corporate diversification
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Corporate DiversificationCorporate Diversification
Corporate Level Strategies
Detail actions taken to gain a competitive advantage through the selection
and management of a mix of businesses competing in several industries
or product markets.
Relevant questions:
• What business should the firm be in?
• How should the corporate office manage its group of businesses?
Corporate DiversificationCorporate Diversification
Levels and Types of Diversification Single-business firm - 100% of revenue comes from a single business unit.
Dominant firm - 70% - 95% of revenue comes from a single business unit.
Related-Constrained - <70% of revenues from dominant business; all businesses share product, technological and distribution linkages.
Related-Linked – More than 30% but less than 70% of revenues come from outside the core business.
Unrelated-Diversified (conglomerate) - More than 70% of firm sales come from outside the core business.
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
DiversificationDiversification
Rationales for Diversification
Corporate DiversificationCorporate Diversification
Corporate DiversificationCorporate Diversification
Incentives to Diversify
Anti-trust and tax laws.
• Cellar-Kefauver Act - Firms cannot acquire firms in related businesses.
• Tax rate differences
- Before 1986, higher taxes on dividends favored spending retained earnings on acquisitions.
- After 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of tax deductible interest payments
Corporate DiversificationCorporate Diversification
Incentives to Diversify
Low profitability or poor industry outlook.
Uncertainty regarding future cash flows.
Firm risk reduction – unsystematic business specific risk.
RiskRisk
Level of DiversificationLevel of Diversification
DominantBusiness
UnrelatedBusiness
RelatedConstrained
SingleBusiness
RelatedLinked
Firm risk reduction – unsystematic business specific risk.
Corporate DiversificationCorporate Diversification
Resources
Despite incentives, managers need the resources to diversify.
Value creation is determined more by the appropriate use of resources than by incentives.
Managerial Motives
Diversification increases firm size, size is positively correlated with compensation.
Diversification reduces employment risk.
Corporate DiversificationCorporate Diversification
Types of Diversification
Why do large diversified companies have different approaches to diversification?
- Financial economies – Internal capital market.
- Vertical economies – Value chain activities.
- Synergistic economies – Exploit interrelationships across business units.
• May be due to different economic rationales for diversifying.
• May be due to distinctive competencies
• Concept of synergy
MultidivisionalMultidivisionalStructureStructure(M-form)(M-form)
Strategic Business-UnitStrategic Business-Unit(SBU) Form(SBU) Form
CooperativeCooperativeFormForm
CompetitiveCompetitiveFormForm
Corporate DiversificationCorporate Diversification
Types of Diversification and Variations
Vertical integrationRelated constrained
Related linked
Unrelated or conglomerate
Corporate DiversificationCorporate Diversification
Types of Diversification
Vertical integration strategies
Full integration
• Generally a dominant business.
• Firm enters into one or more businesses necessary to the manufacture and distribution of its own products.
• Forward and/or backward integration.
• Different degrees of integration
Partial integration
• Benefits?
GovernmentGovernmentAffairsAffairs
LegalLegalAffairsAffairs
CorporateCorporateR&D LabR&D Lab
StrategicStrategicPlanningPlanning
CorporateCorporateHumanHuman
ResourcesResources
CorporateCorporateMarketingMarketing
CorporateCorporateFinanceFinance
ProductProductDivisionDivision
ProductProductDivisionDivision
ProductProductDivisionDivision
PresidentPresident
Vertical economies
Vertical Integration
Corporate DiversificationCorporate Diversification
Types of Diversification
Horizontal diversification strategies
• Subset of related-constrained strategy.
• Firm acquires another firm in the same industry.
• Benefits?
- Decreases competition
- Facilitates market power and economies of scale
• Examples: Continental - Eastern, Compaq – HP.
Corporate DiversificationCorporate Diversification
Types of Diversification
Related constrained strategies
Sharing activities often lowers costs or raises differentiationSharing activities often lowers costs or raises differentiation.
Sharing activities can lower costs if it:Sharing activities can lower costs if it:
- achieves economies of scale.- achieves economies of scale. - boosts efficiency of utilization. - boosts efficiency of utilization. - helps move more rapidly down the learning curve- helps move more rapidly down the learning curve.
• Sharing activities:
Sharing activities can enhance potential for or reduce the Sharing activities can enhance potential for or reduce the cost of differentiation.cost of differentiation.
Must involve activities that are crucial to competitive advantage.Must involve activities that are crucial to competitive advantage.
