Chapter Ten

Corporate-Level
Strategy:
Formulating
and
Implementing
Related and
Unrelated
Diversification

Corporate-Level Strategy
Corporate-Level Strategy should allow a company, or one of

its business units, to perform the value-creation functions at lower

cost or in a way that allows for differentiation and premium price.

Corporate strategy is used to identify:

1. Businesses or industries that the company should
compete in
2. Value creation activities which the company should
perform in those businesses
3. Method to enter or leave businesses or industries
in order to maximize its long-run profitability

Companies must adopt a long-term perspective

Consider how changes in the industry and its products,
technology, customers, and competitors will affect its
current business model and future strategies.

Corporate-Level Strategy
of Diversification
Diversification Strategy is the companys decision to
enter one or more new industries (that are distinct from
its established operations) to take advantage of its
existing distinctive competencies and business model.

Types of diversification:
Related diversification
Unrelated diversification

Methods to implement a
diversification strategy:
Internal new ventures
Acquisitions
Joint ventures

Expanding
Beyond a Single Industry
Staying inside a single industry allows a company to:
Focus its resources
Stick to its knitting

BUT a companys fortunes are tied closely to

the profitability of its original industry:

Can be dangerous if the industry matures and goes

decline
May be missing the opportunity to leverage their
distinctive competencies in new industries
Tendency to rest on their laurels and not engage in
constant learning

To stay agile, companies must leverage

find new ways to take advantage of their distinctive
competencies and core business model
in new markets and industries.

into

A Company as a Portfolio of
Distinctive Competencies
Reconceptualize the company as a
portfolio of distinctive
competencies . . . rather than a
products:
portfolio
Consider of
how
those competencies
might be leveraged to create
opportunities in new industries
Existing competencies versus new
competencies that would need to
be developed
Existing industries in which a
company competes versus new
industries

Establishing a
Competency Agenda
Figure 10.1

Source: Reprinted by permission of Harvard Business School Press. From Competing for the Future: Breakthrough Strategies for
Seizing Control of Your Industry and Creating the Markets of Tomorrow by Gary Hamel and C. K. Prahalad, Boston, MA. Copyright
1994 by Gary Hamel and C. K. Prahalad. All rights reserved.

Increasing Profitability
Through Diversification
A diversified company can create value by:
Transferring competencies
among
existing businesses

Leveraging competencies
to create new businesses

Sharing resources

to realize economies of scope

Using product bundling

Managing rivalry

using diversification as a means in one or more industries

Exploiting general organizational competencies

enhance performance within all business units

by
that

Managers often consider diversification when their

company is generating free cash flow with resources in
excess of those needed to maintain competitive advantage.

 Transferring Competencies
Transferring competencies across industries:
taking a distinctive competency developed in one
industry and implanting it in an EXISTING business
unit in another industry
The competencies transferred must involve
activities that are important for establishing
competitive advantage
Tend to acquire businesses related to their
existing activities because of the commonality
between one or more value-chain functions
For such a strategy to work,
the distinctive competency being
transferred must have real strategic value.

Transfer of Competencies
at Philip Morris
Figure 10.2

 Leveraging Competencies
Leveraging competencies: taking a

distinctive competency developed by a business

in one industry and using it to create a NEW
business unit in a different industry
The difference between
leveraging and transferring
competencies is that an entirely
NEW business is created
Different managerial processes
are involved
Tend to use R&D competencies
to create new business
opportunities in diverse areas

 Sharing Resources
Sharing resources and capabilities

across two or more business units in different

industries to realize economies of scope.
Economies of scope arise when
business units are able to effectively
able to pool, share, and utilize
expensive resources or capabilities:
1. Companies that can share resources
have to invest proportionately less
than companies that cannot share.
2. Resource sharing can result in economies of scale.

Economies of scope are possible only when

there are significant commonalities between
one or more value-chain functions.

Sharing Resources
at Procter & Gamble
Figure 10.3

 Using Product Bundling

Use product bundling to differentiate

products and expand products lines in order to

satisfy customers needs for a package of related
products.

Allows customers to reduce

their number of suppliers for
convenience and cost
savings.
Increased value of orders
gives customers increased
commitment and bargaining
power with suppliers.

 Managing Rivalry
Manage rivalry by holding a competitor in
check that has either entered its industry or
has the potential to do so.

Multipoint competition is when

companies compete with each
other in different industries.
Companies can manage rivalry
by signaling that competitive
attacks
in one industry will
be met by
retaliatory attacks in
the
aggressors home industry.
Mutual forbearance from
signaling
may result in less
intense rivalry
and higher industry profits.

 Exploiting General

Organizational Competencies
General organizational competencies are skills of a
companys top managers and functional experts that
transcend individual functions or business units.
These capabilities help each business unit perform
at a higher level than if it operated as an individual
company:
1. Entrepreneurial capabilities encourage risk taking while

managing & limiting the amount of risk undertaken

2. Organizational design create structure, culture, and
control systems that motivate and coordinate employees
3. Superstrategic capabilities effectively manage the
managers of the business units and helping them think through
strategic problems

These managerial skills are often not present,

they are rare and difficult to develop and put into action.

as

Types of Diversification
Related diversification
Entry into a new business activity in a different industry that:
Is related to a companys existing business activity or
activities and
Has commonalities between one or more components of
each activitys value chain
Based on transferring and leveraging competencies, sharing
resources, and bundling products

Unrelated diversification
Entry into industries that have no obvious connection to any
of a companys value-chain activities in its present industry or
industries
Based on using only general organizational competencies to
increase profitability of each business unit

Commonalities Between Value

Chains of Three Business Units
Figure 10.4

Disadvantages and
Limits of Diversification
Conditions that can make diversification
disadvantageous:
1.

