Allow company to perform value creation functions at
lower cost or in way allowing differentiation & premium
price. Corporate-Level Strategy Used to identify: 1. Businesses/industries in which company should compete 2. Value creation activities company should perform in those businesses 3. Method to enter or leave businesses or industries in order to maximize its long-run profitability Strategy of Diversification Types of diversification: Related diversification Unrelated diversification Methods to implement diversification strategy: Internal new ventures Acquisitions Joint ventures Value Chain Functions Enables Company to Perform 1) At lower cost 2) In way that allows differentiation and gives pricing options 3) Helps manage industry rivalry better Ways to Diversify = Increase Profitability ! Transfer competencies ! Leverage competencies ! Share Resources & Capabilities ! Product bundling ! General organizational competencies
Transferring Competencies Competencies transferred must involve activities important to establish competitive advantage Taking a distinctive competency developed in one industry and implanting it in EXISTING business unit in another industry For strategy to work, the distinctive competency being transferred must have real strategic value. Increase profitability when:
1) Lowers cost structure of one or more business units 2) Enables one or more business units to better differentiate products Taking a distinctive competency developed by a business in one industry and using it to create a NEW business unit in a different industry Leveraging Competencies Economies of scope arise when business units effectively pool, share, & utilize expensive resources or capabilities = possible only when significant commonalities between one or more value-chain functions. Sharing resources and capabilities across two or more business units in different industries to realize economies of scope. Allows customers to reduce suppliers for convenience & cost savings Examples " Telecommunications " Medical equipment Differentiate products/expand product lines to satisfy customers needs for package of related products. Product Bundling Capabilities help business unit perform at higher level than operated as individual: 1) Entrepreneurial encourage risk taking 2) Organizational design create structure, culture, & control systems 3) Superior strategic management effectively manage managers of business units Skills transcend individual functions or business units. General Organizational Competencies Types of Diversification # Related - entry into new business in different industry: Related to companys existing business/activities Has commonalities between one or more components of each activitys value chain Based on transferring/leveraging competencies, sharing resources, & bundling products # Unrelated - entry into industries with no connection to any of companys activities in present industry or industries Based on only general organizational competencies to increase profitability of all business units Disadvantages/Limits of Diversification 1. Changes in Industry/Company Unpredictable future Willing to divest business units 2. Diversification for the Wrong Reasons Clear vision of how value will be created. Extensive diversification can reduce profitability. 3. Bureaucratic Costs of Diversification Costs are function of number of business units portfolio Extent coordination is required to gain benefits. Conditions = diversification disadvantageous: Coordination Among Related Business Units Choosing Strategy o Related Competencies can be applied across greater number of industries Superior capabilities to control bureaucratic costs o Unrelated Functional competencies have few uses across industries Organizational design skills to build competencies
Depends on comparison of benefits of each strategy versus cost of pursuing it: May pursue both strategies simultaneously Internal New Ventures Pitfalls: ! Scale of Entry ! Commercialization ! Poor Implementation Process of transferring/creating new business unit/division in new industry. Successful Internal New Venturing ! Place funding for research in hand of business unit managers ! Effective use of R & D competency ! Foster close links between R & D and marketing ! Large-scale entry leads to greater long- term profits Attractions of Acquisitions o Lack of distinctive competencies o Need to move quickly o Perceived as less risky than internal new ventures o Attractive way to enter new industry protected by high barriers to entry Principle strategy to start horizontal integration: Acquisition Pitfalls o Integrating the acquired company o Overestimating economic benefits o Expense of acquisitions o Inadequate preacquisition screening Guidelines for Successful Acquisition # Identification and screening # Bidding strategy # Integration # Learning from experience Joint Ventures Attractions: o Avoid risks/costs of building new operation o Sharing complementary skills/assets increase probability of success
Pitfalls: o Sharing profits if new business succeeds o Venture partners must share control conflicts can cause failure o Risk of giving know-how away to joint venture partner