CORPORATE LEVEL STRATEGY: RELATED & UNRELATED

DIVERSIFICATION

BUSINESS 189

SPRING 2007

DR. MARK FRUIN

H & V INTEGRATION VERSUS DIVERSIFICATION

• CHAPTERS 9 & 10 NEED TO BE UNDERSTOOD TOGETHER

• THEY CONSIDER THE SAME ISSUE, CORPORATE LEVEL (MULTIBUSINESS) STRATEGIES FROM DIFFERENT ANGLES

• THE CONTEXT IS WHAT WE ARE FAMILIAR WITH - A U.S. POINT OF VIEW

• HOWEVER, DIFFERENT STORIES IN JAPAN, KOREA, CHINA, INDIA, THAILAND, AND ELSEWHERE– BECAUSE DIVERSIFICATION ACHIEVED THROUGH

BUSINESS GROUPS AND INTERFIRM NETWORKS

3 GROWTH STRATEGIES

• DO IT YOURSELF (INTERNAL GROWTH)

• BUY IT (ACQUISITION)

• PARTNER (SHORT- TO LONG-TERM COOPERATIVE STRATEGIES)

DISTINCTIVE v. CORE COMPETENCIES

• DISTINCTIVE COMPETENCIES– SOMETHING THAT YOU DO WELL AND

YOUR RIVALS DON’T DO AS WELL

• CORE COMPETENCIES: VERY FEW DISTINCTIVE COMP-->CORE COMP– EXPANDABILITY– TRANSFERABILITY– INIMITABILITY

ESTABLISHING A COMPETENCY AGENDA: Prahalad & Hamel, p. 339

• INDUSTRY VS COMPETENCY AXES (NOW/EXISTING & FUTURE)

• 2 X 2: EXISTING VS NEW – PREMIER PLUS 10 (NEW COMPETENCE/

EXISTING INDUSTRY: BUILD & EXTEND)– MEGA-OPPORTUNITIES (NEW INDUSTRY/NEW

COMPETENCE - NIRVANA)– WHITE SPACES (NEW INDUSTRY/ EXISTING

COMPETENCY: TRANSFER FROM OLD TO NEW)– FILL IN THE BLANKS (IMPROVE & LEVERAGE:

EXISTING/EXISTING)

INCREASING PROFITABILITY THRU DIVERSIFICATION

• PERFORM ONE OR MORE VALUE CREATING FUNCTIONS AT LOWER COSTS & HIGHER QUALITY (FL STRATEGY)

• PERFORM ONE OR MORE VALUE CREATING FUNCTIONS TO ALLOW DIFFERENTIATION AND GIVE BETTER PRICING OPTIONS (LB STRATEGY)

• HELP THE FIRM BETTER MANAGE INDUSTRY RIVALRY (LB STRATEGY)

• IN OTHER WORDS, USE STRATEGY STACK TO STRATEGIC ADVANTAGE

INCREASING PROFITABILITY THROUGH DIVERSIFICATION

• TRANSFER COMPETENCIES ACROSS INDUSTRIES (TECH & MKT RELATED DIVERSIFICATION)

• LEVERAGE COMPETENCIES (MORE INTANGIBLE THAN TANGIBLE: GOOD FINANCIAL/HR SKILLS)

• SHARING RESOURCES: ECONOMIES OF SCOPE• PRODUCT BUNDLING: OFFERING

COMPLEMENTARY BUT UNRELATED GOODS & SERVICES– WINTEL IS MOST FAMOUS EXAMPLE– FOOD & ENTERTAINMENT AT NIGHTCLUB

MULTIBUSINESS MODEL

• HOW TO TRANSFER & LEVERAGE COMPETENCIES ACROSS INDUSTRIES– FIRST, A BUSINESS MODEL FOR EACH

INDUSTRY IN WHICH FIRM COMPETES• HOW TO SUCCEED IN THIS BUSINESS

– SECOND, HIGHER LEVEL MODEL THAT JUSTIFIES ENTRY INTO DIFFERENT INDUSTRIES

• HOW TO COMBINE MANAGEMENT OF SEVERAL DIFFERENT BUSINESSES

FREE CASH FLOW MEASURE

• FOR SOME, DIVERSIFICATION CHOICES ARISE WHEN FIRM GENERATES CASH IN EXCESS OF THAT REQUIRED TO FUND INVESTMENTS IN EXISTING BUSINESS/ES & TO MEET DEBT REQUIREMENTS

• OF COURSE, BY THIS DEFINITION, DIVERSIFICATION OPPORTUNITIES ARISE WHEN EXCESS RESOURCES OF ANY SORT ARE AVAILABLE, NOT JUST FREE CASH

TRANSFERRING COMPETENCIES• IS NOT EASY• BECAUSE THEY ARE OFTEN STICKY IN

VARIOUS WAYS (E.G., SITE- & TIME- SPECIFIC)• NON-EMBEDDED VERSUS EMBEDDED

– “HYBRIDIZATION” VS. TRUE HYBRIDS

– HYBRIDS HAVE SUPERIOR TRAITS TO BOTH PARENTS

• ECONOMIES OF SCOPE ARISE WHEN TWO OR MORE BUSINESS UNITS SHARE RESOURCES, EITHER TANGIBLE OR INTANGIBLE– BRAND EQUITY

MULTIPOINT COMPETITION

• WHEN COMPANIES COMPETE IN DIFFERENT INDUSTRIES (AT THE SAME TIME & WITH THE SAME RIVALS)– MANAGE RIVALRY– ATTACKS IN ONE INDUSTRY ARE MET OR

MATCHED IN ANOTHER– MOSTLY, MOVES ADJUST PRICES; SOMETIMES

REWORK PRODUCT OFFERINGS– WHY ARE MOVES MOSTLY MINOR?

