This document discusses corporate diversification strategies, including horizontal expansion into related and unrelated industries. It identifies three main dimensions of corporate strategy: business diversification, vertical integration, and geographic expansion. Several motives for diversification are provided, including economies of scope and scale, risk reduction, and avoiding declining industries. The advantages of diversification include market power, scope economies, internal transaction efficiencies, and an internal capital market. Related diversification can be more profitable when industries are related through shared activities, competencies, or linkages.

1. DIVERSIFICATION:
Horizontal Expansion
DIVERSIFICATION:
Horizontal Expansion

2. Diversification 2
Three Dimensions of Corporate
Strategy
Three Dimensions of Corporate
Strategy
Business Diversification
Vertical Integration
Geographic/global Expansion

3. Diversification 3
ExamplesExamples
Then Now
Coca Cola
Eli Lily
Honda
Nintendo
Nokia
GE
Sharp
AT&T
Samsung
Daewoo

4. Diversification 4
Extent of Corporate
Diversification:
Firms vary by Degree of
Diversification
Extent of Corporate
Diversification:
Firms vary by Degree of
Diversification
Low Levels of Diversification
Single-Business - > 95% of revenues from a singles business unit
Dominant-Business - 70-95% from a single business unit
Vertically-integrated Businesses - 70% of sales in value chain
Moderate to High Levels of Diversification
Related-Diversified - 70% or more from businesses that are related.
Businesses must share product, technological or distribution linkages.
Businesses may be related-linked or related constrained
High Levels of Diversification
Unrelated-Diversified - <70% in related business units

5. Diversification 5
Motives for DiversificationMotives for Diversification
Operational economies of scope and scale (Strategic
Competitiveness)
• shared and transferred activities
• leveraging core competencies
Financial economies of scope (Internal Capital Market)
• internal capital allocation
• risk reduction
• tax advantages
Anticompetitive economies of scope (Market Power)
• multipoint competition
• exploiting market power
Employee Incentives (Growth Motive)
• diversifying employees’ risk and improving promotion chances
• maximizing management compensation
• Avoid declining industries

6. Diversification 6
(1) Sharing Linkages Between Businesses
(2) Sharing Core Competence
Bus.
A
Bus.
B
Bus.
C
Bus.
D
Bus.
A
Bus.
B
Bus.
C
Bus.
D
Core
Competence
Corporate Advantages from
Diversification
Corporate Advantages from
Diversification

7. Diversification 7
Corporate Advantages from
Diversification
Corporate Advantages from
Diversification
• Market Power
• Economies of Scope
• Economies of Internalizing Transactions
• Internal Market System
• Information Advantages

8. Diversification 8
Economies of scope
-- cost reduction from achieving minimum scale in
an input factor, derived from producing multiple
products
* tangible assets, e.g., distribution and service
networks, R&D
* intangible assets, e.g., brand names, corporate
reputations, technology
Scope Advantages from
Diversification
Scope Advantages from
Diversification
* organizational capabilities, e.g., management
capabilities, marketing skills

9. Diversification 9
Scale Advantages from
Diversification
Scale Advantages from
Diversification
Economies of Scale in Administration,
Financing and Control
= cost advantages from reaching minimum efficient scale in
administrative and control activities by centralizing similar
activities at the corporate HQ, and by operating an
internal capital market
* Administration, e.g. centralized strategic planning,
centralized legal functions, etc.
* Control, e.g. centralized accounting and financial
functions
* Financing, e.g. centralized internal capital allocation
function

10. Diversification 10
Diversification and
Performance
Diversification and
Performance
Diversification into related industries
may be more profitable than into
unrelated industries
Source: Rumelt (1974)

11. Diversification 11
Approaches to
Corporate Strategy
Approaches to
Corporate Strategy
Related Diversification Strategies
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
Efficient internal capital market
allocation

12. Diversification 12
Sharing ActivitiesSharing Activities
Key Characteristics
Sharing Activities often lowers costs or raises differentiation
Sharing Activities can lower costs if it:
Example: Using a common physical distribution system and sales
force such as Procter & Gamble’s disposable diaper and paper
towel divisions
** Achieves economies of scale
** Boosts efficiency of utilization
** Helps move more rapidly down Learning Curve
Example: General Electric’s costs to advertise, sell and service
major appliances are spread over many different products
Sharing ActivitiesSharing Activities

13. Diversification 13
BCG Growth-Share
Matrix
BCG Growth-Share
MatrixLow
LowHigh
Annualrealrateofmarketgrowth%
High
Relative Market Share
Earnings: high stable, growing
Cash flow: neutral
Strategy: invest for growth
Earnings: low, unstable, growing
Cash flow: negative
Strategy: analyze to determine
whether business can
be grown into a
star, or
will degenerate
into a dog
Earnings: high stable
Cash flow: high stable
Strategy: milk
Earnings: low, unstable
Cash flow: neutral or negative
Strategy: divest