2. DIVERSIFICATION: THE PROCESS OF ENTERING NEW INDUSTRIES,
DISTINCT FROM A COMPANY’S CORE OR ORIGINAL INDUSTRY, TO
MAKE NEW KINDS OF PRODUCTS FOR CUSTOMERS IN NEW
MARKETS
Ways in which profitability can be increased
▪ Transfer competencies between business units in different
industries
▪ Leverage competencies to create business units in new
industries
▪ Share resources between business units to realize synergies
or economies of scope
▪ Use product bundling
▪ Utilize general organizational competencies that increase
the performance
▪ Diversified company: A company that makes and sells
products in two or more different or distinct industries.
3. TRANSFERRING COMPETENCIES
▪ Taking a distinctive competency developed by a business unit in one
industry and implanting it in a business unit operating in another
industry.
▪ Commonality: Skill or competency that when shared by two or
more business units allows them to operate more effectively and
create more value for customers.
▪ Increase profitability when they:
▪ Lower the cost structure of one or more of a diversified company’s business
units
▪ Enable one or more of its business units to better differentiate their products
▪ Distinctive competency being transferred must have real strategic
value
▪ Should involve value-chain activities to increases profitability
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4. TRANSFER OF COMPETENCIES AT PHILIP MORRIS
4
For example, Miller Brewing was related to Philip Morris’s tobacco business because
it was possible to create important marketing commonalities; both beer and tobacco are mass-market
consumer goods in which brand positioning, advertising, and product development skills are crucial to
create successful new products. In general, such competency transfers increase profitability when they
either (1) lower the cost structure of one or more of a diversified company’s business units or (2) enable
one or more of its business units to better differentiate their products, both of which give business unit
pricing options to lower a product’s price to increase market share or to charge a premium price.
Coca-Cola acquired Minute Maid, the
fruit juice maker, to take advantage of
commonalities in global distribution and
marketing, and this acquisition has proved
to be highly successful. On the other
hand, Coca-Cola once acquired the movie
studio Columbia Pictures because it
believed it could use its marketing
prowess to produce blockbuster movies.
This acquisition was a disaster that cost
Coca-Cola billions in losses, and
Columbia was eventually sold to Sony,
which was then able to base many of its
successful PlayStation games on the hit
movies the studio produced.
5. LEVERAGING COMPETENCIES
▪ Taking a distinctive competency developed by a
business unit in one industry and using it to
create a new business unit in a different industry
▪ Basis of the model
▪ Company’s competitive advantage in one industry be
applied to create a differentiation
▪ Cost-based competitive advantage for a new business
unit in a different industry
For example, Apple leveraged its competencies in personal computer (PC)
hardware and software to enter the smartphone industry. Once again, the
multibusiness model is based on the premise that the set of distinctive
competencies that are the source of a company’s competitive advantage in one
industry might be applied to create a differentiation or cost-based competitive
advantage for a new business unit or division in a different industry. 5
6. SHARING RESOURCES AND CAPABILITIES
ECONOMIES OF SCOPE: SYNERGIES THAT ARISE WHEN ONE OR MORE
OF A DIVERSIFIED COMPANY’S BUSINESS UNITS ARE ABLE TO LOWER
COSTS OR INCREASE DIFFERENTIATION
To realize cost-saving or differentiation synergies
because they can more effectively pool, share, and utilize:
expensive resources or capabilities,
such as skilled people, equipment, manufacturing facilities,
distribution channels, advertising campaigns, and R&D laboratories.
For example, the costs of GE’s consumer products advertising, sales, and service activities
reduce costs across product lines because they are spread over a wide range of products
such as light bulbs, appliances, air conditioners, and furnaces. There are two major sources
of these cost reductions.
Eg. Bashundhara Diaper/ Paper/ Sanitary Napkin, sharing R&D, marketing and sales!
Sources of cost reductions
▪Sharing lowers the cost structure
▪Marketing function does the differentiation of products leading to a
higher ROIC 6
7. PRODUCT BUNDLING: GOOGLE?
PATHAO?
