1. Chapter Ten Corporate-Level Strategy: Formulating and
Implementing Related and Unrelated Diversification

2. 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:
Businesses or industries that the company should compete in
Value creation activities which the company should perform in those businesses
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.
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3. Corporate-Level Strategy of Diversification
Diversification Strategy is the company’s 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
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4. Expanding Beyond a Single Industry
Staying inside a single industry allows a company to:
Focus its resources  ‘Stick to its knitting’
BUT a company’s fortunes are tied closely to the profitability of its original industry:
Can be dangerous if the industry matures and goes into 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.
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5. A Company as a Portfolio of Distinctive Competencies
Reconceptualize the company as a portfolio of distinctive competencies rather than a portfolio of products:
Consider 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
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6. 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.
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7. 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 by using diversification as a means in one or more industries
Exploiting general organizational competencies that enhance performance within all business units
Managers often consider diversification when their company is generating free cash flow – with resources in excess of those needed to maintain competitive advantage.
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8.  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.
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9. Transfer of Competencies at Philip Morris
Figure 10.2
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10.  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
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 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:
Companies that can share resources have to invest proportionately less than companies that cannot share.
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.
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12. Sharing Resources at Procter & Gamble
Figure 10.3
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13.  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.
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 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 aggressor’s home industry.
Mutual forbearance from signaling may result in less intense rivalry and higher industry profits.
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15.  Exploiting General Organizational Competencies
General organizational competencies are skills of a company’s 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:
Entrepreneurial capabilities – encourage risk taking while managing & limiting the amount of risk undertaken
Organizational design – create structure, culture, and control systems that motivate and coordinate employees
Superstrategic capabilities – effectively manage the managers of the business units and helping them think through strategic problems
These managerial skills are often not present, as they are rare and difficult to develop and put into action.
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16. Types of Diversification
Related diversification
Entry into a new business activity in a different industry that:
Is related to a company’s existing business activity or activities and
Has commonalities between one or more components of each activity’s 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 company’s value-chain activities in its present industry or industries
Based on using only general organizational competencies to increase profitability of each business unit
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17. Commonalities Between Value Chains of Three Business Units
Figure 10.4
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18. Disadvantages and Limits of Diversification
Conditions that can make diversification disadvantageous:
Changing Industry and Firm-Specific Conditions
Future success of this strategy is hard to predict.
Over time, changing situations may require businesses to be divested.
Diversification for the Wrong Reasons
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 company’s portfolio, and the
Extent to which coordination is required to gain the benefits.
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19. Coordination Among Related Business Units
Figure 10.5
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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 company’s 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
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21. Sony’s Web of Corporate-Level Strategy
Figure 10.6
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22. 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.
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23. Entry Strategies to Implement Multibusiness Model
Various entry strategies may be employed based on the company’s 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.
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24.  Pitfalls of New Ventures
Scale of entry
Large-scale entry is initially more expensive than small scale 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
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25. Scale of Entry and Profitability
Figure 10.7
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26.  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
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27.  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
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28.  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
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29.  Guidelines for Successful Acquisition
Target identification and preacquisition screening for:
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.
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 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
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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
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