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CORPORATE DIVERSIFICATION STRATEGY :

Operates in multiple industries or market simultaneously


Product Diversification : Multiple Industries Simultaneously Geographic Market Diversification Strategy : Multiple

Geographic Market Simultaneously


Both Industries and Geographic Market Simultaneously =

Product Market Diversification Strategy

Limited Corporate Diversification : Most of


Business Activities fall within a single industry and geographic market.
Single Business Firms : ( WD-40 )

95% of total sales in a single product / market.


70% - 95% of total sales in a single product / market.

Dominant Business Firms : ( Donato Pizza )

Related Corporate Diversification


Related Constrained : ( Pepsi Co )
70 % of revenues comes from a single business, and different businesses share numerous links and common attributes. Same as above, except that the different business share only few links and common attributes. 70 % of revenues comes from a single business, and there are few, if any, links or common attributes among business.

Related Linked : ( Disney ) Unrelated Corporate Diversification : ( GE )

VALUE OF CORPORATE DIVERSIFICATION


Valuable Economies of Scope
OPERATIONAL :

Shared Activities Core Competencies Internal Capital Allocation Risk Reduction Tax Advantages Multiple Competition Exploiting Market Power Maximizing Management Compensation

FINANCIAL :

ANTI COMPETITIVE :

EMPLOYEE AND STAKEHOLDER INCENTIVES :

Technology Development

A, B, C
Product Design Product Design

A, B
Manufacturing

C
Manufacturing

A, B
Marketing

A, B, C
Distribution Distribution

A
Service

B, C A, B, C

LIMITS OF ACTIVITY SHARING


a) b) CROSS BUSINESS RELATIONSHIPS STANDARDIZED COMPONENTS RESTRICT MEETING SPECIFIC NEEDS OF CUSTOMER IF ONE BUSINESS HAS A POOR REPUTATION OTHERS ARE AFFECTED

c)

CORE COMPETENCIES
RESOURCES AND CAPABILITIES ENABLING TO OPERATE SUCCESSFULLY IN SEVERAL BUSINESSES.

CORE COMPETENCIES LOWER COSTS / LARGER REVENUE AS SOURCES OF ECONOMIES OF SCOPE.


CORE COMPETENCIES THRU SHARED ACTIVITIES E.G. : INNOVATIONS AND R&D ( 3M : SUBSTRATES, ADHESIVES AND COATINGS ) CORE COMPETENCIES WITHOUT SHARED ACTIVITIES BUT BRAND NAME AND ECCENTRIC MARKETING E.G. : VIRGIN GROUP.

LIMITS OF CORE COMPETENCIES


HOW DIVERSIFIED FIRM IS ORGANIZED (NEXT CHAPTER). INTANGIBLE NATURE OF THE ECONOMIES OF SCOPE (SHARED KNOWLEDGE, EXPERIENCE, AND WISDOM ACROSS BUSINESSES) DOMINANT LOGIC. THE INTANGIBILITY OF CORE COMPETENCIES INVENTED COMPETENCIES E.G. : AIRLINES AND SHOES BUSINESS. THE VALUE MAY BE VERY SMALL (E.G. : STRONG GOVT. REL.)

CAPITAL ALLOCATION
EXTERNAL MARKET : INDEPENDENT ENTITIES HIGH RETURN, HIGH CASH FLOW INTERNAL MARKET : DIVERSIFIED FIRM COMPETE FOR CORPORATE CAPITAL
INTERNAL MARKET MUST OFFER EFFICIENCY ADVANTAGES OVER EXTERNAL MARKET DUE TO INFORMATION ACCESS

ADVANTAGES OF OWNING A BUSINESS


DOWNPLAY REPORT NOT TO REVEAL ALL THE POSITIVE INFO

QA :
Why do you think, a diversified firm do not always gain cost of capital advantage being part of a diversified firms portfolio ? (Lower overall risk vs performance and prospects)

LIMITS ON INTERNAL MARKET


Unrelated vs Related Better info on diversified firm, otherwise . ( Inflate the performance ? ) Escalation of commitment

RISK REDUCTION
Diversified Businesses Stable Returns / Cash Flow overtime ?

TAX ADVANTAGES
Use losses in some of the businesses to offset profits in others (reduce overall tax liability) Reduce the capacity) risk of bankruptcy (debt

ANTI COMPETITIVE ECONOMIES OF SCOPE


Multi Point Competition Diversified firms compete in multiple markets mutual forbearance / tacit collusion (strong strategic linkages / related diversification)

MARKET POWER
MARKET POWER IN ONE BUSINESS CAN SUBSIDIZE OPERATIONS OF ANOTHER OF ITS BUSINESSES PREDATORY PRICING / DEEP POCKETS MODEL FIRM SIZE INCENTIVE TO DIVERSIFY SALES BUT COMPENSATION IS NOW MORE AND MORE TIED TO ECONOMIC PERFORMANCE ( USE STOCKS AND OTHER FORMS OF DEFERRED COMPENSATION )

TYPE OF ECONOMIES OF SCOPE 1. OPERATIONAL ECONOMIES OF SCOPE - Shared Activities - Core Competencies 2. FINANCIAL ECONOMIES OF SCOPE

CAN IT BE POSITIVE RETURNS VALUABLE ? REALIZED BY TO EQUITY EQUITY HOLDERS HOLDERS

POSSIBLE POSSIBLE

NO NO

POSSIBLE POSSIBLE

- Internal Capital Allocation - Risk Reduction - Tax Advantages


3. ANTICOMPETITIVE ECONOMIES OF SCOPE - Multipoint Competition - Exploiting Market Power 4. EMPLOYEE INCENTIVE FOR DIVERSIFICATION - Maximizing Management Compensation

POSSIBLE POSSIBLE POSSIBLE

NO YES NO

POSSIBLE NO POSSIBLE (SMALL)

POSSIBLE POSSIBLE

NO NO

POSSIBLE POSSIBLE

NO

NO

NO

RARITY
CORPORATE DIVERSIFICATION IS NOT A RARE STRATEGY

IMITABILITY
LESS COSTLY TO DUPLICATE ECONOMIES OF SCOPE COSTLY TO DUPLICATE ECONOMIES OF SCOPE

SHARED ACTIVITIES
RISK REDUCTION TAX ADVANTAGES EMPLOYEE COMPENSATION

CORE COMPETENCE
INTERNAL CAPITAL ALLOCATION MULTIPOINT COMPETITION EXPLOITING MARKET POWER

SUBSTITUTES FOR DIVERSIFICATION


GROW AND DEVELOP EACH OF ITS BUSINESSES SEPARATELY COST LEADERSHIP / PRODUCT DIFFERENTIATION ( NESTLE FOCUSED ON COST / REVENUE ADVANTAGE IN INTERNATIONAL OPERATIONS ). STRATEGIC ALLIANCE ECONOMIES OF SCOPE IN R&D WITH DIFFERENT FIRMS.