GENERAL ORGANIZATIONAL COMPETENCIES

• RARE, CROSS-ORG COMPETENCIES (RELATED TO IDEA OF GEN. MGMT SKILLS)– ENTREPRENEURIAL CAPABILITIES– ORGANIZATIONAL DESIGN SKILLS (SYSTEMS,

STRUCTURES & CONTROL CAPABILITIES)

– SUPERIOR STRATEGIC CAPABILITIES (INTANGIBLE GOVERNANCE SKILLS)

– (LEADERSHIP AND/OR ABILITY TO SEIZE THE MOMENT)

TYPES OF DIVERSIFICATION

• RELATED– CONSTRAINED (MARKET-BASED)– LINKED (TECHNOLOGY-LINKED)

• UNRELATED– CONGLOMERATES– BUSINESS GROUPS

LIMITS TO DIVERSIFICATION

• BUREAUCRATIC COSTS – NUMBER OF BUSINESSES– COORDINATION AMONG BUSINESSES

• LIMITS TO EFFECTIVE GOVERNANCE• CULTURE FALLS APART; THERE IS NO

CENTER• (FOCUS NEEDED TO SUCCEED IN

INDIVIDUAL BUSINESSES IS LOST)

SONY’S WEB OF CORPORATE-LEVEL STRATEGY

• FIGURE ON p. 357• SONY’S CORE INDUSTRY OF CONSUMER

ELECTRONICS• SURROUNDED BY

– RELATED DIVERSIFICATION (COMPUTERS, CELL PHONES)

– UNRELATED DIVERSIFICATION (PLAY STATION)– BACKWARD INTEGRATION (COMPONENTS)– FORWARD INTEGRATION (MUSIC, MOVIES)

• WHAT DO YOU THINK OF THIS FIGURE?

INTERNAL NEW VENTURES• A KIND OF DIVERSIFICATION• WHY NEW VENTURES FAIL

– MARKET ENTRY TOO SMALL A SCALE• LARGE SCALE ENTRY A PRECONDITION OF

SUCCESS, ESP. FOR LARGE FIRMS

– POOR COMMERCIALIZATION SKILLS• CROSSING THE CHASM (TWICE)

– POOR MANAGEMENT OF VENTURE PROCESS• TOO MANY NEW VENTURES STARTED• MISUNDERSTAND STRATEGIC CONTEXT• UNDERESTIMATE TIME & COSTS INVOLVED• POOR IMPLEMENTATION/EXECUTION

GUIDELINES FOR SUCCESSFUL INTERNAL VENTURING

• UNDERSTAND BOTH THE “R” & THE “D” OF R&D

• DOWNSTREAM LINKS TO MARKETING & SALES ARE CRITICAL DURING “D”

• KEY OBJECTIVES FOR STRATEGIC SUCCESS ARTICULATED EARLY & OFTEN

• CROSS-FUNCTIONAL DEVELOPMENT TEAMS

• KNOW WHEN TO HOLD’EM & FOLD’EM

VENTURE STAGES-PHASES-STEPS

• 30 + STEPS FROM START TO STOP

• DOES NOT STANDARDIZE CYCLE TIMES - THESE VARY BY INDUSTRY?

• DOES NOT ESTIMATE PHYSICAL AND PSYCHOLOGICAL COSTS

• MOST FIRMS DO NOT WIND UP FINISHING WHAT THEY SET OUT TO DO

• INITIAL RESOURCES, INCLUDING HR, ARE NOT WHAT IS NEEDED ALONG WAY

ACQUISITIONS STRATEGY• GUIDELINES FOR SUCCESS

– IDENTIFICATION & SCREENING– BIDDING STRATEGY (AVOID BIDDING WARS)– INTEGRATION (PRE- & POST-INTEGRATION)– LEARNING FROM EXPERIENCE (OF MAKING

ACQUISITIONS; LEARNING FROM ACQUIRED FIRMS; VICARIOUS LEARNING (OTHERS DOING THE SAME THING)

PORTER’S GUIDELINES

• 3 TESTS– ATTRACTIVE INDUSTRY?– RECOVER INITIAL INVESTMENT?– BETTER OFF WITH (OR WITHOUT)

• 4 STRATEGIES– SHARING ACTIVITIES (POOLING)– RESTRUCTURING– SKILLS TRANSFER– FINANCIAL MANAGEMENT

RESTRUCTURING

• DIVERSIFICATION DISCOUNT– THE WHOLE IS NOT MORE THAN THE SUM OF

THE PARTS

• EXIT STRATEGIES– DIVESTMENT

• MARKET-BASED VS MANAGEMENT BUYOUT (MBO)

– HARVEST AND THEN LIQUIDATE• DELAYED DIVESTMENT

ALTERNATIVES TO FIRM-LEVEL DIVERSIFICATION

• BUSINESS GROUPS– HOLDING COMPANY MODEL (EUROPE)– FAMILY-BASED IN EMERGING ECONOMIES

• INTERFIRM NETWORKS– INTERMARKET AND VERTICAL

• CONSORTIUMS– EASIEST AT PRE-COMPETITIVE STAGES

• INDUSTRIAL DISTRICTS– STRENGTH & DIVERSITY BY BEING THERE

PHILIPS V. MATSUSHITA• WHAT KIND OF C-L STRATEGIES ARE

BEING DEPLOYED• DISSIMILAR WHEN IN DIFFERENT

INDUSTRIES BUT SIMILAR IN THE SAME INDUSTRIES?

• WHAT IS PHILIPS GOOD AT? MATSUSHITA?

• WHAT FACTORS ARE LIKELY TO INFLUENCE SUCCESS OF C-L STRATEGIES?