Corporate Strategy:

Related & Unrelated Diversification

Dr. Mohammad Hamsal, MBA

 How do Strategists Pursue Growth?
Corporate strategy: determines the
industries where the corporation will operate
and what activities will be undertaken by firms
within the corporation
Acquisition: strategy in which one firm buys a
controlling or 100% interest in another firm
Strategic alliance: strategy in which 2 or
more firms form a relationship in order to
pursue mutual interests that have implications
for the long-term, at least for one of the
partner firms
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 Two Types of Organizations

Single/Focused/Specialized Diversified Companies:

Companies Related & Unrelated

Focus on core business Wide range business portfolios

Integrated management Very complex management

Specialist Generalist

Long-term plan Flexible to market changes

Technology capability Building strong capital

Tend to centralization Decentralization - spin off

Source: Saloner, Shepard & Podolny (2001), Strategic Management, JW&S

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Single Business: Examples

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 Single Business Strategy: BNI
10 Priorities for Turnaround

People Development

Business Budaya Pemimpin yg

Berkinerja & Kuat & SDM Operational
Excellence Improvement
Pelayanan Berkualitas
Retail Bank
Modern Implementasi
IT
Aliansi
Strategik
BNI EXCELLENCE Pemantapan
Jaringan
Unggul dalam Layanan
Penagihan Distribusi
Kredit dan Kinerja
Macet & Efisiensi Biaya
NPL yang Operasional
Agresif
Strategic Control
Kompetensi Effective Risk
Kredit & Sales Management

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Specialized Firm Strategies: Walt Disney

Mickey Mouse,
Animated
cartoons of
characters

Theaters, TVs, videos, Sources Komplementor:

toys, magazines, of Hotel, Restoran,
books, internet, Revenues produk lain.
record album

Life Action

Core
Competences

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Diversification of Business Scope: Walt Disney

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 Corporate-Level Strategy
Corporate-Level Strategy should allow a company to
perform the value creation functions at lower cost or in a way
that allows for differentiation and premium price.

Corporate strategy is used to identify:

1. Businesses or industries that the company
should compete in
2. Value creation activities which the company
should perform in those businesses
3. Method to enter or leave businesses or
industries in order to maximize its long-run
profitability

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 Expanding Beyond a Single Industry
Staying inside a single industry allows a company to:
Focus its resources Stick to the knitting
BUT staying within a single industry:
Can be dangerous if the industry matures and goes into
decline
May cause firms to miss the opportunity to leverage their
distinctive competencies in new industries
Can cause firms to develop a tendency to rest on their laurels
and not engage in constant learning

To stay agile, companies must leverage

find new ways to take advantage of their distinctive
competencies and core business model
in new markets and industries.
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 A Company as a Portfolio of Core
Competencies
Reconceptualize the company as a portfolio of
distinctive competencies. . . rather than a portfolio
of products:
Consider how those competencies might
be leveraged to create opportunities in new
industries
Existing competencies versus new
competencies that would need to be
developed
Existing industries in which a company
competes versus new industries

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Why Diversify beyond Core Competence?

Mistaken idea: bigger is always better

Bigger businesses typically lead to bigger
salaries and more career opportunities for
managers
Firms that diversify assume strategic risks
Disney diversified from its core (animated
films, theme parks) to unrelated businesses

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 Corporate Strategy of Diversification
Diversification Strategy is the companys decision to enter
one or more new industries (that are distinct from its
established operations) to take advantage of its existing
distinctive competencies and business model.
Related Diversification
Entry into a new business activity in a different industry that:
Is related to a companys existing business activity or activities and
Has commonalities between one or more components of each activitys
value chain
Based on transferring and leveraging competencies, sharing resources, and
bundling products
Unrelated Diversification
Entry into industries that have no obvious connection to any of a
companys value chain activities in its present industry or industries
Based on using only general organizational competencies to increase
profitability of each business unit

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Sonys Web of Corporate Strategy

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Coordination among Related Business
Units

