Corporate Diversification
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  • Using The Strategic Business-Unit Form Of The Multidivisional Structure To Implement The Related Linked Strategy (discussed on pp. 215) Complexity is reflected by the organization’s size and product and market diversity. Related linked firm GE, for example, has 28 strategic business units (SBUs), each with multiple divisions. GE Aircraft Engines, Appliances, Power Systems, NBC, and GE Capital are a few of the firm’s SBUs. The scale of GE’s business units is striking. GE Aircraft Engines is the world’s leading manufacturer of jet engines. With almost 30 divisions, GE Capital is a diversified financial services company creating comprehensive solutions to increase client productivity and efficiency. The GE Power Systems business unit has 21 divisions including GE Energy Rentals, GE Distributed Power, and GE Water Technologies. GEs SBUs are making efforts to form competencies in services and technology as a source of competitive advantage. Recently, technology was identified as an advantage for the GE Medical Systems SBU, as that unit’s divisions share technological competencies to produce equipment, including computed tomography (CT) scanners, MRI systems, nuclear medicine cameras, and ultrasound systems. Once a competence is developed in one of GE Medical Systems’ divisions, it is quickly transferred to the other divisions in that SBU so that the competence can be leveraged to increase the unit’s overall performance.
  • Using The Competitive Form Of The Multidivisional Structure To Implement The Unrelated Diversification Strategy (discussed on pp. 223) Started as a small textile company in 1923, Textron Inc. is an industrial conglomerate using the unrelated diversification strategy. It has grown through volume, geography, vertical or horizontal integration, and diversification. Its growth started when the firm vertically integrated in 1943 to gain control of declining revenues and underutilized production capacity. Facing another revenue decline in 1952, the company diversified by acquiring businesses in unrelated industries. Today, Textron has five divisions—aircraft, automotive, industrial products, fastening systems, and finance. Return on invested capital is the financial control Textron uses as the primary measure of divisional performance. According to the firm, “return on invested capital serves as both a compass to guide every investment decision and a measurement of Textron’s success.”

Corporate Diversification Presentation Transcript

  • 1. Corporate Diversification Corporate Level Strategies
    • Detail actions taken to gain a competitive advantage through the selection
    • and management of a mix of businesses competing in several industries
    • or product markets.
    • Relevant questions:
    • What business should the firm be in?
    • How should the corporate office manage its group of businesses?
  • 2. Corporate Diversification Levels and Types of Diversification
      • Single-business firm - 100% of revenue comes from a single business unit.
      • Dominant firm - 70% - 95% of revenue comes from a single business unit.
      • Related-Constrained - <70% of revenues from dominant business; all
      • businesses share product, technological and distribution linkages.
      • Related-Linked – More than 30% but less than 70% of revenues come from
      • outside the core business.
      • Unrelated-Diversified (conglomerate) - More than 70% of firm sales
      • come from outside the core business.
  • 3. Rationales for Diversification Corporate Diversification Incentives Resources Managerial Motives Diversification
  • 4. Corporate Diversification Incentives to Diversify
      • Anti-trust and tax laws.
    • Cellar-Kefauver Act - Firms cannot acquire firms in related businesses.
    • Tax rate differences
    • - Before 1986, higher taxes on dividends favored spending
    • retained earnings on acquisitions.
    • - After 1986, firms made fewer acquisitions with retained earnings,
    • shifting to the use of debt to take advantage of tax deductible
    • interest payments
  • 5. Corporate Diversification Incentives to Diversify
      • Low profitability or poor industry outlook.
      • Uncertainty regarding future cash flows.
      • Firm risk reduction – unsystematic business specific risk.
  • 6. Risk Level of Diversification Dominant Business Unrelated Business Related Constrained Single Business Related Linked
      • Firm risk reduction – unsystematic business specific risk.
  • 7. Corporate Diversification Resources
      • Despite incentives, managers need the resources to diversify.
      • Value creation is determined more by the appropriate use of resources
      • than by incentives.
    Managerial Motives
      • Diversification increases firm size, size is positively correlated
      • with compensation.
      • Diversification reduces employment risk.
  • 8. Corporate Diversification Types of Diversification
      • Why do large diversified companies have different approaches to
      • diversification?
    - Financial economies – Internal capital market. - Vertical economies – Value chain activities. - Synergistic economies – Exploit interrelationships across business units.
    • May be due to different economic rationales for diversifying.
    • May be due to distinctive competencies
    • Concept of synergy
  • 9. Corporate Diversification Types of Diversification and Variations Vertical integration Related constrained Related linked Unrelated or conglomerate Multidivisional Structure (M-form) Strategic Business-Unit (SBU) Form Cooperative Form Competitive Form
  • 10. Corporate Diversification Types of Diversification
      • Vertical integration strategies
    Full integration
    • Generally a dominant business.