Changing Industry and Firm-Specific Conditions

2.

Future success of this strategy is hard to predict.

Over time, changing situations may require businesses
to be divested.

Diversification for the Wrong Reasons

3.

Must have clear vision as to how value will be created.

Extensive diversification tends to reduce rather than improve
profitability.

Bureaucratic Costs of Diversification

Costs are a function of the number of business units in a

companys portfolio, and the
Extent to which coordination is required to gain the benefits.

Coordination Among
Related Business Units
Figure 10.5

Choosing a Strategy
The choice of strategy depends on a comparison of the
benefits of each strategy versus the cost of pursuing it:

Related diversification
When companys competencies can be applied across a
greater number of industries and
Company has superior capabilities to keep bureaucratic
costs under control

Unrelated diversification
When functional competencies have few useful applications
across industries and
Company has good organizational design skills to build
distinctive competencies

Web of corporate level strategy

May pursue both related and unrelated diversification
As well as other strategies that improve long-term profitability

Sonys Web of
Corporate-Level Strategy
Figure 10.6

Diversification That
Dissipates Value
Diversifying to pool risks
Stockholders can diversify their own portfolios at lower costs
than the company can.
This represents an unproductive use of resources as profits
can be returned to shareholders as dividends.
Research suggests that corporate diversification is not an
effective way to pool risks.

Diversifying to achieve greater growth

Growth on its own does not create value.
Business cycles of different industries are inherently difficult
to predict.

Based on a large number of academic studies:

Extensive diversification tends to reduce,

rather than improve, company profitability.

Entry Strategies to
Implement Multibusiness Model
Various entry strategies may be employed based on
the companys competencies and capabilities:

Internal New Ventures

Company has a set of valuable competencies in its existing

businesses.
Competences leveraged or recombined to enter new business
areas.

Acquisitions

Company lacks important competencies to compete in an area.

Company can purchase an incumbent company that has those
competencies at a reasonable price.

Joint Ventures

Company can increase the probability of success by teaming

up with another company with complementary skills.
Joint ventures are preferred when risks and costs of setting up
a new business unit are more than company can assume.

 Pitfalls of New Ventures

Scale of entry
Large-scale entry is initially
more expensive than smallscale entry, but it brings
higher returns in the long run.

Commercialization
Technological possibilities
should not overshadow
market needs and opportunities.

Poor implementation
Demands on cash flow
Need clear strategic objectives
Anticipate time and costs

Scale of Entry and Profitability

Figure 10.7

 Guidelines for Successful

Internal New Venturing

Structured approach to managing internal

new venturing:
Research aimed at advancing basic science
and technology
Development research aimed at finding and
refining commercial applications for the
technology
Foster close links between R&D and
marketing; between R&D and manufacturing
Selection process for choosing ventures
Monitor progress

 The Attractions of Acquisition

Acquisitions are the principle strategy
used to implement horizontal integration:
Used to achieve diversification when the
company lacks important competencies
Enable a company to move quickly
Perceived as less risky than internal new
ventures
An attractive way to enter a new industry that
is protected by high barriers to entry

 Acquisition Pitfalls
There is ample evidence that many acquisitions fail to
create value or to realize their anticipated benefits:

Integrating the acquired company

Difficulty in integrating value-chain and management activities
High management and employee turnover in acquired company

Overestimating the economic benefits

Overestimate the competitive advantages and value-added that
can be derived from the acquisition
Pay too much for the target company

The expense of acquisitions

Premium paid for publicly traded companies
Premium cancels out the prospective value-creating gains

Inadequate preacquisition screening

Weaknesses of acquisitions business model are not clear

 Guidelines for

Successful Acquisition

Target identification and preacquisition

screening for:
1.
2.
3.
4.
5.

Financial position
Distinctive competencies and competitive advantage
Changing industry boundaries
Management capabilities
Corporate culture

Bidding strategy
Avoid hostile takeovers and speculative bidding.
Encourage friendly takeover with amicable merger.

Integration
Eliminate duplication of facilities and functions.
Divest unwanted business units included in acquisition.

Learning from experience

Conduct post-acquisition audits.

 Joint Ventures
Attractions:

Helps avoid the risks and costs of building a new

operation from the ground floor
Teaming with another company that has
complementary skills and assets may increase the
probability of success

Pitfalls:

Requires the sharing of profits if the new business

succeeds
Venture partners must share control conflicts on
how to run the joint venture can cause failure
Run the risk of giving critical know-how away to
joint venture partner

Restructuring
Restructuring is the process of divesting businesses and
exiting industries to focus on core distinctive competencies
in order to increase company profitability.

Why restructure?
Diversification discount: investors see highly
diversified companies as less attractive
Complexity and lack of transparency in financial
statements
Too much diversification
Diversification for the wrong reasons

Response to failed acquisitions

Innovations in strategic management have
diminished the advantages of vertical integration
or diversification