Corporate Diversification Corporate Level Strategies  Detail actions taken to gain a competitive advantage through the selection and management of a mix of businesses compe

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Corporate Diversification Corporate Level Strategies  Detail actions taken to gain a competitive advantage through the selection and management of a mix of businesses compe Powered By Docstoc
					                Corporate 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 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.
              Corporate Diversification

Rationales for Diversification



      Incentives



      Resources                  Diversification




     Managerial
      Motives
                 Corporate 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 Diversification

Incentives to Diversify

       Low profitability or poor industry outlook.

       Uncertainty regarding future cash flows.

       Firm risk reduction – unsystematic business specific risk.
   Firm risk reduction – unsystematic business specific risk.




Risk




         Single    Dominant       Related      Related    Unrelated
        Business   Business     Constrained    Linked     Business


                       Level of Diversification
               Corporate 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 Diversification

Types of Diversification

   Why do large diversified companies have different approaches to
    diversification?

    •   May be due to different economic rationales for diversifying.
    •   May be due to distinctive competencies
    •   Concept of synergy

           - Financial economies – Internal capital market.

           - Vertical economies – Value chain activities.

           - Synergistic economies – Exploit interrelationships across
             business units.
                   Corporate Diversification
Types of Diversification and Variations


                              Multidivisional
                                Structure
                                (M-form)           Unrelated or conglomerate




        Cooperative                                  Competitive
          Form                                         Form

                         Strategic Business-Unit        Related linked
Vertical integration           (SBU) Form
Related constrained
                    Corporate Diversification
Types of Diversification

   Vertical integration strategies

    •   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

                    Full integration            Partial integration

    •   Benefits?
Vertical Integration


                               President

             Government                              Legal
               Affairs                               Affairs



                               Corporate
Corporate        Strategic                        Corporate    Corporate
                                Human
R&D Lab          Planning                         Marketing     Finance
                               Resources


Product                         Product                         Product
Division                        Division                        Division
                             Vertical economies
                    Corporate Diversification
Types of Diversification

   Horizontal diversification strategies

    •   Subset of related-constrained strategy.

    •   Firm acquires another firm in the same industry.

    •   Examples: Continental - Eastern, Compaq – HP.
    •   Benefits?

          - Decreases competition

          - Facilitates market power and economies of scale
                  Corporate Diversification
Types of Diversification

   Related constrained strategies

    •   Sharing activities:

         Sharing activities often lowers costs or raises differentiation.
         Sharing activities can lower costs if it:

                - achieves economies of scale.
                - boosts efficiency of utilization.
                - helps move more rapidly down the learning curve.

         Sharing activities can enhance potential for or reduce the
          cost of differentiation.

         Must involve activities that are crucial to competitive advantage.
                 Corporate Diversification
Types of Diversification

   Related constrained strategies

    •   Transferring core competencies:

         Exploits 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 leads to competitive advantage
          only if the similarities among business units meet the following
          conditions:
                Corporate Diversification
Types of Diversification

   Related constrained strategies

          - activities involved in the businesses are similar enough that sharing
            expertise is meaningful.

               - transfer of skills involves activities which are important to
                 competitive advantage.

               - the skills transferred represent significant sources of competitive
                 advantage for the receiving unit
                 Corporate Diversification
Types of Diversification

   Related constrained strategies

    •   Synergies based on interrelationships:

         Tangible interrelationships:

             - Sources of tangible interrelationships
                  * Marketing
                  * Production
                  * Technological (R&D)
                  * Procurement
                  * Infrastructure.

             - Costs of achieving tangible interrelationships

                  * Coordination
                  * Compromise
                  * Inflexibility
                 Corporate Diversification
Types of Diversification

   Related constrained strategies

    •   Synergies based on interrelationships:

         Intangible interrelationships:

              - Sharing of know-how, or transferring of skills that have already
                been paid for.
              - Same generic strategy
              - Same type of buyer
              - Similar configuration of value chain
              - Similar important value activity
              - Example: Phillip Morris acquisition of Kraft and Miller Brewing.
Related Constrained Strategy

                                 President

              Government                                  Legal
                Affairs                                   Affairs


                                 Corporate
  Corporate        Strategic                           Corporate    Corporate
                                  Human
  R&D Lab          Planning                            Marketing     Finance
                                 Resources


 Product                          Product                            Product
 Division                         Division                           Division

                               Synergistic economies
                 Corporate 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.
  Related Linked Strategy
                                        President


   Corporate          Strategic        Corporate         Corporate           Corporate
   R&D Lab            Planning          HRM              Marketing            Finance



            SBU                           SBU                              SBU


  Division         Division        Division      Division        Division         Division
           Division                       Division                         Division


Vertical & Synergistic economies
                                                     Financial economies
                 Corporate Diversification
Types of Diversification

   Unrelated diversified strategies

    •   Efficient internal capital market

         Firms using this strategy frequently use acquisitions.
                  - 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 Diversification
Types of Diversification

   Unrelated diversified strategies

    •   Efficient internal capital market

         Scope of operating divisions.
            - 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




                                     President


             Legal
                                     Finance              Auditing
             Affairs



                  Division      Division   Division   Division


      Financial economies

				
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