▪ Providing products that are connected to each
other
▪ Allows companies to expand their range providing
customers a complete package
▪ Goal - Bundle products to offer customers:
▪ Lower prices
▪ Superior set of services
▪ Does not always require joint ownership
▪ Can be achieved through market contracts
Once again, diversification to obtain economies of scope is possible only when there
are significant commonalities between one or more of the value-chain functions in a
company’s different business units or divisions that result in synergies that increase
profitability.
8. GENERAL ORGANIZATIONAL COMPETENCIES
Competencies that result from the skills of a company’s top
managers that help every business unit within a company
perform at a higher level than it could if it operated as a
separate or independent company.
▪ Three kinds of general organizational competencies help a company increase its
performance and profitability:
• Entrepreneurial capabilities: Manager’s capacity able to identify new
opportunities and act on them to create a stream of new and improved
products, in its current industry and in new industries.
• Organizational design capabilities: The ability of the managers of a company
to create a structure, culture, and control systems that motivate and
coordinate employees to perform at a high level. HR Skills!
• Strategic capabilities: They must possess the intangible, hard-to-define
governance skills that are required to manage different business units in a way
that enables these units to perform better than they
would if they were independent companies.
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9. 1. ENTREPRENEURIAL CAPABILITIES
▪ Required to take advantage of the free cash flow
▪ To promote entrepreneurship, a company must:
▪ Encourage managers to take risks
▪ Give managers the time and resources to pursue novel
ideas
▪ Not punish managers when a new idea fails
▪ Make sure that the company’s free cash flow is not wasted
in risky ventures that would generate a low return on
investment
Some companies seem to have a greater capability to
stimulate their managers to act in entrepreneurial ways
than others, for example, Apple, 3M, Google, and Samsung
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10. 2. CAPABILITIES IN ORGANIZATIONAL
DESIGN
▪ Organizational design skills: Ability of the
managers to create a structure, culture, and
control systems that motivate and coordinate
employees to perform at a high level
▪ Major factor that:
▪ Influences a company’s entrepreneurial capabilities
▪ Determines a company’s ability to create functional
competencies
▪ Determines a diversified company’s ability to profit
from its multibusiness model
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11. 3. SUPERIOR STRATEGIC MANAGEMENT
CAPABILITIES
▪ Required to manage different business units to
perform better than they would if they were
independent companies
▪ Ability to diagnose the underlying source of the
problems of a poorly performing business unit
Turnaround strategy: When managers of a diversified
company identify inefficient and poorly managed
companies in other industries and then acquire and
restructure them to improve their performance—and
thus the profitability of the total corporation.
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12. SUPERIOR STRATEGIC MANAGEMENT CAPABILITIES: WAYS
TO IMPROVE THE PERFORMANCE OF THE ACQUIRED
COMPANY
First, the top managers of the acquired company are replaced with a more aggressive top-
management team.
Second, the new top management team sells off expensive assets, such as underperforming divisions,
executive jets, and elaborate corporate headquarters; it also terminates managers and employees to
reduce the cost structure.
Third, the new management team works to devise new strategies to improve the performance of the
operations of the acquired business and improve its efficiency, quality, innovativeness, and customer
responsiveness.
Fourth, to motivate the new top-management team and the other employees of the acquired
company to work toward such goals, a company-wide pay-for-performance bonus system linked to
profitability is introduced to reward employees at all levels for their hard work.
Fifth, the acquiring company often establishes “stretch” goals for employees at all levels; these are
challenging, hard-to-obtain goals that force employees at all levels to work to increase the company’s
efficiency and effectiveness.
Finally, the members of the new top-management team clearly understand that if they fail to
increase their division’s performance and meet these stretch goals within some agreed upon amount
of time, they will be replaced.
MAINLY, the system of rewards and sanctions that corporate managers of the acquiring company
establish provide the new top managers of the acquired unit with strong incentive to develop
strategies to improve their unit’s operating performance.
