CORPORATE LEVEL STRATEGY: RELATED & UNRELATED DIVERSIFICATION, Chpt 10

1. CORPORATE LEVEL STRATEGY: RELATED & UNRELATED DIVERSIFICATION, Chpt 10 BUSINESS 189 Spring 2014 DR. MARK FRUIN

2. H & V INTEGRATION VERSUS DIVERSIFICATION • UNDERSTAND CHAPTERS 9 & 10 TOGETHER • THEY CONSIDER THE SAME ISSUE, CORPORATE LEVEL (MULTI-BUSINESS) STRATEGIES FROM DIFFERENT ANGLES • IN A FAMILIAR CONTEXT - U.S. POINT OF VIEW • RARE THAT COMPANIES CAN INVEST IN DIFFERENT LINES OF BUSINESS ELSEWHERE IN WORLD • MOST FIRMS = SINGLE LINES OF BUSINESS FIRMS • HOWEVER, DIFFERENT STORIES IN JAPAN, KOREA, CHINA, INDIA, THAILAND, AND INDONESIA • BECAUSE DIVERSIFICATION ACHIEVED THROUGH BUSINESS GROUPS AND INTERFIRM NETWORKS

3. GROWTH STRATEGIES • DO IT YOURSELF (INTERNAL GROWTH) • HORIZONTAL INTEGRATION • VERTICAL INTEGRATION • GEOGRAPHICAL EXPANSION/(INTEGRATION) • BUY IT (ACQUISITION) • PARTNER (SHORT- TO LONG-TERM COOPERATIVE STRATEGIES; JOINT VENTURES, ALLIANCES & LONG-TERM RELATIONSHIPS)

4. DISTINCTIVE vs. CORE COMPETENCIES • DISTINCTIVE COMPETENCIES • SOMETHING YOU DO WELL & YOUR RIVALS DON’T DO AS WELL • CORE COMPETENCIES: VERY FEW DISTINCTIVE COMPETENCIES BECOME -->CORE COMPETENCIES – WHY? • HARD TO REALIZE THREE-AT-THE-SAME-TIME COMPETENCIES • EXPANDABILITY • TRANSFERABILITY • INIMITABILITY

5. INCREASE PROFITABILITY THRU DIVERSIFICATION: MULTIPLE STRATEGIES IN MULTIPLE BUs • PERFORM ONE OR MORE VALUE CREATING FUNCTIONS AT LOWER COSTS & HIGHER QUALITY (FL STRATEGY) • ONE OR MORE VALUE CREATING FUNCTIONS FOR PRODUCT DIFFERENTIATION & TO GIVE BETTER PRICING OPTIONS (BL STRATEGY) • HELP THE FIRM BETTER MANAGE INDUSTRY RIVALRY (LB STRATEGIES OTHER THAN CL & DIFF) • IN OTHER WORDS, USE STRATEGY STACK FOR COMPANY-WIDESIMULTANEOUS STRATEGIC ADVANTAGES • FUNCTIONAL AND BUSINESS STRATEGIES EMPLOYED SIMULTANEOUSLY IN MULTIPLE LINES OF BUSINESS ACTIVTY • RELYING ON SHARING OF COMPANYWIDE RESOURCES, CAPABILITES & COMPETENCIES, BOTH TANGIBLE & INTANGIBLE, E.G. BRAND; VERY HARD TO DO WELL

6. INCREASING PROFITABILITY THROUGH DIVERSIFICATION • TRANSFER COMPETENCIES ACROSS INDUSTRIES (TECH VERSUS MARKET BASED DIVERSIFICATION) • LEVERAGE COMPETENCIES (MORE INTANGIBLE THAN TANGIBLE: SIGNIFICANT FINANCIAL OR HR SKILLS) • SHARING RESOURCES: ECONOMIES OF SCOPE • BUILDING BRAND POWER ACROSS BUSINESSES: A KIND OF SCOPE • PRODUCT BUNDLING: OFFERING COMPLEMENTARY BUT UNRELATED GOODS & SERVICES • WINTEL IS MOST FAMOUS EXAMPLE • FOOD & ENTERTAINMENT AT NIGHTCLUB OR MALL • UTILIZE GENERAL MANAGEMENT COMPETENCIES (THIS IS VERY INTANGIBLE; WHAT ARE GENERAL MANAGEMENT COMPETENCIES?)

