CORPORATE LEVEL STRATEGY: RELATED & UNRELATED DIVERSIFICATION

1. CORPORATE LEVEL STRATEGY: RELATED & UNRELATED DIVERSIFICATION BUSINESS 189 SPRING 2007 DR. MARK FRUIN

2. H & V INTEGRATION VERSUS DIVERSIFICATION • CHAPTERS 9 & 10 NEED TO BE UNDERSTOOD TOGETHER • THEY CONSIDER THE SAME ISSUE, CORPORATE LEVEL (MULTIBUSINESS) STRATEGIES FROM DIFFERENT ANGLES • THE CONTEXT IS WHAT WE ARE FAMILIAR WITH - A U.S. POINT OF VIEW • HOWEVER, DIFFERENT STORIES IN JAPAN, KOREA, CHINA, INDIA, THAILAND, AND ELSEWHERE • BECAUSE DIVERSIFICATION ACHIEVED THROUGH BUSINESS GROUPS AND INTERFIRM NETWORKS

3. 3 GROWTH STRATEGIES • DO IT YOURSELF (INTERNAL GROWTH) • BUY IT (ACQUISITION) • PARTNER (SHORT- TO LONG-TERM COOPERATIVE STRATEGIES)

4. DISTINCTIVE v. CORE COMPETENCIES • DISTINCTIVE COMPETENCIES • SOMETHING THAT YOU DO WELL AND YOUR RIVALS DON’T DO AS WELL • CORE COMPETENCIES: VERY FEW DISTINCTIVE COMP-->CORE COMP • EXPANDABILITY • TRANSFERABILITY • INIMITABILITY

5. ESTABLISHING A COMPETENCY AGENDA: Prahalad & Hamel, p. 339 • INDUSTRY VS COMPETENCY AXES (NOW/EXISTING & FUTURE) • 2 X 2: EXISTING VS NEW • PREMIER PLUS 10 (NEW COMPETENCE/ EXISTING INDUSTRY: BUILD & EXTEND) • MEGA-OPPORTUNITIES (NEW INDUSTRY/NEW COMPETENCE - NIRVANA) • WHITE SPACES (NEW INDUSTRY/ EXISTING COMPETENCY: TRANSFER FROM OLD TO NEW) • FILL IN THE BLANKS (IMPROVE & LEVERAGE: EXISTING/EXISTING)

6. INCREASING PROFITABILITY THRU DIVERSIFICATION • PERFORM ONE OR MORE VALUE CREATING FUNCTIONS AT LOWER COSTS & HIGHER QUALITY (FL STRATEGY) • PERFORM ONE OR MORE VALUE CREATING FUNCTIONS TO ALLOW DIFFERENTIATION AND GIVE BETTER PRICING OPTIONS (LB STRATEGY) • HELP THE FIRM BETTER MANAGE INDUSTRY RIVALRY (LB STRATEGY) • IN OTHER WORDS, USE STRATEGY STACK TO STRATEGIC ADVANTAGE

7. INCREASING PROFITABILITY THROUGH DIVERSIFICATION • TRANSFER COMPETENCIES ACROSS INDUSTRIES (TECH & MKT RELATED DIVERSIFICATION) • LEVERAGE COMPETENCIES (MORE INTANGIBLE THAN TANGIBLE: GOOD FINANCIAL/HR SKILLS) • SHARING RESOURCES: ECONOMIES OF SCOPE • PRODUCT BUNDLING: OFFERING COMPLEMENTARY BUT UNRELATED GOODS & SERVICES • WINTEL IS MOST FAMOUS EXAMPLE • FOOD & ENTERTAINMENT AT NIGHTCLUB

8. MULTIBUSINESS MODEL • HOW TO TRANSFER & LEVERAGE COMPETENCIES ACROSS INDUSTRIES • FIRST, A BUSINESS MODEL FOR EACH INDUSTRY IN WHICH FIRM COMPETES • HOW TO SUCCEED IN THIS BUSINESS • SECOND, HIGHER LEVEL MODEL THAT JUSTIFIES ENTRY INTO DIFFERENT INDUSTRIES • HOW TO COMBINE MANAGEMENT OF SEVERAL DIFFERENT BUSINESSES

9. FREE CASH FLOW MEASURE • FOR SOME, DIVERSIFICATION CHOICES ARISE WHEN FIRM GENERATES CASH IN EXCESS OF THAT REQUIRED TO FUND INVESTMENTS IN EXISTING BUSINESS/ES & TO MEET DEBT REQUIREMENTS • OF COURSE, BY THIS DEFINITION, DIVERSIFICATION OPPORTUNITIES ARISE WHEN EXCESS RESOURCES OF ANY SORT ARE AVAILABLE, NOT JUST FREE CASH