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 The Multi-Business Company
Stakeholder markets
(Capital market etc.) Anything above the
business unit level
represents corporate
Corporate Corporate parent
activity:
level
Board Corporate parent
The role of the
Corporate corporate parent is to
center add value.
The corporate parent
Divisions is the middle man
between the
Business businesses and the
SBU capital markets, etc.
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 Focus on Unique Propositions
Unique parenting proposition
Corporate parent
Corporate Parenting
Corporate Board
Strategy Advantage
level

Corporate Superior
centre Performance

Divisions

Competitive
Business Advantage
Business SBU Strategy
level
Dr. Mohammad Hamsal Unique selling proposition
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 Parenting Propositions
A parenting proposition is an area of parenting where the
corporate level has (or is ambitious to have) special skills
that can create value added in its businesses.
Often corporate managers have not considered what
their parent propositions are: Either it was not relevant or
the concept was not understood.
Implicit position: Ask not what we do for the businesses.
Ask what the businesses can do for the company.
Parenting propositions must be built around a logic that
explains why the parent is in a better position than the
business unit to define particular initiatives
The challenge is finding a set of parenting propositions
and using them to decide on a list of corporate initiatives.
Source: Goold, Campbell, Alexander (1994)

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 Types of Parenting Propositions
Select propositions:
Creating value by acquiring units or people for less than they are worth or disposing
of activities for more than they are worth.
Build propositions:
Helping units expand their size and scope of activity, for example helping with
globalization and product range extension, or by raising growth ambitions.
Stretch propositions:
Helping units improve costs, quality, or profitability, for example by setting stretching
targets, providing benchmarks, or intervening to raise performance levels.
> Granada: Ability to stretch performance
Link propositions:
Work together in ways that the units would find difficult if left to themselves, for
example by facilitating coordination, centralizing activities or providing management
support.
> Monsanto: Develop Life sciences by integrating the pharmaceutical,
agrochemical, and biotechnology business
Leverage propositions:
Exploit a central resource, such as a brand, a relationship, a skill, or a patent, in new
markets or businesses.
> Unilever: The skills at moving product and market information across business
borders.

Source: Goold, Campbell, Alexander (2002: 280)

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Commonalities Between Value
Chains of Three Business Units

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 Increasing Profitability
Through Diversification
A diversified company can create value by:
Transferring competencies among existing businesses
Leveraging competencies to create new businesses
Sharing resources to realize economies of scope
Using product bundling
Managing rivalry by using diversification as a means in
one or more industries
Exploiting general organizational competencies that
enhance performance within all business units
Managers often consider diversification when their
company is generating free cash flow with resources in
excess of those needed to maintain competitive advantage.
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 A Dynamic, Evolutionary View of
Diversification
Jack Welch: Create a market leader or get out of the business

Variation Selection Retention

Acquire new Select businesses for Divest businesses

businesses in growth based on their where competitive
order to increase ability to develop advantage cannot
the gene pool of competitive advantage be achieved and re-
resources invest in the gene
pool

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 Entry Strategies to Implement the
Multibusiness Model

Internal New Ventures

Company has a set of valuable competencies in its existing
businesses
Competences leveraged or recombined to enter new business
areas
Acquisitions
Company lacks important competencies to compete in an area
Company can purchase an incumbent company that has those
competencies at a reasonable price
Joint Ventures
Company can increase the probability of success by teaming up
with another company with complementary skills
Joint ventures are preferred when risks and costs of setting up a
new business unit are more than company can assume

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 Restructuring
Restructuring is the process of divesting businesses
and exiting industries to focus on core distinctive
competencies in order to increase company profitability.

Why restructure?
Diversification discount: investors see highly
diversified companies as less attractive
Complexity and lack of transparency in financial statements
Too much diversification
Diversification for the wrong reasons
Response to failed acquisitions
Innovations in strategic management have
diminished the advantages of vertical integration or
diversification
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 Summary
Diversification is an alluring, almost inevitable
growth strategy
Businesses should be viewed by corporate
headquarters as something more than financial
assets
Corporate parents justify their existence by
adding value to business units
A resource-based diversification strategy
commits corporate HQ to leveraging, learning
and developing core competencies or invisible
assets

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