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13. 1. RELATED DIVERSIFICATION
▪ Corporate-level strategy based on the goal of
establishing a business unit in a new industry
related to a company’s existing business units
▪ By some form of commonality or linkage between their
value-chain functions
▪ Basis of multibusiness model
▪ Taking advantage of strong commonalities that can be
modified to increase the competitive advantage
▪ Allowing a company to use any general organizational
competency it possesses
▪ Cocacola/Minutemaid, Pathao Courier/Ride
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The two corporate strategies of related diversification and unrelated diversification can be
distinguished by how they attempt to realize these five profit-enhancing benefits of diversification
14. 2. UNRELATED DIVERSIFICATION
▪ Corporate-level strategy that uses general
organizational competencies to increase the
performance of all the company’s business units
▪ Companies pursuing this are called conglomerates
▪ Internal capital market: Corporate-level strategy
whereby the firm’s headquarters assesses the
performance of business units and allocates
money across them. Cash generated by units that
are profitable but have poor investment
opportunities within their business is used to
cross-subsidize businesses that need cash and have
strong promise for long run profitability.
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15. DISADVANTAGES OF DIVERSIFICATION
1. Changes in the industry or company
▪ Management
▪ Technology
2. Diversification for the wrong reasons
▪ Pooling risks, diversifying risks by investing differently.
▪ Entry into a wrong business or at wrong time or for wrong
reasons
3. Bureaucratic costs: Costs associated with solving the
transaction difficulties between business units and
corporate headquarters
▪ Factors responsible
▪ Number of business units in a company’s portfolio
▪ Degree to which coordination is required to realize the advantages
of diversification
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16. COORDINATION AMONG RELATED BUSINESS UNITS
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RELATED VERSUS UNRELATED
DIVERSIFICATION
Related diversification
• Company’s competencies can be
applied across a greater number
of industries
• Company has superior strategic
capabilities that allow it to keep
bureaucratic costs under close
control
Unrelated diversification
• Company’s top managers are
skilled at raising the profitability of
poorly run businesses
• Company’s managers use their
strategic management
competencies to:
• Improve the competitive advantage of
their business units
• Keep bureaucratic costs under control
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18. INTERNAL NEW VENTURING
▪ 3M has a near legendary knack for creating new
or improved products from internally generated
ideas, and then establishing new business units
to create the business model that enables it to
dominate a new market. Similarly, HP entered
into the computer and printer industries by
using internal new venturing.
▪ PRAN in Bangladesh?
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19. INTERNAL NEW VENTURING
▪ Transferring resources and creating a new
business unit in a new industry to innovate new
kinds of products
▪ Used by companies that are:
▪ Technology-based and pursue related diversification
▪ Venturing to enter a newly emerging industry
▪ Pitfalls
▪ Market entry on too small a scale
▪ Poor commercialization of the new-venture product
▪ Poor corporate management of new-venture division
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20. GUIDELINES FOR SUCCESSFUL
INTERNAL NEW VENTURING
▪ Understanding and basing new ventures on R&D
▪ Giving funding for research to business unit managers
who can narrow down and then select the best set of
research projects
▪ Work with R&D scientists to continually develop and
improve the business model and strategies
▪ Fostering links between R&D and marketing to the
commercial success of the new product
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21. GUIDELINES FOR SUCCESSFUL
INTERNAL NEW VENTURING
▪ Fostering links between R&D and manufacturing to
ensure cost-effective manufacturing of the product
▪ Construct efficient-scale manufacturing facilities
and give marketing a large budget
▪ To develop a future product campaign that will build
market presence and brand loyalty quickly
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22. ACQUISITIONS
PRINCIPAL WAY COMPANIES ENTER NEW INDUSTRIES TO PURSUE VERTICAL
INTEGRATION AND DIVERSIFICATION USED BY COMPANIES TO MOVE FAST TO
ESTABLISH A PRESENCE IN AN INDUSTRY LESS RISKY THAN INTERNAL NEW
VENTURES. EASY WAY TO ENTER AN INDUSTRY THAT IS PROTECTED BY HIGH
BARRIERS TO ENTRY. ALIBABA+HUNGRYNAKI!
• Integrating the acquired company
• Overestimating economic benefits
• Expense of acquisitions
• Inadequate pre-acquisition screening
Pitfalls
• Target identification and pre-acquisition screening
• Bidding strategy
• Integration
• Learning from experience
Guidelines for success
23. JOINT VENTURES
▪ Two or more companies agree to pool their
resources to create new business
▪ Allows a company to share the risks and costs
associated with establishing a business unit
▪ Resulting problems
▪ Partner with superior skills will have to give away
profits
▪ Different business models or time horizons leading to a
conflict about how to run the joint venture
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