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 in
Crafting 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

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 Examples of Related Diversification?
Proctor and Gamble (distribution/marketing)
 Provides branded consumer goods products worldwide
 3 GBUs
 Beauty GBU
 Beauty segment
 Grooming segment
 Health and Well-Being GBU
 Health Care segment
 Snacks, Coffee, and Pet Care segment
 Household Care GBU
 Fabric Care and Home Care segment
 Baby Care and Family Care segment

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 Examples of Related Diversification?
Johnson and Johnson
 Engages in the research and development, manufacture, and sale of various
products in the health care field worldwide
 3 segments
 Consumer segment
 Products for baby care, skin care, oral care, wound care, and women’s
health care fields, as well as nutritional and over-the-counter
pharmaceutical products
 Pharmaceutical segment
 Products for anti-infective, antipsychotic, cardiovascular, contraceptive,
dermatology, gastrointestinal, hematology, immunology, neurology,
oncology, pain management, urology, and virology
 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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 What is Unrelated Diversification?
 Involves diversifying into businesses with
 No strategic fit
 No meaningful value chain
relationships
 No unifying strategic theme

 Approach is to venture into “any business

in which we think we can make a profit”
 Firms pursuing unrelated diversification are
often referred to as conglomerates
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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,
hydrolics, golf carts
 Finance – aircraft finance, asset-based
lending, distribution finance, golf finance, resort
finance

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Diversification and Shareholder Value

 Related Diversification

 A strategy-driven approach to creating

shareholder value

 Unrelated Diversification

 A finance-driven approach to creating

shareholder value

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 Combination Related-Unrelated
Diversification Strategies
 Dominant-business firms
 One major core business accounting for 50 - 80 percent of
revenues, with several small related or unrelated
businesses accounting for remainder
 Narrowly diversified firms
 Diversification includes a few (2 - 5) related or unrelated
businesses
 Broadly diversified firms
 Diversification includes a wide collection of either related
or unrelated businesses or a mixture
 Multibusiness firms
 Diversification portfolio includes several unrelated groups
of related businesses
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Fig. 9.4: Identifying a Diversified Company’s Strategy

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 Strategies for Entering
New Businesses

Acquire existing company

Internal start-up

Joint venture/strategic partnerships

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 Evaluating the Strategy of a Diversified
Company

Step 1: Assess long-term attractiveness of each industry

firm is in
Step 2: Assess competitive strength of firm’s business
units
Step 3: Check competitive advantage potential of cross-
business strategic fits among business units
Step 4: Check whether firm’s resources fit requirements
of present businesses
Step 5: Rank performance prospects of businesses and
determine priority for resource allocation
Step 6: Craft new strategic moves to improve overall
company performance
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Strategic Options for Firms Already
Diversified

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 Why Firms Expand Globally

 Gain access to new customers

 Achieve lower costs and enhance
competitiveness
 Capitalize on core competencies
 Spread business risk across wider market
base
 Access to raw materials
 Exchange rate fluctuations
 Trade policies – tariffs

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 Competing Internationally Versus
Competing Globally
 International
 Compete in a select few foreign markets

 Global
 Has or pursue a market presence on most
continents and in all major countries

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 Cross Country Differences

 Cultures and lifestyles

 Market demographics
 Market conditions
 Growth rate
 Distribution systems
 Need for responsiveness
 Location advantages
 Exchange rates
 Host government restrictions

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 Two Primary Patterns
of International Competition

Multi-country
Competition

Global
Competition
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Strategy Options for International Markets
 Exporting
 Maintain national production and export
goods to foreign markets
 Licensing
 Allow foreign firms to produce and
distribute your product or use your
technology
 Franchising

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Strategy Options for International Markets
 Strategic Alliances and Joint Ventures
 Combine resources with foreign
partner(s)
 Multicountry
 Think-local, act-local
 Tailor strategy to each country
 Global
 Think-global, act-global
 Pursue same basic strategy worldwide

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 Building Competitive Advantage
in Foreign Markets
 Locating activities
 Transferring of competencies to foreign
markets
 Coordinating cross-border activities
 Profit sanctuaries
 Cross-market subsidization

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