7. MULTIBUSINESS MODELS • HOW TO TRANSFER & LEVERAGE COMPETENCIES ACROSS INDUSTRIES • FIRST, A BUSINESS MODEL FOR EACH INDUSTRY IN WHICH FIRM COMPETES • HOW TO SUCCEED IN THIS BUSINESS? THIS COMES FIRST • SECOND, HIGHER LEVEL MODEL (WHAT DOES THIS MEAN?) THAT JUSTIFIES ENTRY INTO DIFFERENT INDUSTRIES • HOW TO COMBINE MANAGEMENT SKILLS ACROSS SEVERAL DIFFERENT BUSINESSES • WHAT CAN WE OFFER THAT WILL ENABLE US TO COMPETE SUCCESSFULLY AG. SPECIALISTS IN THIS INDUSTRY?? • THIS IS ALWAYS THE CHALLENGE: WHEN WE DIVERSIFY, WE GO TOE-TO-TOE AGAINST SPECIALISTS IN EACH BUSINESS AREA

8. FREE CASH FLOW MEASURE • FOR SOME, DIVERSIFICATION CHOICES ARISE WHEN FIRMS GENERATE CASH IN EXCESS OF WHAT IS REQUIRED TO FUND INVESTMENTS IN EXISTING BUSINESS/ES & MEET DEBT REQRMNTS • BY THIS DEFINITION, DIVERSIFICATION OPPORTUNITIES ARISE WHEN EXCESS RESOURCES OF ANY SORT AVAILABLE, NOT JUST FREE CASH • WHAT OTHER EXCESS RESOURCES MAY EXIST? • ? • ? • ?

9. TRANSFERRING COMPETENCIES • IS NOT EASY • BECAUSE THEY ARE OFTEN STICKY (EMBEDDED) IN VARIOUS WAYS (E.G., SITE- & TIME- SPECIFIC) • NON-EMBEDDED VERSUS EMBEDDED • “HYBRIDIZATION” VS. TRUE HYBRIDS • HYBRIDS HAVE SUPERIOR TRAITS TO BOTH PARENTS • ECONOMIES OF SCOPE MAY ARISE WHEN TWO OR MORE BUSINESS UNITS SHARE RESOURCES, EITHER TANGIBLE OR INTANGIBLE, AND COSTS ARE SPREAD ACROSS PRODUCT VARIETIES • BRAND EQUITY AS EXAMPLE • WOULD WE EXPECT A SUCCESSFUL PERFUMERY TO MAKE GOOD FASHION APPAREL? (CHANEL; DKNY?) • OR A MOTORCYLCE CO TO MAKE GOOD TRUCKS: H-D F150?

10. MULTIPOINT COMPETITION • COMPANIES COMPETE IN DIFFERENT INDUSTRIES AT THE SAME TIME & WITH THE SAME RIVALS • ONLY POSSIBLE WHEN COMPANIES HAVE MULTIPLE LINES OF BUSINESS WHICH OVERLAP • MANAGE RIVALRY • ATTACKS IN ONE INDUSTRY ARE MET/MATCHED IN ANOTHER • MOSTLY, MOVES ADJUST PRICING; SOME REWORKING OF PRODUCT OFFERINGS • WHY ARE MOVES MOSTLY MINOR? • DON’T WANT TO TRIGGER PRICE WARS OR RETALIATION ACROSS OTHER LINES OF BUSINESS

11. GENERAL ORGANIZATIONAL COMPETENCIES • RARE, CROSS-ORG COMPETENCIES (RELATED TO IDEA OF GEN. MGMT SKILLS) • ENTREPRENEURIAL CAPABILITIES • ORGANIZATIONAL DESIGN SKILLS (SYSTEMS, STRUCTURES & CONTROL CAPABILITIES) • SUPERIOR STRATEGIC CAPABILITIES (INTANGIBLE GOVERNANCE SKILLS) • BETTER MANAGEMENT • BETTER STRATEGY SELECTION & IMPLEMENTATION • LEADERSHIP AND/OR ABILITY TO SEIZE THE MOMENT

12. TYPES OF DIVERSIFICATION • RELATED • CONSTRAINED (OR MARKET-BASED) • LINKED (OR TECHNOLOGY-LINKED) • UNRELATED • CONGLOMERATES • BUSINESS GROUPS

13. LIMITS TO DIVERSIFICATION • BUREAUCRATIC COSTS • NUMBER OF BUSINESSES MANAGED • TRANSACTION COSTS • COORDINATION AMONG BUSINESSES • BOUNDED RATIONALITY; OPPORTUNISM • LIMITS TO EFFECTIVE GOVERNANCE • CULTURE FALLS APART; THERE’S NO CENTER • THE FOCUS NEEDED TO SUCCEED IN INDIVIDUAL BUSINESSES IS LOST WHEN MULTIPLE BUSINESSES ARE BEING MGMED

14. SONY’S WEB OF CORPORATE-LEVEL STRATEGY: AN EXAMPLE • FIGURE: SONY’S CONSUMER ELECTRONICS CORE • SURROUNDED BY • RELATED DIVERSIFICATION (COMPUTERS, SMART PHONES) • UNRELATED DIVERSIFICATION (PLAY STATION); (THIS DOESN’T SEEM UNRELATED TO ME) • BACKWARD INTEGRATION (COMPONENTS) • FORWARD INTEGRATION (MUSIC, MOVIES) • WHAT DO YOU THINK OF THIS FIGURE? • WHAT’S BEEN HAPPENING TO SONY LATELY? • WHAT’S BEEN THE PROBLEM? • HOW DOES THIS RELATE TO DIVERSIFICATION STRAT?

