North South University

School of Business & Economics (SBE)

EMB 690 Strategic Management

Fall Semester, 2021
Week 7
 Today’s lecture outline

Generic competitive strategies

Corporate-level strategy
Types of Diversification
Related diversification
Unrelated diversification
 Fig. From Thinking Strategically about the
Company’s Situation to Choosing a Strategy:
Where are we at?
 Business Model
A company’s Business Model is the ‘Plan of doing
business related to its cost and revenue’ or ‘How to
make money in this business’?
Both start-up ventures and established companies need
a well defined business model to take new products and
services.
Process of business model design is part of business
strategy. Company’s strategy is complementary to its
business model.
Implementation of company’s business model is a part
of Business Operations (organization structure, human
resources, sequence of operations and systems e.g.
information technology architecture, production lines)
 Strategic Options

Withdraw- close business; sell?

Maintain current position- defend?

Grow- how?
 Corporate-level Strategy

Corporate-level strategy is an action

taken to gain a competitive advantage
through the selection & management of
a mix of businesses competing in several
industries or product markets
 Corporate-Level Strategy
How do we sustain competitive advantages in our
current business? What new businesses or industries do
we wish to enter?

Corporate strategy is used to identify:

1. Businesses/industries firm should be in
2. Value creation activities firm should perform
3. Methods to enter/exit businesses/industries to
maximize long-run profitability

Companies must adopt a long-term perspective

in formulating a corporate-level strategy.
 A Primary approach to
corporate-level strategy is
diversification;
 Diversification
Diversification is a form of growth strategy;
Growth strategies involve a significant
increase in performance objectives (usually
sales or market share) beyond past levels of
performance;
Diversification strategies are used to expand
firms' operations by adding markets, products,
services, or stages of production to the
existing business;
The purpose of diversification is to allow the
company to enter lines of business that are
different from current operations;
 Diversification
Fortune 500 companies with >25%
revenues from diversified activities;
1950 38%
1974 63%
1988 47%
2021 ≥
WHY??
Diversification
When?
Opportunity or threat
Why?
Tax laws
Diversification
Low performance
Uncertain future cash flows
Risk reduction
How?
Horizontal, Vertical or strategic outsourcing
 DIVERSIFICATION: HORIZONTAL, VERTICAL
OR STRATEGIC OUTSOURCING?

Diversification strategies can also be classified

by the direction of the diversification.
 Horizontal integration
 Vertical integration
 Strategic outsourcing
Repositioning & Redefining a Business Model

oHorizontal Integration: Acquiring/merging

with industry competitors. … is a strategy
where a company acquires, mergers or takes
over another company in the same industry
value chain.
oFor example, Disney merging with Pixar (movie
production), Exxon with Mobile (oil production,
refining & distribution) or the infamous Daimler
Benz & Chrysler merger (car developing,
manufacturing & retailing).
The diagram illustrates HI in manufacturing industry
Repositioning & Redefining a Business Model
oVertical Integration: Expanding operations
backward into industry that produces inputs
for company or forward into industry that
distributes company’s products (entering new
industries to support the business model of its ‘core’
industry).
oFor example, Avon pursued a backward form
of vertical integration by entering into the
production of some of its cosmetics. Forward
diversification occurs when firms move closer
to the consumer in terms of the production
stages.
The diagram illustrates vertical integration
 Repositioning & Redefining a Business Model
o Strategic Outsourcing: Letting some value creation
activities within business be performed by
independent entity.
o The opposite of integration is outsourcing value-
creation activities to subcontractors.
o In recent years there has been a clear move among
many enterprises to outsource non-core or non-
strategic activities.
o Any function can be outsourced, if it is not critical to
a firm’s success (is not one of its distinctive competencies).
o For example, Manufacturing, Customer service,
Business development & sales, Marketing & advertising,
Accounts receivable collections.
 Why? … Reasons for diversification
Value-creating diversification
 Economies of scope (A reduction in cost made when it is less
expensive to produce two products together than it is to produce
each product separately).
 Sharing activities.
 Transferring core competencies.
 Market power.
 Blocking competitors through multipoint competition.
 Efficient internal capital allocations.
 Purchasing other corporations & restructuring their assets
 Financial economies:
o Cost savings through improved allocations of financial
resources.
o Internal information may be source of competitive
advantage.
o Investments inside or outside firm.
Transfer of Competencies at Philip Morris
Sharing Resources at Procter & Gamble
 Types of Diversification …
 Firm earns >30% of its sales volume outside a dominant
business and businesses related to each other classified as
related diversification (Based on transferring/leveraging
competencies, sharing resources, & bundling products):
Economies of scope;
Sharing activities;
Transferring core competencies;
Market power;
Blocking competitors through multi-point competition;
 Firm earns >30% ... but no relationships between businesses
classified as unrelated diversification (Based on only general
organizational competencies to increase profitability of all business units):
Financial economies;
Efficient internal capital allocation;
Business restructuring;
 Related Diversification
Gillette
– Blades & razors
– Toiletries
– Oral-B toothbrushes
– Writing instruments & stationery
– Braun shavers, coffee makers, alarm clocks
– Duracell batteries
 Related Diversification
Pepsico
– Soft drinks (e.g. Pepsi, Mountain Dew)
– Fruit juices (e.g. Tropicana)
– New age & other beverages (e.g. Lipton
ready to-drink (RTD) tea, Starbucks RTD
coffee, bubly™ Sparkling Water)
– Snack foods (e.g. Ruffles, Lays, Doritos)
Coordination Among Related Business Units
 Unrelated Diversification

Samsung
Operations in more than 60 countries
 Electronics
 Machinery & heavy industry
 Automotive (passenger cars, commercial
trucks)
 Chemicals
 Financial services
 Other (e.g. theme parks, hotels, medical
centers, film, music & TV)
Sony’s Web of Corporate-Level Strategy
Levels & types of diversification
Low levels of diversification
Single business More than 95 per
cent of revenue A
comes from a single
business

Dominant business Between 70 & 95 per A

cent of revenue
comes from a single B
business
 Levels & types of diversification
Moderate to high levels of diversification
Related constrained Less than 70 % of
revenue comes from
the dominant A
business, & all
businesses share B C
product, technological
& distribution linkages

Related linked (mixed Less than 70 % of A

related & unrelated) revenue comes from
the dominant
B C
business, & there are
only limited links
between businesses
 Levels & types of diversification
Very high levels of diversification

Unrelated Less than 70 % of A

revenue comes
from the
B C
dominant
business, & there
are no common
links between
businesses
Disadvantages/Limits of Diversification
Conditions = diversification disadvantageous:

1. Changes in Industry/Company
 Unpredictable future
 Willing to divest business units
2. Diversification for the Wrong Reasons
 Clear vision of how value will be created.
 Extensive diversification can reduce profitability.
3. Bureaucratic Costs of Diversification
 Costs are function of number of business units portfolio
 Extent coordination is required to gain benefits.