Chapter9 CorporateDiversification
WhatisCorporateDiversification
CorpDiversificationstrategyWhenafirmoperatesinmultipleindustriesormarketssimultaneously
ProductDiversification StrategyWhenafirmoperatesinmultipleindustries simultaneously
GeographicMarket DiversificationStrategyWhen firmoperates multiplegeographicmarkets
a in simultaneously
ProductmarketDiversification Strategy When firmimplements
a typeofdiversificationsimultaneously
both
LimitedCorporate
Diversification
LimitedCorpDiversification whenallormostofitsbusnactivitiesfallwin asingleindustry geographicalmarket
Sinolebushfirmsfirmsw greaterthan95 oftheirtotalsalesin asingleproductmarket
am
2
fi ii
Pursue businessesBusiness E
siffiiiiii i fi f
asmallerBusiness F
iiiiiniiraswncantwno
RelatedCorporateDiversification
Whenafirmengagesinbusinessesinmorethanoneproductormarket
Whenlessthan70 ofafirm'srevenuecomesfroma singleproductmarket thesemultiplelinesofbusnshareimportanteconomiesofscope
Economy ofScopeExistswhenthevaluecreated severalbusnsoperatedtogetherisgreater
by thanthevalueofthesebushs operated
Relate strained
Whenallbusnsinwhichafirmoperatessharethe sameeconomiesofscope
Strategy is relatedbeof theeconomiesofscopethatexistsamongafirmsbusns
It is constrained
beallofthebusns in afirm'sportfoliosharethesameeconomiesofscope
Relatedlinked Ifthe diffbusnsthatasinglefirmpursuesrealizedifftypesofeconomiesofscope
than70 ofafirm'srevenuesisgeneratedinasingleproductmarket whenthebusnsin a
UnrelatedCorporateDiversification Whenless
firmsportfolioshareafew
Value ofCorporateDecision
Mustbesomevaluableeconomyofscopeamongthemultiplebusnsinwhichafirmisoperating
Mustbelesscostlyformanagers in afirmtorealizetheseeconomiesofscopethanforoutsideequityholdersontheirown
Scopereferstothe rangeofbusns inwhichadiversifiedfirmoperates
tothelowercostsorhigherrevenuesassociated w operatingmultiplebusns
Economiesrefer
Diversification
toExploitSharedActivities
Valuechainanalysiscanbeusedtodescribespecificbusnactivities of afirm
SharedActivitiesPotentialsourcesofoperationaleconomiesofscopefordiversifiedfirms
LimitsofActivitySharing
1Substantialorganizationalissuesareoftenassociated w adiversifiedfirm'slearninghowtomanagecrossbusn
relationships
2Maylimittheabilityofabushtomeetitsspecificcustomer'sneed
3 Ifonebusn in adiversified
firmhasapoorreputationsharingactivitieswthatbushcanreducethequalityofthereputation
ofotherbusnsinthefirm
CoreCompetenciesasanEconomyofScope
Corecompetencies Is identified asthecollective learning inthe organizationespeciallyhowtocoordinatediverseproduction
skills integratemultiplestreamsoftechnologies
SharedBusiness TransnationalCoreCompetencieslearning know how eexperiencethatdevelopsinabush In a diversifiedfirm
thatcanbeleveraged inotherbusn Winthatfirm
SharedBusinessLevel
Competencies
Mayormaynotbeaccompledbysharedactivities
TransnationalStrategyBushwn diversified
a firmthatdevelops thensharesthiscorecompetence wotherbusn inthefirm in a
nondomesticmarket
CorporateCompetenceExistswhenafirmdevelopsmanagerialskills
technicalknow
how experience wisdomin managingadiversified
Corecompetencies
Lim
1 StemsfromimportantorganizationalissuesThe thatadiversifiedfirmisorganizedcaneitherfacilitatethecorecompetenciesorprevent
way
