Hill 8e Basic Ch10

Copyright Houghton Mifflin Company. All rights reserved.
10 | 1
Theory of Strategic Management
with Cases, 8e
Hills, Jones
Chapter Ten
Corporate Diversification Strategy
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Corporate-Level Strategy should allow a company to
perform the value creation functions at lower cost or in a way
that allows for differentiation and premium price.
Corporate-Level Strategy
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
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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.
of Diversification
Types of diversification:
Related diversification
Unrelated diversification
Methods to implement a diversification
strategy:
Internal new ventures
Acquisitions
Joint ventures
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Expanding Beyond a
Single Industry
BUT staying within a single industry:
+ Can be dangerous if the industry matures and goes
into decline
+ May cause firms to miss the opportunity to leverage their
distinctive competencies in new industries
+ Can cause firms to develop a tendency to rest on their
laurels and not engage in constant learning

Staying inside a single industry allows a company to:
Focus its resources Stick to the knitting
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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A Company as a Portfolio of
Distinctive Competencies
+ 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
Reconceptualize the company as a portfolio of
distinctive competencies. . . rather than a portfolio
of products:
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Establishing a
Competency Agenda
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.
Figure 10.1
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Increasing Profitability
Through Diversification
C Transferring competencies among existing businesses
C Leveraging competencies to create new businesses
C Sharing resources to realize economies of scope
C Using product bundling
C Managing rivalry by using diversification as a means in one
or more industries
Exploiting general organizational competencies that
enhance performance within all business units
A diversified company can create value by:
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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Transferring Competencies
The competencies transferred must involve
activities that are important for establishing
competitive advantage

Transferring competencies across industries:
taking a distinctive competency developed in one
industry and implanting it in an EXISTING business
unit in another industry
For such a strategy to work,
the distinctive competency being transferred
must have real strategic value.
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Transfer of Competencies
at Philip Morris
Figure 10.2
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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
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
Leveraging Competencies
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Economies of scope arise when business
units are able to effectively able to pool,
share, and utilize expensive resources or
capabilities:
Sharing resources and capabilities across two or
more business units in different industries to realize
economies of scope.
Economies of scope are possible only when
there are significant commonalities between
one or more value-chain functions.
Sharing Resources
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Sharing Resources
at Procter & Gamble
Figure 10.3
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Allows customers to reduce
their number of suppliers
for convenience and cost
savings.
Examples:
telecommunications and
medical equipment
industries.
Use product bundling to differentiate products and
expand product lines in order to satisfy customers
needs for a package of related products.
Using Product Bundling
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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.
Manage rivalry by holding in check a competitor
that has either entered the industry or has the
potential to do so.
Managing Rivalry
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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. Superior strategic capabilities effectively manage the
managers of the business units and helping them think through
strategic problems

General organizational competencies are skills
that transcend individual functions or business units.
Utilizing General
Organizational Competencies
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Two 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
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Commonalities Between Value
Chains of Three Business Units
Figure 10.4
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Disadvantages and
Limits of Diversification
1. 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.
2. 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.
3. 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.
Conditions that can make diversification
disadvantageous:
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Coordination Among
Related Business Units
Figure 10.5
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Choosing a Strategy
+ 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

The choice of strategy depends on a comparison of the
benefits of each strategy versus the cost of pursuing it:
Firms may pursue both strategies
simultaneously
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Sonys Web of
Figure 10.6
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Entry Strategies to Implement the
Multibusiness Model
OInternal New Ventures
Company has a set of valuable competencies in its existing
businesses
Competences leveraged or recombined to enter new business
areas
O Acquisitions
Company lacks important competencies to compete in an area
Company can purchase an incumbent company that has those
competencies at a reasonable price
OJoint 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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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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Scale of Entry Versus Profitability
Figure 10.7
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Guidelines for Successful
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
Structured approach to managing internal
new venturing:
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The Attractions of Acquisitions
+ 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
Acquisitions are the principle strategy
used to implement horizontal integration:
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Acquisition Pitfalls
+ 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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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
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
Restructuring is the process of divesting businesses
and exiting industries to focus on core distinctive
competencies in order to increase company profitability.

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