1. Chapter #8 Corporate Diversification

2. Opening Case: PepsiPepsi Revenues over $27 billion (bigger than coke) 57% of revenues comes from snack foods (Lay’s, Frito-lay, Doritos) Now controls 64% of U.S. snack food market Diversified geographically (1/3 comes from non-US sales) Good for you (Gatorade) Better for you (baked Doritos) Fun for you (60%)Gatorade

3. What is corporate Diversification? Product Diversification When a firm operates in multiple industries simultaneously Geographic market diversification When a firm operates in multiple geographic markets simultaneously Product-market diversification

4. International Box How global is global? 3 geographic zones –North America, Europe and Asia Only 2.4% had 20% or more of their sales in all three of these global regions Only 5% had 20% or more of their sales in two of the three

5. Types of corporate Diversification Limited diversification –Single business: 95% or more of firm revenues comes from a single product market Example: WD-40WD-40 –Dominant business: Between 70 and 95% of a firm revenues comes from a single product market Example: Donatos PizzaDonatos Pizza

6. Types of corporate Diversification Related Diversification –Related Constrained: Less than 70% of firm revenues come for a single product market, and different business share numerous links and common attributes Example: PepsiCo –Related Linked: Less than 70% of firm revenues come for a single product market, and different business share only a few links and common attributes or differnte links and common attributes Example: Disney

7. Types of corporate Diversification Unrelated diversification –Less than 70 % of firm revenues comes for a single product market, and there are few, if any, links or common attributes among businesses Example: GEGE

8. Economies of Scope When the value of the products or services a firm sells increases as a function of the number of businesses that a firm operates in.

12. Exploiting activity sharing –Bundling –Reputation Limits of activity sharing –Cross-business relationships difficult to manage –Limit flexibility –Reputation

13. Core Competencies –Example: VirginVirgin Brand Richard Branson CEO Limits of Core competencies –Organizational issues –Dominant logic (intangible) Invented competencies Competency not that impactful

14. Financial economies of scope Capital Allocation –Internal capital markets –May create an advantage in terms of knowledge Limits –Types of diversification may make it more difficult to allocate capital –Higher quality information not guaranteed –Business managers inflate numbers Excalation of commitment

15. Financial economies of scope Risk Reduction Tax Advantages –Losses to offset profits –Increase debt capacity

16. Anti-competitive economies of scope Multi-point competition –Mutual forbearance Market Power –Cross-subsidization Predatory pricing Deep pockets model

17. Ethics WTO Protests