CORPORATE LEVEL

STRATEGY

RELATED AND
UNRELATED
DIVERSIFICATION

WHAT IS
DIVERSIFICATION?
The process of adding new businesses
to the company that are distinct from
its established operations.

CLUE
Major competitor of Apple Inc.

DID YOU KNOW?

A diversified company
It pursues the corporate-level strategy of related
diversification.
A division of the Samsung Corporation, which pursues
unrelated diversification.

PUTTING
ALL THE
EGGS IN
ONE
INDUSTRY
BASKET

TWO TYPES OF
DIVERSIFICATION
Related diversification
Involves diversifying into
businesses whose value chains
possess competitively valuable
strategic fits with value chain(s)
of firms present business(es)

Unrelated
diversification

Involves diversifying into

businesses with no deliberate
effort to seek out businesses
having strategic fit with firms
present business(es)

RELATED DIVERSIFICATION
Entry into a new business
activity in a different industry
that is related to a
companys existing business
activity, or activities, by
commonalities between one or
more components of each
activitys value chain

VALUE CHAIN
RELATIONSHIPS
FOR RELATED
BUSINESSES

UNRELATED DIVERSIFICATION
Entry into industries that have
no obvious connection to any
of a companys value chain
activities in its present industry
or industries

VALUE CHAINS FOR

UNRELATED BUSINESSES

FIVE MAIN WAYS IN WHICH

DIVERSIFICATION CAN
INCREASE
COMPANY
Transferring Competencies
PROFITABILITY
Leveraging Competencies
Sharing Resources and
Capabilities
Using Product Bundling
Utilizing General Organizational
Competencies

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

TRANSFER OF
COMPETENCIES AT PHILIP
MORRIS

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 AND

CAPABILITIES
Cost reductions associated with sharing
resources across businesses
Economies of scope

SHARING RESOURCES AT
PROCTOR & GAMBLE

USING PRODUCT
BUNDLING
Entering into industries that provide
customers with new products that are
connected or related to their existing
products.
The goal is to bundle products to
offer customers lower prices and/or a
superior set of services.

UTILIZING
GENERAL
Competencies that transcend
individual functions or businesses
and reside at the corporate level in the multi-business
enterprise
ORGANIZATIONAL
When these general
COMPETENCIES
competencies are present they
help each business unit within a
company perform at a higher
level than it could if it operated
as a separate or independent
companythis increases the
profitability of the entire
corporation.

THREE KINDS OF GENERAL

ORGANIZATIONAL COMPETENCIES

WHICH HELP A COMPANY INCREASE ITS

PERFORMANCE AND PROFITABILITY
1.Entrepreneurial capabilities
2.Effective organization structure
and controls
3.Superior strategic capabilities

THE LIMITS OF
DIVERSIFICATION
Three principal reasons why a business

model based on diversification may lead to

a loss of competitive advantage:
(1) changes in the industry or inside a
company that occur over time,
(2) diversification pursued for the wrong
reasons, and
(3) excessive diversification that results in
increasing bureaucratic costs.

CHANGES IN THE INDUSTRY

OR COMPANY
Companys top management team
often changes
When the managers who possess the
hard-to-define skills leave, they often
take their visions with them.
When new technology blurs industry
boundaries, it can destroy the source
of a companys competitive
advantage

DIVERSIFICATION FOR THE

WRONG REASONS
Risk pooling
Business cycle
Entry into new industries will rescue it
and lead to long-term growth and
profitability
Extensive diversification tends to reduce
rather than improve company profitability.
It can dissipate value instead of creating
it

DIVERSIFICATION FOR THE

WRONG REASONS

THE BUREAUCRATIC COSTS

OF DIVERSIFICATION
The bureaucratic costs of diversification exceed the
benefits created by the strategy
The costs increases that arise in large, complex
organizations due to managerial inefficiencies

NUMBER OF BUSINESS
Basing important resource allocation
decisions on only the most superficial
analysis of each business units
competitive position.
Information overload

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

COORDINATION AMONG
RELATED BUSINESS UNITS

METHODS COMPANIES USE

TO ENTER
NEW
INDUSTRIES
Internal New Venturing
Acquisition
Joint Ventures

INTERNAL NEW VENTURING

A company has a set of valuable
competencies in its existing
businesses that can be leveraged or
recombined to enter a new
business or industry.

