Section 5

Corporate Level Strategy: Creating

Value through Diversification
Vertical Integration
 Forward or backwards
– Full integration
– Taper integration
 Benefits
– Barrier to entry
– Specialized assets
– Protecting product quality
– Improved scheduling
 Risks
– Costs
– Rapid technological changes
– Demand predictability
Alternatives to Vertical Integration
 Competitive bidding
 Long term contracts or strategic alliances
– Hostage taking
– Credible commitments
– Maintaining market discipline
Outsourcing
 Cost reduction and differentiation
 Hold-ups, scheduling and hallowing out
 Snack Foods Beverage Foods
s

Frito-Lay North America

Frito-Lay International Quaker North America

Pepsi-Cola North America

Gatorade/Tropicana North America
PepsiCo Beverages International
 Snack Foods

Frito-Lay North America

Lay’s Funyuns
Ruffles Sunchips
Doritos Cracker Jack
Santitas Chester’s popcorn
Fritos Grandma’s cookies
Cheetos Munchos
Rold Gold Smartfood
Baken-ets fried pork skins
Oberto meat snacks
 Snack Foods

Frito-Lay International

Bocabits wheat snacks Walkers potato crisps

Crujitos corn snacks Walkers Square potato snacks
Fandangos corn snacks Walkers Monster Munch Corn snacks
Hamkas snacks Miss Vickie’s potato chips
Niknaks cheese sticks Gamesa cookies
Quavers potato snacks Dippas
Sabritas potato chips Sonric’s sweet snacks
Twisties cheese snacks
 Snack Foods

Frito-Lay International

Bocabits wheat snacks Walkers potato crisps

Crujitos corn snacks Walkers Square potato snacks
Fandangos corn snacks Walkers Monster Munch Corn snacks
Hamkas snacks Miss Vickie’s potato chips
Niknaks cheese sticks Gamesa cookies
Quavers potato snacks Dippas
Sabritas potato chips Sonric’s sweet snacks
Twisties cheese snacks
 Beverage
s

Pepsi-Cola North America

Pepsi-Cola Lipton
Mountain Dew Dole
Slice Aquafina
Mug Frappuccino
Sierra Mist SoBe
FruitWorks AMP
 Beverage
s

Gatorade/Tropicana North America

Gatorade
Propel
Tropicana
Dole juices
Beverage
s

PepsiCo Beverages International

Loóza juices and nectars

Copella juices
Frui’Vita juices
Tropicana 100 juices
 Foods

Quaker North America

Quaker Oats Quaker rice cakes and granola bars

Cap’n Crunch cereal Rice-A-Roni side dishes
Life cereal Near East couscous/pilafs
Quisp cereal Aunt Jemima mixes & syrups
King Vitaman cereal Quaker grits
Mother’s cereal
 How are we going
Foods to compete and
gain a competitive
advantage in
each of our
Business Level businesses?
Strategies
Quaker North America

Quaker Oats Quaker rice cakes and granola bars

Cap’n Crunch cereal Rice-A-Roni side dishes
Life cereal Near East couscous/pilafs
Quisp cereal Aunt Jemima mixes & syrups
King Vitaman cereal Quaker grits
Mother’s cereal
Snack Foods Beverage Foods
s

Corporate Level Strategy

1) What businesses do we want to compete in?
2) How do manage effectively across businesses
Where did they go?
Crafting Corporate Strategy
Moves to enter new businesses
Boosting combined performance of the
businesses
Capturing synergies and turning them into
competitive advantages
Establishing investment priorities and steering
resources into business units
How to Diversify?
1) Internal Development - corporate
entrepreneurship
– able to appropriate a larger portion of wealth
– avoids complexities of multiple partners
– time consuming and requires diversity of
organizational capabilities
How to Diversify?
2) Strategic Alliances and Joint Ventures
– entering a new market via the combination of
complementary resources - do more together
– cost reduction
– development/diffusion of technology
Problems with
– appropriate partners - skills and compatibility
– trust and commitment
– communication
Who Makes a Geo?
Geo Storm was actually manufactured by Isuzu.
The Storm is the Isuzu Impulse.
Geo Prizm = Toyota Corolla
Geo Tracker = Suzuki Sidekick
Geo Metro = Suzuki Esteem or Swift w/hatchback
No Geo cars were actually made by General
Motors. They were all imported from foreign
manufacturers.
How to Diversify?
3) Merger & Acquisition - acquisition of
assets and capabilities of another company
– high tech & technology intensive
– access to products
– consolidation
– access to segments
Acquisitions
Reasons of Acquisitions