    • Firm enters into one or more businesses necessary to the manufacture
    • and distribution of its own products.
      • Forward and/or backward integration.
      • Different degrees of integration
    Partial integration
    • Benefits?
  • 11. Vertical economies Vertical Integration Government Affairs Legal Affairs Corporate R&D Lab Strategic Planning Corporate Human Resources Corporate Marketing Corporate Finance Product Division Product Division Product Division President
  • 12. Corporate Diversification Types of Diversification
      • Horizontal diversification strategies
    • Subset of related-constrained strategy.
    • Firm acquires another firm in the same industry.
    • Benefits?
    - Decreases competition - Facilitates market power and economies of scale
    • Examples: Continental - Eastern, Compaq – HP.
  • 13. Corporate Diversification Types of Diversification
      • Related constrained strategies
    • Sharing activities often lowers costs or raises differentiation .
    • Sharing activities can lower costs if it:
    • - achieves economies of scale.
      • - boosts efficiency of utilization.
      • - helps move more rapidly down the learning curve .
    • Sharing activities:
    • Sharing activities can enhance potential for or reduce the
    • cost of differentiation.
    • Must involve activities that are crucial to competitive advantage.
  • 14. Corporate Diversification Types of Diversification
      • Related constrained strategies
    • Exploits interrelationships among divisions .
    • Start with value chain analysis
      • - identify ability to transfer skills or expertise among similar
      • value chains.
      • - exploit ability to transfer activities
    • Transferring core competencies:
    • Transferring core competencies leads to competitive advantage
    • only if the similarities among business units meet the following
    • conditions:
  • 15. Corporate Diversification Types of Diversification
      • Related constrained strategies
    • - activities involved in the businesses are similar enough that sharing
    • expertise is meaningful.
      • transfer of skills involves activities which are important to
      • competitive advantage.
      • the skills transferred represent significant sources of competitive
      • advantage for the receiving unit
  • 16. Corporate Diversification Types of Diversification
      • Related constrained strategies
    • Tangible interrelationships:
    • Synergies based on interrelationships:
    * Marketing * Production * Technological (R&D) * Procurement * Infrastructure. - Sources of tangible interrelationships - Costs of achieving tangible interrelationships * Coordination * Compromise * Inflexibility
  • 17. Corporate Diversification Types of Diversification
      • Related constrained strategies
    • Intangible interrelationships:
    • Synergies based on interrelationships:
    • Sharing of know-how, or transferring of skills that have already
    • been paid for.
    • - Same generic strategy
    • - Same type of buyer
    • - Similar configuration of value chain
    • - Similar important value activity
    • - Example: Phillip Morris acquisition of Kraft and Miller Brewing.
  • 18. Related Constrained Strategy Synergistic economies Government Affairs Legal Affairs Corporate R&D Lab Strategic Planning Corporate Human Resources Corporate Marketing Corporate Finance Product Division Product Division Product Division President
  • 19. Corporate Diversification Types of Diversification
      • Related linked strategies
    • Very similar to related constrained except larger and more diversified.
    • Related businesses are grouped into Strategic Business Units (SBUs).
    • Facilitates the realization of synergies within related units and
    • across unrelated ones.
    • Allows integration of selected businesses as opposed to all
    • businesses in a related constrained firm.
  • 20. Vertical & Synergistic economies Financial economies Related Linked Strategy President Corporate R&D Lab Strategic Planning Corporate HRM Corporate Marketing Corporate Finance Division Division Division SBU SBU SBU Division Division Division Division Division Division
  • 21. Corporate Diversification Types of Diversification
      • Unrelated diversified strategies
    • Firms using this strategy frequently use acquisitions.
    • Efficient internal capital market
      • - acquire sound, attractive companies.
      • - acquired units are autonomous.
      • - acquiring corporation supplies needed capital.
      • portfolio managers transfer resources from units that
      • generate cash to those with high growth potential and
      • substantial cash needs.
      • - add professional management & control to sub-units.
      • - sub-unit managers compensation based on unit results.
  • 22. Corporate Diversification Types of Diversification
      • Unrelated diversified strategies
    • Scope of operating divisions.
    • Efficient internal capital market
      • - Comparable in terms of performance criteria
      • - Don’t overly concentrate in one business
      • - Buy market leaders
      • - Use wholly owned approach
    • Acquisition / divestment policies
    - Be able to maintain control -- Avoid high tech and service - Avoid unfriendly acquisitions - Divest rather than turnaround - Don’t get into businesses that are difficult to unload - If problems develop unload early
  • 23. Unrelated Diversification Strategy Financial economies President Legal Affairs Finance Auditing Division Division Division Division