Corporate Strategy: Diversification, Acquisitions, and Internal New Ventures

1
Corporate Strategy Diversification,
Acquisitions, and Internal New Ventures

• Lecture 10

2
Overview

• Diversification
• The process of adding new businesses to the
  company that are distinct from its established
  operations
• Vehicles for diversification
• Internal new venturing
• Starting a new business from scratch
• Acquisitions
• Joint ventures
• Restructuring
• Reducing the scope of diversified operations by
  exiting from business areas

3
Expanding Beyond a Single Industry

• Advantages of staying in a single industry
• Focus resources and capabilities on competing
  successfully in one area
• Focus on what the company knows and does best
• Disadvantages of being in a single industry
• Danger of the industry declining
• Missing the opportunity to leverage resources and
  capabilities to other activities
• Resting on laurels and not continually learning

4
The Multibusiness Model

• Develop a business model for each industry in
  which the company competes
• Develop a higher-level multibusiness model that
  justifies entry into different industries in
  terms of profitability

5
The BCG Matrix
Source Perspectives, No. 66, The Product
Portfolio. Adapted by permission from The Boston
Consulting Group, Inc., 1970.
6
The Strategic Implications of the BCG Matrix

• Stars
• Aggressive investments to support continued
  growth and consolidate competitive position of
  firms.
• Question marks
• Selective investments divestiture for weak firms
  or those with uncertain prospects and lack of
  strategic fit.
• Cash cows
• Investments sufficient to maintain competitive
  position. Cash surpluses used in developing and
  nurturing stars and selected question mark firms.
• Dogs
• Divestiture, harvesting, or liquidation and
  industry exit.

7
The McKinsey/GE Matrix
8
Scoring the Matrix
9
Limitations on Portfolio Planning

• Flaws in portfolio planning
• The BCG model is simplistic considers only two
  competitive environment factors relative market
  share and industry growth rate.
• High relative market share is no guarantee of a
  cost savings or competitive advantage.
• Low relative market share is not always an
  indicator of competitive failure or lack of
  profitability.
• Multifactor models such as McKinsey/GE matrix are
  better though imperfect.

10
A Company as a Portfolio of Distinctive
Competencies

• Reconceptualize the company as a portfolio of
  distinctive competencies rather than a portfolio
  of products
• Consider how those competencies might be
  leveraged to create opportunities in new
  industries
• Existing vs. new competencies
• Existing industries in which a company competes
  vs. new industries

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Establishing a Competency Agenda
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Increasing Profitability Through Diversification

• Transferring competencies
• Taking a distinctive competence developed in one
  industry and applying it to an existing business
  in another industry
• The competencies transferred must involve
  activities that are important for establishing
  competitive advantage (Phillip Morris tobacco
  beer)
• Leveraging competencies (Microsoft iPod clone)
• Taking a distinctive competency developed by a
  business in one industry and using it to create a
  new business in a different industry
• Sharing resources economies of scope
• Cost reductions associated with sharing resources
  across businesses (Coles Myer)

13
Increasing Profitability Through Diversification
(contd)

• Exploiting general organizational competencies
• Competencies that transcend individual functions
  or businesses and reside at the corporate level
  in the multibusiness enterprise
• Entrepreneurial capabilities
• Effective organization structure and controls
• Superior strategic capabilities (e.g. Tyco)

14
Types of Diversification

• Related diversification
• Entry into a new business activity in a different
  industry that is related to a companys existing
  business activity, or activities, by
  commonalities between one or more components of
  each activitys value chain
• Unrelated diversification
• Entry into industries that have no obvious
  connection to any of a companys value chain
  activities in its present industry or industries

15
The Limits of Diversification

• Related diversification is only marginally more
  profitable than unrelated diversification
• Extensive diversification tends to depress rather
  than improve profitability

16
Bureaucratic Costs and Diversification Strategy

• The costs increases that arise in large, complex
  organizations due to managerial inefficiencies
• Number of businesses in a companys portfolio
• Information problems
• Monitoring, lost opportunities
• Dominant logic
• Inability to identify the unique profit
  contribution of a business unit that shares
  resources with another unit
• Sends poor signals leads to bad decisions
• Imputation problem, transfer pricing
• Limits of diversification
• Bureaucratic costs place a limit on the amount of
  diversification that can profitably be pursued
• Costs are higher in related diversifications

17
Guidelines for successful acquisitions

• Properly identify acquisition targets and conduct
  a thorough pre-acquisition screening of the
  target firm.
• Use a bidding strategy with proper timing to
  avoid overpaying for an acquisition.
• Hostile or voluntary?
• Follow through on post-acquisition integration
  synergy-producing activities of the acquired
  firm.
• Dispose of unwanted residual acquisition assets.
• VALUE ENHANCING!!!

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Diversification That Dissipates Value

• Diversifying to pool risks
• Stockholders can diversify their own portfolios
  at lower costs than the company can
• Research suggests that corporate diversification
  is not an effective way to pool risks
• Diversifying to achieve greater growth
• Growth on its own does not create value

19
Turnaround Strategy

• The causes of corporate decline
• Poor management incompetence, neglect
• Overexpansion empire-building CEOs
• Inadequate financial controls no profit
  responsibility
• High costs low labor productivity
• New competition powerful emerging competitors
• Unforeseen demand shifts major market changes
• Organizational inertia slow to respond to new
  competitive conditions

20
The Main Steps of Turnaround

• Changing the leadership
• Replace entrenched management with new managers.
• Redefining strategic focus
• Evaluate and reconstitute the organizations
  strategy.
• Asset sales and closures
• Divest unwanted assets for investment resources.
• Improving profitability
• Reduce costs, tighten finance and performance
  controls.
• Acquisitions
• Make acquisitions of skills and competencies to
  strengthen core businesses.

21
Guidelines for Successful Internal New Venturing

• Structured approach to managing internal new
  venturing
• Research research aimed at advancing basic
  science and technology
• Development research aimed at finding and
  refining commercial applications for the
  technology
• Foster close links between RD and marketing
  between RD and manufacturing
• Selection process for choosing ventures
• Monitor progress
• Create a new venture culture (e.g. 3M)

22
Exercises

• Dun Bradstreet
• ATT