Between Value Chains of Three Business Units
Figure 10.4
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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:
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Coordination Among Related Business Units
Figure 10.5
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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
The choice of strategy depends on a comparison of the benefits of each strategy versus the cost of pursuing it:
Firms may pursue both strategies simultaneously
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Sony’s Web of Corporate-Level Strategy
Figure 10.6
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Entry Strategies to Implement the 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
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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
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Scale of Entry Versus Profitability
Figure 10.7
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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:
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The Attractions of Acquisitions
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:
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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
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Guidelines for Successful Acquisition
Target identification and preacquisition screening for: • Financial position• Distinctive competencies and competitive advantage• Changing industry boundaries• Management capabilities• 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
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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
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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.