15. INTERNAL NEW VENTURES • A KIND OF DIVERSIFICATION • WHY NEW VENTURES FAIL: 3 MAIN REASONS • MARKET ENTRY AT TOO SMALL A SCALE • LARGE SCALE ENTRY A PRECONDITION OF SUCCESS, ESP. FOR LARGE FIRMS • POOR COMMERCIALIZATION SKILLS • CROSSING THE CHASM (TWICE); FROM EMBRYONIC TO GROWTH, AND GROWTH TO MATURITY • POOR MANAGEMENT OF VENTURE PROCESS • TOO MANY NEW VENTURES STARTED • MISUNDERSTAND STRATEGIC CONTEXT; WHAT IT TAKES TO SUCCEED AS A NEW VENTURE • UNDERESTIMATE TIME & COSTS INVOLVED • POOR IMPLEMENTATION/EXECUTION • RUNNING BIG FIRMS VS SMALL REQUIRES VERY DIFF. SKILLS

16. GUIDELINES FOR SUCCESSFUL INTERNAL VENTURING • UNDERSTAND BOTH “R” & “D” OF R&D • DOWNSTREAM LINKS TO MARKETING & SALES ARE CRITICAL DURING “D” & “R” • KEY OBJECTIVES FOR STRATEGIC SUCCESS ARTICULATED EARLY & OFTEN • CROSS-FUNCTIONAL DEVELOPMENT TEAMS; CROSS-DIVISIONAL PROJECTS • KNOW WHEN TO HOLD’EM & FOLD’EM

17. VENTURE STAGES-PHASES-STEPS • 30 + STEPS FROM START TO STOP • DOES NOT STANDARDIZE CYCLE TIMES - THESE VARY BY INDUSTRY • DOES NOT ESTIMATE PHYSICAL AND PSYCHOLOGICAL COSTS • MOST FIRMS DO NOT WIND UP FINISHING WHAT THEY SET OUT TO DO • INITIAL RESOURCES, INCLUDING HR & MARKETING, ARE NOT WHAT IS NEEDED TO MOVE ALONG THE WAY • ADDING RESOURCES & CAPABILITIES AFTER THE START IS DIFFICULT • INERTIA ALREADY IN PLACE • JEALOUSIES AND RIVALRIES AG. NEWCOMERS

18. ACQUISITIONS STRATEGY • GUIDELINES FOR SUCCESS • 1) IDENTIFY, SCREEN & VET; DO IT ALL OVER AGAIN • 2) BIDDING STRATEGY (AVOID BIDDING WARS) • 3) INTEGRATION (PRE- & POST-INTEGRATION MEASURES) • 4) LEARNING FROM EXPERIENCE (OF MAKING ACQUISITIONS; LEARN FROM ACQUIRED FIRMS • 5) VICARIOUS LEARNING (LEARNING FROM OTHERS DOING SAME THING/SAME SORT OF ACQUISITION) • 6) ORGANIZATIONAL AS OPPOSED TO INDIVIDUAL LEARNING

19. PORTER’S GUIDELINES FOR DIVERSIFICATION • 3 TESTS • ATTRACTIVE INDUSTRY? • RECOVER INITIAL INVESTMENT? • BETTER OFF WITH (OR WITHOUT) RESOURCES & CAPABILITIES; SHORT-TERM & LONG-TERM • 4 STRATEGIES • SHARING ACTIVITIES (POOLING) • RESTRUCTURING (KNOW HOW TO REORG; KNOW HOW TO SLICE & DICE) • SKILLS TRANSFER • FINANCIAL MANAGEMENT

20. RESTRUCTURING FOLLOWING DIVERSIFICATION • DIVERSIFICATION DISCOUNT • THE WHOLE IS OFTEN NOT MORE THAN THE SUM OF THE PARTS • SHARE PRICE OF ACQUIRING FIRM GOES DOWN AFTER ACQUISITION • EXIT STRATEGIES • DIVESTMENT • MARKET-BASED VS MANAGEMENT BUYOUT (MBO) • HARVEST AND THEN LIQUIDATE • DELAYED DIVESTMENT