Corporate Strategy and

Diversification
Corporate Strategy and Diversification
• Focuses on corporate strategy moves from being a single-business
enterprise to a diversified, multi-industry company. This means:
• Picking new industries to enter and deciding on the means of entry
• Pursuing opportunities to leverage cross-business value chain relationships
where there is strategic fit into competitive advantage
• Initiating actions to boost the combined performance of the corporation’s
collection of businesses
• Sticking closely with existing business lineup
• Broadening the scope of diversification by entering additional industries
• Retrenching to a narrower scope of diversification
• Broadly restructuring the entire company
Justifying Diversification
• Diversification is justified if it provides long-term economic value for
shareholders, tested through:
• Industry attractiveness
• Cost of Entry (where more attractive industries are typically more expensive)
• Better-off test (or synergies built by expanding towards the new industry)
Ways to Diversify a Business
• Diversification by Acquisition
• Access resources and capabilities already built by a firm, at the cost of an acquisition premium
(priced higher than market value)
• Diversification by Internal Development or Corporate Venturing
• Only if in-house has most of the resources and capabilities necessary
• There is ample time
• It is less expensive vs acquisition
• Will not adversely affect supply-demand balance
• Rival firms of new industry will be slow to respond vs new entrants
• Diversification by Joint Venture
• Good when industry is too complex, uneconomical or risky to pursue alone
• Disadvantageous because ally will have access to some resources put on the table
• Exposes the organization to unnecessary risk
• Typically less durable (Can walk away at less expense than if investing alone)
Modes of Entry
• Does the company have all of the resources and capabilities it requires in-
house?
• If yes, internal development may be considered.
• Are there entry barriers?
• If yes, is it low or high?
• Low : Internal Development
• High : Acquisition or Joint Venture (with added risks)
• Is speed an important factor?
• If yes, acquisition is faster due to it’s established targets and low requirements
• What is the least costly mode of entry based on the company’s objectives?
• Acquisition is expensive, Joint ventures less so, internal development costs are
dependent on necessities and time required
Diversification through Related and Unrelated
Businesses
• Related Businesses are considered related if their value chains exhibit
competitively important cross-business commonalities. Inverse this,
we consider them unrelated.
• Both of these have considered benefits depending on the risk-carrying
capacity of the organization and its shareholders.
Related Business Diversification
• Strategic fit, the commonality of value chain activities of the expanded business
with already in place processes and activities, poses less risks, but provides less
advantages in broadening the horizons, resources and capabilities of the
organization
• Opportunities of diversifying to related business include:
• Transferring expertise, capacities and strategic assets from established to expansion
• Sharing costs between businesses and combining related value chain activities
• Exploiting common use of a brand-name
• Sharing other resources to support the value chain
• Engaging in cross-business collaboration and knowledge sharing
• What is leveraged in related business diversification is specialized resources and
capabilities
Where can Strategic Fit be found
• Supply Chain Activities
• Procuring Materials
• Logistics, Collaboration, Common Supply Chains
• Economies of Scale if using same parts/components
• Research and Development, Technology Activities
• Technological advances
• Manufacturing
• Cost-efficient production methods
• Quality Control expertise
• Sales and Marketing
• Same media ads, brochures
• Reduction to singular sales force
• Distribution
• Distribution Center consolidation
• Customer Service
Economies of Scope
• Cost reductions from operating in a large scope of operations with
numerous strategic fits. Through these strategic fits, the higher the
potential for related diversification strategies that give them
advantages over rivals as long as
• These cross-business strategic fits are exploited
• That related diversification is pushed for strategic fits to appear
• That the larger businesses are converted into competitive advantage
• That benefits come from transferring specialized capacities and resources
• That benefits are not automatically realized unless management and the
workforce accepts and are able to reap it
Diversification into Unrelated Businesses
• Typically, this strategy is poised for corporations who are willing to
expand to ANY business where there is an opportunity for good
financial results
• Profitability and Return on Investment
• Attractive Growth Potential
• Significantly contribute to parent firm’s bottom line
Considerations in Unrelated Expansion  Corporate Reputation
 Credit Rating
 Access to Financial
• No cross-business strategic fit Markets
 Governance Mechanisms
• Dedication to being a “corporate parent”  Management Training
Programs
• Developing capabilities  Corporate Ethics
• Guidance, Grooming and Governing Constituents Programs
 Data and Communication
• Sharing and Transferring general resources and capabilities Centers
 Administrative Resources
 Public Relations and
Legal
 Budgeting, Financial
Reporting
 Quality Control
Corporate Parenting Benefits
• High-level oversight and guidance
• General Resource provision at lower costs
• Umbrella Branding – A corporate branding that can be added to
different business types
• Cross-business Allocation of Financial Resources
• Acquiring and Restructuring Undervalued Companies
Parenting Advantage
• The parenting advantage coming from an established parent company
supporting an expansion demonstrates abilities to pass through the
tests of corporate advantages easier than those without guidance
• Diversification into industries that can produce good ROI
• Negotiation through pressures to gain favorable acquisition prices
• Provision of high-managerial oversight, resource allocation and portfolio
management
Drawbacks of Unrelated Diversification
• Demanding Managerial Requirements
• Limited Competitive Advantage Potential
• Volatile Growth and Stabilization
• Risks are different and significantly less anticipated than established
risks
Steps in Evaluating Strategies for Diversification
• Assess the attractiveness of industries has diversified into, both by itself
and within the umbrella
• Assess the competitive strengths of the company’s business units
• Evaluate the extent of cross-business strategic fit along the value chains of
each business
• Check whether the firm’s resources fit the requirements of its present
lineup
• Ranking the performance prospects of the businesses from best to worst
and determining what should be prioritized
• Craft a new strategic move plan to improve overall corporate performance
Industry Attractiveness Scores

• Does each industry the

organization has diversified into
represent a good market for
the company to be in?
• Which are the most and least
attractive?
• How appealing is the whole
group of industries?
Competitive Strength Assessments

• How large is the market share

• How expensive or cheaper is it
• How well does it match our key product
attributes
• What benefits will it receive from sister
businesses
• How well does it bargain with
suppliers/customers
• How well do they push their brand
image?
• What are their other
resources/capabilities
• How profitable are they vs competitors?