10. TRANSFERRING COMPETENCIES • IS NOT EASY • BECAUSE THEY ARE OFTEN STICKY 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 ARISE WHEN TWO OR MORE BUSINESS UNITS SHARE RESOURCES, EITHER TANGIBLE OR INTANGIBLE • BRAND EQUITY

11. MULTIPOINT COMPETITION • WHEN COMPANIES COMPETE IN DIFFERENT INDUSTRIES (AT THE SAME TIME & WITH THE SAME RIVALS) • MANAGE RIVALRY • ATTACKS IN ONE INDUSTRY ARE MET OR MATCHED IN ANOTHER • MOSTLY, MOVES ADJUST PRICES; SOMETIMES REWORK PRODUCT OFFERINGS • WHY ARE MOVES MOSTLY MINOR?

12. 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) • (LEADERSHIP AND/OR ABILITY TO SEIZE THE MOMENT)

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

14. LIMITS TO DIVERSIFICATION • BUREAUCRATIC COSTS • NUMBER OF BUSINESSES • COORDINATION AMONG BUSINESSES • LIMITS TO EFFECTIVE GOVERNANCE • CULTURE FALLS APART; THERE IS NO CENTER • (FOCUS NEEDED TO SUCCEED IN INDIVIDUAL BUSINESSES IS LOST)

15. SONY’S WEB OF CORPORATE-LEVEL STRATEGY • FIGURE ON p. 357 • SONY’S CORE INDUSTRY OF CONSUMER ELECTRONICS • SURROUNDED BY • RELATED DIVERSIFICATION (COMPUTERS, CELL PHONES) • UNRELATED DIVERSIFICATION (PLAY STATION) • BACKWARD INTEGRATION (COMPONENTS) • FORWARD INTEGRATION (MUSIC, MOVIES) • WHAT DO YOU THINK OF THIS FIGURE?

16. INTERNAL NEW VENTURES • A KIND OF DIVERSIFICATION • WHY NEW VENTURES FAIL • MARKET ENTRY TOO SMALL A SCALE • LARGE SCALE ENTRY A PRECONDITION OF SUCCESS, ESP. FOR LARGE FIRMS • POOR COMMERCIALIZATION SKILLS • CROSSING THE CHASM (TWICE) • POOR MANAGEMENT OF VENTURE PROCESS • TOO MANY NEW VENTURES STARTED • MISUNDERSTAND STRATEGIC CONTEXT • UNDERESTIMATE TIME & COSTS INVOLVED • POOR IMPLEMENTATION/EXECUTION

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

18. 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, ARE NOT WHAT IS NEEDED ALONG WAY

19. ACQUISITIONS STRATEGY • GUIDELINES FOR SUCCESS • IDENTIFICATION & SCREENING • BIDDING STRATEGY (AVOID BIDDING WARS) • INTEGRATION (PRE- & POST-INTEGRATION) • LEARNING FROM EXPERIENCE (OF MAKING ACQUISITIONS; LEARNING FROM ACQUIRED FIRMS; VICARIOUS LEARNING (OTHERS DOING THE SAME THING)

20. PORTER’S GUIDELINES • 3 TESTS • ATTRACTIVE INDUSTRY? • RECOVER INITIAL INVESTMENT? • BETTER OFF WITH (OR WITHOUT) • 4 STRATEGIES • SHARING ACTIVITIES (POOLING) • RESTRUCTURING • SKILLS TRANSFER • FINANCIAL MANAGEMENT

21. RESTRUCTURING • DIVERSIFICATION DISCOUNT • THE WHOLE IS NOT MORE THAN THE SUM OF THE PARTS • EXIT STRATEGIES • DIVESTMENT • MARKET-BASED VS MANAGEMENT BUYOUT (MBO) • HARVEST AND THEN LIQUIDATE • DELAYED DIVESTMENT

22. ALTERNATIVES TO FIRM-LEVEL DIVERSIFICATION • BUSINESS GROUPS • HOLDING COMPANY MODEL (EUROPE) • FAMILY-BASED IN EMERGING ECONOMIES • INTERFIRM NETWORKS • INTERMARKET AND VERTICAL • CONSORTIUMS • EASIEST AT PRE-COMPETITIVE STAGES • INDUSTRIAL DISTRICTS • STRENGTH & DIVERSITY BY BEING THERE

23. PHILIPS V. MATSUSHITA • WHAT KIND OF C-L STRATEGIES ARE BEING DEPLOYED • DISSIMILAR WHEN IN DIFFERENT INDUSTRIES BUT SIMILAR IN THE SAME INDUSTRIES? • WHAT IS PHILIPS GOOD AT? MATSUSHITA? • WHAT FACTORS ARE LIKELY TO INFLUENCE SUCCESS OF C-L STRATEGIES?