Chapter 10

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

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Overview
1 Diversification
The process of adding new businesses to the company that are distinct from its established operations

2 Vehicles for diversification

Internal new venturing
Starting a new business from scratch

Acquisitions (formerly horizontal integration) Joint ventures

3 Restructuring
Reducing the scope of diversified operations by exiting from business areas
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Typical Evolution of Business

Single Product/Service Business Vertical Integration Horizontal Integration/Merger Related Diversification Unrelated Diversification

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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

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A Brief History of Diversification

1960s and 70s the trend was to diversify so as not to be too dependent on any single industry 1980s a general reversal of that thinking as management found that they couldnt manage the beast
M. Porter circa 1989

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Diversification: Three Types

Concentric: adding new but related products or services; commonalities between one or more components of each activitys value chain. Horizontal: adding new but unrelated products for current customers

Conglomerate: adding new, unrelated products or services; no obvious connection to any of a companys value chain activities in its present industry or industries

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Scopable Assets

resources and capabilities that can be applied to new products and new geographic markets

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Increasing Profitability Through Concentric 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

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Philip Morris
We want to become the worlds largest provider of packaged consumer-products. * Biggest move was hostile takeover of Kraft General Foods, the worlds second largest food producer behind Nestle.

* Hamish Maxwell, CEO

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Transfer of Competencies at Philip Morris

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Increasing Profitability Through Diversification (contd)

Leveraging competencies
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

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Sharing Resources at Procter & Gamble

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Increasing Profitability Through Diversification

Managing rivalry: multipoint competition
Diversifying into an industry in order to hold a competitor in check that has either entered its industry or has the potential to do so Multipoint competition: companies competing against each other in different industries Disney vs. Viacom

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Infoseek
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Viacom
Showtime

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AOL Time Warner

Compuserve

TNT
Road Runner

Time Magazine Hanna - Barbera Cartoons

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Fortune
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Disneys Latest Foray: Infoseek

Our products, our movies, sports and news all have to be delivered to the home and will be delivered via broadband lines from cable, TV, or satellite. We want to be in control of our destinations. We want to control our films, products, and entertainment.*
* Michael Eisner

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Horizontal Diversification

Walmart has attempted to acquire a bank (denied regulatory approval) and had planned to open 500 or so branches inside its stores

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Horizontal Diversification

Amazon is pursuing horizontal diversification with an aggressive entry into toys and consumer electronics

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Increasing Profitability Through Unrelated Diversification

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
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The Limits of Diversification

Related diversification is only marginally more profitable than unrelated diversification Extensive diversification tends to depress rather than improve profitability

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Bureaucratic Costs and Diversification Strategy

The costs increases that arise in large, complex organizations due to managerial inefficiencies Number of businesses in a companys portfolio
Information overload

Coordination among businesses

Inability to identify the unique profit contribution of a business unit that shares resources with another unit

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Bureaucratic Costs and Diversification Strategy (contd)

Limits of diversification
Bureaucratic costs place a limit on the amount of diversification that can profitably be pursued

Related or unrelated diversification?

Related diversified companies can create value in more ways than unrelated companies, but they have to bear higher bureaucratic costs

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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

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Restructuring
Reducing the scope of the company by exiting business areas Why restructure?
Diversification discount: investors see highly diversified companies as less attractive
Complexity and lack of transparency in financial statements Too much diversification or for the wrong reasons

Response to failed acquisitions Innovations have diminished the advantages of vertical integration or diversification

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The Case of Allegis Corp.

April 30, 1987 UAL, Inc. changes its name to Allegis Corporation Holding Company for Hertz Rental Car, Westin and Hilton Hotels, and United Airlines

June 9, 1987 Car rental executive Frank Olson is elected interim chairman, president - CEO of Allegis and chairman of United following departure of Richard Ferris. Edward Carlson rejoins Allegis board as a director and serves until May 26, 1988.

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 Sept. 3, 1987 The Allegis board approves the sale of Hilton International Oct. 29, 1987 Conniston Partners, a major Allegis investor group, forces Allegis to sell off its interests in The Hertz Corporation and Westin Hotels Company May 26, 1988 Allegis name is dropped and the holding company is named UAL Corporation.
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Restructuring Strategies
Exit strategies
Divestment
Spinoff Selling to another company Management buyout (MBO)

Harvest Liquidation

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In June 2005, Viacom announced a plan to separate into two focused and nimble companies, consisting of businesses with great assets and industry-leading brands. The separation was completed on December 31, 2005, by spinning off a new publicly traded company called "Viacom Inc." that consists of the advertising-supported cable networks business, the Paramount Pictures business and Famous Music. The surviving company, which was formerly known as Viacom, changed its name upon the separation to "CBS Corporation."
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