Increase Market Power

Overcome Entry Barriers

Increased Speed

Lower Risk

Avoid Competition
Acquisitions
Reasons of Acquisitions Problems with Acquisitions

Increase Market Power Integration of two firms

Overcome Entry Barriers Overpayment/Debt

Increased Speed Overestimation of Synergy

Lower Risk Overdiversification

Avoid Competition Managerial energy absorption

Become too large

Substitute for innovation

Acquisitions
Reasons of Acquisitions Problems with Acquisitions Results

Increase Market Power Integration of two firms Poor

Performance
Overcome Entry Barriers Overpayment/Debt

Increased Speed Overestimation of Synergy

Lower Risk Overdiversification

Avoid Competition Managerial energy absorption

Become too large

Substitute for innovation

Who Wins?

Acquired Firm
Shareholders
 Related Diversification at Disney
Entertainment/Production

Theme Parks

Resorts

Entertainment/Broadcasting

Retailing

Cruise Lines
Levels of Diversification (cont.)
Related Diversification - entering product markets
that share some resource or capability
requirements with the current business – horizonal
relationships across businesses
Advantages of related diversification include:
 Leveraging Core Competencies
 Sharing Activities
 Market Power
 Vertical Integration - integration of preceding or
successive productive processes - Shaw Industries
buying a fiber company or floor covering retailer.
Vertical Integration
Benefits
– can not be held hostage – reduces buyer/supplier power
– greater control over operations
– access to new business/technologies
– reduce procurement and sales efforts
Risks
– increased overhead, capital and administrative costs
– loss of flexibility
– unbalanced capacities
– reaction of competitors
 Tyco Electronics
Tyco Telecommunications
Tyco Fire and Security
Tyco Safety Products
Tyco Healthcare
Tyco Plastics
Tyco Adhesives
Tyco Flow Control
Tyco Electrical and Metal Products
Tyco Fire and Building Products
Tyco Infrastructure Services
Tyco
Limits itself to businesses that can be held
strictly accountable for a few key financial
measures
Mature, stable, low-tech industries which face
certain environments and little R&D
investments
Levels of Diversification (cont.)
Unrelated Diversification - few similarities in the
resources and capabilities required among the
firm’s businesses
Conglomerate Diversification - no relatedness
between businesses
Unrelated/Conglomerate
Diversification
Attempts to create value through the management of
vertical relationships among the businesses
Approve plans and budgets, competent legal, financial,
accounting, HR or other support function
Effective control systems
Restructuring - buy low, sell high
– spinoffs
– turnaround
Creating Value through Restructuring

Good, consistent job of making good

investments
Favorable negotiations
Shrewd selling at the top
Shifting investment to high growth/return
businesses
Portfolio analysis
 BCG Growth-Share Matrix
– question marks, dogs, cash cows, stars
 GE- Nine Cell Matrix
Boston Consulting Group Matrix
Relative Market Share

Question
Stars
Marks
Growth
Rate

Cash
Dogs
Cows
 BCG Matrix for PepsiCo - Early 1990s
Relative Market Share

High Taco
Bell
Growth
Rate

10% Pizza
Hut

Frito
Low Lay
Soft
KFC Drinks

High 1.0 Low

 BCG Matrix for PepsiCo - Early 1990s
Relative Market Share

Pizza
Taco Hut
High Bell
Growth
Rate

Frito
5% Lay
KFC
Low Soft
Drinks

High .75 Low

GE 9 Cell Matrix for Pepsico
High Competitive Strengths Low

High
Snack Foods
Attractiveness

Soft Drinks

Low