thisexploitationfromoccurring
2 Resultoftheintangiblenatureoftheseeconomiesofscope
of
DominantLogicIntangiblecharacter theserelationships Acommon of
way thinkingaboutstrategyacrossdiffbusns
of of
Theintangibility corecompetenciescanleaddiversifiedfirmstomake2kinds errorsinmanagingrelatedness
InventedCompetenciesNot of
realsourcesofeconomies scope
to
Diversification ExploitFinancialEconomies ofScope
canbeallocatedtobusnsinoneoftwoways
Diversification CapitalAllocationCapital
1Cancompeteforcapital intheexternalcapitalmarket
In P 1m Linadiversifiedfirm competeforcorporatecapital
get
Limits
fifth firmpursuescanaffecttheefficiencyofthisallocationprocess
2 Increasedefficiency ofinternalcapitalallocationdependsonmanagersinadiversifiedfirmhavingbetterinfoforcapitalallocation
thantheinfoaulb.toexternalsources
3Managers inchargeofallocationmayhaveanincentivetocontinueinvestinginabushdespiteitspoorperformanceeprospects
of
Escalation commitmentReputationestatusof
mgrsdependonthesuccessofthesebusninvestmentsMingrsoften
continue
throwinggoodmoney thesebusns inhopetheysomedayimprove
Diversification Risk
Reduction
Riskinessofthecashflowsofdiversifiedfirmsislowerthantheriskinessofthecashflowofundiversifiedfirms
Isduetothelowcorrelationbtwncashflowsassociatedwtwobusns
TaxAdvantages ofDiversification
1 Diversifiedfirmcanuselossesinsomeofitsbusnstooffsetprofitsinother
2 Itcanalso theriskinessofafirm'scashflowscanalsoreduceprobabilitythatafirmwilldeclarebankruptcy
reduce
Diversification
toExploitAnticompetitiveEconomiesofScope
MultpointCompetitionExistswhentwoormorediversifiedfirmssimultaneouslycompete in multiplemarkets
ExDell HPcompeteinboththepersonalcomputermarket themarketforcomputerprinters
MutualforbearanceSituationinwhichallpartiesforbearonareciprocalbasisThe
restraint thecapacity to
endure
TacitCollusionWhenbusnscooperatetoreducerivalrybelowthelevelexpectedunderperfectcompetition
Diversification MarketPowerInternalallocationofcapital
amnga
diversifiedfirm'sbusns
mayenable ittoexploitinsomeof
itsbusnsthemktpoweradvantages itenjoys inotherofitsbusns
PredetoryPricingSettingpricessothat lessthanthesubsidizedbush'scosts
theyare
DeepP ocketsmodelD enablesafirmtoapplyitsmonopolypowerinseveraldifferentbusns
iversification
FirmSizeEmployeeIncentivestoDiversify
Employeesmayhaveincentives todiversifythatareindependent ofanybenefitsfromothersourcesofeconomiesofscope
firmbutthesizeofthe
Primarydeterminant ofthecompensationoftopmgrsin afirmisnottheeconomicperformanceofthe
firmusuallymeasured insales
RarityofDiversification
Mostlargefirmshaveadoptedsomeformofdiversificationifonlythelimiteddiversification ofadominantbusinessfirm
Im
8 satisfaction
Extenttowhichavaluableerarecorporatediversificationstrategyis immunefromdirectduplicationdependsonhowcostly itis
forcompetingfirmstorealizethissameeconomyofscope
Sharedactivitiesriskreductiontaxadvantages eemployeecompensationasbasesforcorporatediversificationareusuallyrelatively
Subs
t.fi af p grow developeachofitsbusnsseparately
Growingindependentbusns wn adiversified
firmcanbeasubsituteforexploiting economiesofscopein adiversification
2Strategist likeafirmmaybeabletogaintheeconomiesofscope itcouldhaveobtained if ithadcarefully exploited
ofscopeacrossitsbusns
economies
