Corporate Strategy: Diversification, Acquisitions, and Internal New Ventures

Lecture 10

Overview Diversification

The process of adding new businesses to the company that are distinct from its established operations

Vehicles for diversification Internal new venturing

Starting a new business from scratch Acquisitions Joint ventures

Restructuring Reducing the scope of diversified operations by

exiting from business areas

Expanding Beyond a Single Industry Advantages of staying in a single industry

Focus resources and capabilities on competing successfully in one area

Focus on what the company knows and does best Disadvantages of being in a single industry

Danger of the industry declining Missing the opportunity to leverage resources and

capabilities to other activities Resting on laurels and not continually learning

The Multibusiness Model

Develop a business model for each industry in which the company competes

Develop a higher-level multibusiness model that justifies entry into different industries in terms of profitability

The BCG Matrix

Source: Perspectives, No. 66, “The Product Portfolio.” Adapted by permission from The Boston Consulting Group, Inc., 1970.

The Strategic Implications of the BCG Matrix Stars

Aggressive investments to support continued growth and consolidate competitive position of firms.

Question marks Selective investments; divestiture for weak firms or

those with uncertain prospects and lack of strategic fit.

Cash cows Investments sufficient to maintain competitive

position. Cash surpluses used in developing and nurturing stars and selected question mark firms.

Dogs Divestiture, harvesting, or liquidation and industry

exit.

The McKinsey/GE Matrix

Scoring the Matrix

Industry AttractivenessWt Biz 1 Biz 2 Biz 3

Growth 10 7 2 9Buyers 10 0 9 5Barriers 10 8 8 1Rivalry 10 5 9 5Suppliers 10 10 8 2Subs 10 1 5 2Overall 60 30 41 23

Medium High Medium

Limitations on Portfolio Planning Flaws in portfolio planning:

The BCG model is simplistic; considers only two competitive environment factors– relative market share and industry growth rate.

High relative market share is no guarantee of a cost savings or competitive advantage.

Low relative market share is not always an indicator of competitive failure or lack of profitability.

Multifactor models such as McKinsey/GE matrix are better though imperfect.

A Company as a Portfolio of Distinctive Competencies Reconceptualize the company as a

portfolio of distinctive competencies rather than a portfolio of products

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

Existing vs. new competencies Existing industries in which a company

competes vs. new industries

Establishing a Competency Agenda

Increasing Profitability Through Diversification

Transferring competencies Taking a distinctive competence developed in one

industry and applying it to an existing business in another industry

The competencies transferred must involve activities that are important for establishing competitive advantage (Phillip Morris tobacco & beer)

Leveraging competencies (Microsoft iPod clone) Taking a distinctive competency developed by a

business in one industry and using it to create a new business in a different industry

Sharing resources: economies of scope Cost reductions associated with sharing resources

across businesses (Coles Myer)

Increasing Profitability Through Diversification (cont’d) Exploiting general organizational

competencies Competencies that transcend individual

functions or businesses and reside at the corporate level in the multibusiness enterprise

Entrepreneurial capabilities Effective organization structure and

controls Superior strategic capabilities (e.g. Tyco)

Types of Diversification Related diversification

Entry into a new business activity in a different industry that is related to a company’s existing business activity, or activities, by commonalities between one or more components of each activity’s value chain

Unrelated diversification Entry into industries that have no obvious

connection to any of a company’s value chain activities in its present industry or industries

The Limits of Diversification

Related diversification is only marginally more profitable than unrelated diversification

Extensive diversification tends to depress rather than improve profitability

Bureaucratic Costs and Diversification Strategy The costs increases that arise in large, complex

organizations due to managerial inefficiencies Number of businesses in a company’s portfolio

Information problems Monitoring, lost opportunities

Dominant logic Inability to identify the unique profit contribution of a

business unit that shares resources with another unit Sends poor signals – leads to bad decisions Imputation problem, transfer pricing

Limits of diversification Bureaucratic costs place a limit on the amount of

diversification that can profitably be pursued Costs are higher in related diversifications

Guidelines for successful acquisitions

Properly identify acquisition targets and conduct a thorough pre-acquisition screening of the target firm.

Use a bidding strategy with proper timing to avoid overpaying for an acquisition. Hostile or voluntary?

Follow through on post-acquisition integration synergy-producing activities of the acquired firm.

Dispose of unwanted residual acquisition assets.

VALUE ENHANCING!!!

Diversification That Dissipates Value Diversifying to pool risks

Stockholders can diversify their own portfolios at lower costs than the company can

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

Turnaround Strategy

The causes of corporate decline Poor management– incompetence, neglect Overexpansion– empire-building CEO’s Inadequate financial controls– no profit

responsibility High costs– low labor productivity New competition– powerful emerging

competitors Unforeseen demand shifts– major market

changes Organizational inertia– slow to respond to new

competitive conditions

The Main Steps of Turnaround

Changing the leadership Replace entrenched management with new managers.

Redefining strategic focus Evaluate and reconstitute the organization’s strategy.

Asset sales and closures Divest unwanted assets for investment resources.

Improving profitability Reduce costs, tighten finance and performance

controls. Acquisitions

Make acquisitions of skills and competencies to strengthen core businesses.

Guidelines for Successful Internal New Venturing Structured approach to managing internal

new venturing Research 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

Create a new venture culture (e.g. 3M)

Exercises

Dun & Bradstreet AT&T