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