Corporate DiversificationCorporate Diversification
Types of Diversification
Related constrained strategies
Exploits interrelationships among divisionsExploits interrelationships among divisions.
Start with value chain analysis
- identify ability to transfer skills or expertise among similar value chains. - exploit ability to transfer activities
• Transferring core competencies:
Transferring core competencies leads to competitive advantage only if the similarities among business units meet the following conditions:
Corporate DiversificationCorporate Diversification
Types of Diversification
Related constrained strategies
- activities involved in the businesses are similar enough that - activities involved in the businesses are similar enough that sharing sharing expertise is meaningful.expertise is meaningful.
- transfer of skills involves activities which are important transfer of skills involves activities which are important toto competitive advantage.competitive advantage.
- the skills transferred represent significant sources of the skills transferred represent significant sources of competitivecompetitive advantage for the receiving unitadvantage for the receiving unit
Corporate DiversificationCorporate Diversification
Types of Diversification
Related constrained strategies
Tangible interrelationships: Tangible interrelationships:
• Synergies based on interrelationships:
* * Marketing* Production* Technological (R&D)* Procurement* Infrastructure.
- Sources of tangible interrelationships- Sources of tangible interrelationships
- Costs of achieving tangible interrelationships
* Coordination* Compromise* Inflexibility
Corporate DiversificationCorporate Diversification
Types of Diversification
Related constrained strategies
Intangible interrelationships: Intangible interrelationships:
• Synergies based on interrelationships:
- Sharing of know-how, or transferring of skills that have already Sharing of know-how, or transferring of skills that have already been paid for.been paid for.- Same generic strategy- Same generic strategy- Same type of buyer- Same type of buyer- Similar configuration of value chain- Similar configuration of value chain- Similar important value activity- Similar important value activity- Example: Phillip Morris acquisition of Kraft and Miller Brewing.- Example: Phillip Morris acquisition of Kraft and Miller Brewing.
GovernmentGovernmentAffairsAffairs
LegalLegalAffairsAffairs
CorporateCorporateR&D LabR&D Lab
StrategicStrategicPlanningPlanning
CorporateCorporateHumanHuman
ResourcesResources
CorporateCorporateMarketingMarketing
CorporateCorporateFinanceFinance
ProductProductDivisionDivision
ProductProductDivisionDivision
ProductProductDivisionDivision
PresidentPresident
Related Constrained Strategy
Synergistic economies
Corporate DiversificationCorporate Diversification
Types of Diversification
Related linked strategies
• Very similar to related constrained except larger and more diversified.
• Related businesses are grouped into Strategic Business Units (SBUs).
Facilitates the realization of synergies within related units and across unrelated ones.
Allows integration of selected businesses as opposed to all businesses in a related constrained firm.
PresidentPresident
CorporateCorporateR&D LabR&D Lab
StrategicStrategicPlanningPlanning
CorporateCorporateHRMHRM
CorporateCorporateMarketingMarketing
CorporateCorporateFinanceFinance
DivisionDivision
DivisionDivisionDivisionDivision
SBUSBU SBUSBU SBUSBU
DivisionDivision
DivisionDivisionDivisionDivision
DivisionDivision
DivisionDivisionDivisionDivision
Vertical & Synergistic economiesFinancial economies
Related Linked Strategy
Corporate DiversificationCorporate Diversification
Types of Diversification
Unrelated diversified strategies
Firms using this strategy frequently use acquisitions.
• Efficient internal capital market
- acquire sound, attractive companies.- acquired units are autonomous.- acquiring corporation supplies needed capital.- portfolio managers transfer resources from units that generate cash to those with high growth potential and substantial cash needs.- add professional management & control to sub-units.- sub-unit managers compensation based on unit results.
Corporate DiversificationCorporate Diversification
Types of Diversification
Unrelated diversified strategies
Scope of operating divisions.
• Efficient internal capital market
- Comparable in terms of performance criteria- Don’t overly concentrate in one business- Buy market leaders- Use wholly owned approach
Acquisition / divestment policies- Be able to maintain control -- Avoid high tech
and service- Avoid unfriendly acquisitions- Divest rather than turnaround- Don’t get into businesses that are difficult to
unload- If problems develop unload early
Unrelated Diversification Strategy
PresidentPresident
LegalLegalAffairsAffairs
FinanceFinance AuditingAuditing
DivisionDivision DivisionDivision DivisionDivision DivisionDivision
Financial economies
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