1. Corporate Strategy: Diversification, Acquisitions, and Internal New Ventures
Lecture 10

2. Overview Diversification Vehicles for diversification Restructuring
The process of adding new businesses to the company that are distinct from its established operations
Vehicles for diversification
Internal new venturing
Starting a new business from scratch
Acquisitions
Joint ventures
Restructuring
Reducing the scope of diversified operations by exiting from business areas

3. Expanding Beyond a Single Industry
Advantages of staying in a single industry
Focus resources and capabilities on competing successfully in one area
Focus on what the company knows and does best
Disadvantages of being in a single industry
Danger of the industry declining
Missing the opportunity to leverage resources and capabilities to other activities
Resting on laurels and not continually learning

4. The Multibusiness Model
Develop a business model for each industry in which the company competes
Develop a higher-level multibusiness model that justifies entry into different industries in terms of profitability

5. The BCG Matrix
Source: Perspectives, No. 66, “The Product Portfolio.” Adapted by permission from The Boston Consulting Group, Inc., 1970.

6. The Strategic Implications of the BCG Matrix
Stars
Aggressive investments to support continued growth and consolidate competitive position of firms.
Question marks
Selective investments; divestiture for weak firms or those with uncertain prospects and lack of strategic fit.
Cash cows
Investments sufficient to maintain competitive position. Cash surpluses used in developing and nurturing stars and selected question mark firms.
Dogs
Divestiture, harvesting, or liquidation and industry exit.

7. The McKinsey/GE Matrix

8. Scoring the Matrix

9. Limitations on Portfolio Planning
Flaws in portfolio planning:
The BCG model is simplistic; considers only two competitive environment factors– relative market share and industry growth rate.
High relative market share is no guarantee of a cost savings or competitive advantage.
Low relative market share is not always an indicator of competitive failure or lack of profitability.
Multifactor models such as McKinsey/GE matrix are better though imperfect.

10. 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 vs. new competencies
Existing industries in which a company competes vs. new industries

11. Establishing a Competency Agenda

12. Increasing Profitability Through Diversification
Transferring competencies
Taking a distinctive competence developed in one industry and applying it to an existing business in another industry
The competencies transferred must involve activities that are important for establishing competitive advantage (Phillip Morris tobacco & beer)
Leveraging competencies (Microsoft iPod clone)
Taking a distinctive competency developed by a business in one industry and using it to create a new business in a different industry
Sharing resources: economies of scope
Cost reductions associated with sharing resources across businesses (Coles Myer)

13. Increasing Profitability Through Diversification (cont’d)
Exploiting general organizational competencies
Competencies that transcend individual functions or businesses and reside at the corporate level in the multibusiness enterprise
Entrepreneurial capabilities
Effective organization structure and controls
Superior strategic capabilities (e.g. Tyco)

14. 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, by commonalities between one or more components of each activity’s value chain
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

15. The Limits of Diversification
Related diversification is only marginally more profitable than unrelated diversification
Extensive diversification tends to depress rather than improve profitability

16. Bureaucratic Costs and Diversification Strategy
The costs increases that arise in large, complex organizations due to managerial inefficiencies
Number of businesses in a company’s portfolio
Information problems
Monitoring, lost opportunities
Dominant logic
Inability to identify the unique profit contribution of a business unit that shares resources with another unit
Sends poor signals – leads to bad decisions
Imputation problem, transfer pricing
Limits of diversification
Bureaucratic costs place a limit on the amount of diversification that can profitably be pursued
Costs are higher in related diversifications

17. Guidelines for successful acquisitions
Properly identify acquisition targets and conduct a thorough pre-acquisition screening of the target firm.
Use a bidding strategy with proper timing to avoid overpaying for an acquisition.
Hostile or voluntary?
Follow through on post-acquisition integration synergy-producing activities of the acquired firm.
Dispose of unwanted residual acquisition assets.
VALUE ENHANCING!!!

18. Diversification That Dissipates Value
Diversifying to pool risks
Stockholders can diversify their own portfolios at lower costs than the company can
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

19. Turnaround Strategy The causes of corporate decline
Poor management– incompetence, neglect
Overexpansion– empire-building CEO’s
Inadequate financial controls– no profit responsibility
High costs– low labor productivity
New competition– powerful emerging competitors
Unforeseen demand shifts– major market changes
Organizational inertia– slow to respond to new competitive conditions

20. The Main Steps of Turnaround
Changing the leadership
Replace entrenched management with new managers.
Redefining strategic focus
Evaluate and reconstitute the organization’s strategy.
Asset sales and closures
Divest unwanted assets for investment resources.
Improving profitability
Reduce costs, tighten finance and performance controls.
Acquisitions
Make acquisitions of skills and competencies to strengthen core businesses.

21. Guidelines for Successful Internal New Venturing
Structured approach to managing internal new venturing
Research 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
Create a new venture culture (e.g. 3M)

22. Exercises
Dun & Bradstreet
AT&T