REASONS INTERNAL NEW

VENTURING FAILS
Entry on too small a scale
Poor commercialization
Poor corporate management of the
internal venture process

GUARDING AGAINST SUCH

FAILURE

Involves a carefully planned approach

toward project selection and
management
Integration of R&D and marketing to
improve the chance new products will
be commercially successful
Entry on a scale large enough to
result in competitive advantage.

ACQUISITIONS
Often the best way to enter a new industry
when a company lacks the competencies
required to compete in a new industry
It can purchase a company that does have
those competencies at a reasonable price
The method chosen to enter new industries
when there are high barriers to entry and a
company is unwilling to accept the time frame,
development costs, and risks associated with
pursuing internal new venturing.

ACQUISITIONS BECOME
UNPROFITABLE WHEN
STRATEGIC
MANAGERS:

Underestimate the problems

associated with
integrating an acquired company

Overestimate the profit that can be created from an

acquisition
Pay too much for the acquired company
Perform inadequate pre-acquisition screening to
ensure the acquired company will increase the
profitability of the whole company

GUARDING AGAINST
ACQUISITION FAILURES

# 1 ! Careful pre-acquisition screening

Carefully selected bidding strategy
Effective organizational design to
successfully integrate the operations of the
acquired company into the whole company
Managers who develop a general
managerial competency by learning from
their experience of past acquisitions

JOINT VENTURES
Used to enter a new industry
when:
the risks and costs associated with
setting up a new business unit are
more than a company is willing to
assume on its own
a company can increase the
probability that its entry into a new
industry will result in a successful
new business by teaming up with
another company that has skills
and assets that complement its own

RESTRUCTURING
Many companies expand into new industries
to increase profitability. Sometimes, however,
they need to exit industries to increase their
profitability and spin-off and split apart their
existing businesses into separate, independent
companies
Restructuring is the process of reorganizing
and divesting business units and exiting
industries to refocus on a companys core
business and rebuild its distinctive
competencies

RESTRUCTURING IS
REQUIRED TO

a business model that

no longer
creates
CORRECT
THE
FOLLOWING
competitive advantage
PROBLEMS

the inability of investors to assess the

competitive advantage of a highly diversified
company from its financial statements
excessive diversification due to top managers
desiring growth without profitability
innovations in strategic management such as
strategic alliances and outsourcing that reduce
the advantages of vertical integration and
diversification

TYCO'S CHANGING
CORPORATE LEVEL
STRATEGIES

WHAT IS

TYCO'S STRATEGY: STEP 1

Use acquisitions to become the
dominant competitor
Consolidate fragmented
industries
Attain economies of scale
Get a cost-based advantage
over smaller rivals

TYCO'S STRATEGY: STEP 2

Seek out companies that make
basic, low-tech products who are in
decline
Approach top management to see
if they support being acquired
After an audit, Tyco makes a bid
Once acquired, Tyco works to find
ways to strengthen its business
model and improve performance

THE TYCO EFFECT ON

ACQUISTIONS
Corporate overhead and workforce is slashed
Old top management replaced with Tyco managers
Unprofitable products were sold off
Manufacturing plants merged with Tyco's existing operations to
reduce cost
Once the cost structure is renewed, Tyco establishes challenging
goals while handing out strong financial incentives for motivation

THE FALL OF TYCO

Tyco in the 1990's

Tyco in the
2000's

THE FALL OF TYCO

Tyco's recent acquisitions
did not contribute to
profitability
The company was growing,
but performance was
deteriorating
Analysts criticized Tyco top
management for hiding
failure through
inappropriate accounting
methods

CEO AND CFO SHAMED

CEO Dennis Kozlowski and
CFO Mark Swartz called out
for illegally altering financial
reports
The pair were forced to resign
in 2003
Both men were sentenced to
prison in 2005 for grand
larceny, securities fraud,
falsifying records and
conspiring to defraud Tyco to
fund lavish lifestyles

TYCO IN LIMBO
In the mid-2000's, Tyco's
business model was a failure
and its stock prices
plummeted
Investors found it impossible
to evaluate the profitability of
its business units
CEO Edward Breen reversed
the old business model to
increase value to
shareholders

TYCO, BRAND NEW

Breen decided to split Tyco into three separate
companies in order to create more value
Each of the new companies would be better positioned
in their respective industries to maintain and grow
market share
In 2007, Tyco split into Tyco International, Tyco
Electronics and Covidien
By 2009, it seemed that all three companies developed
the business models needed to boost their profitability

THANK YOU FOR LISTENING AND

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