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Lecture 6 Diversification Strategy

Lecture 6 Diversification Strategy - Diversification...

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Diversification Strategy
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Diversification Strategy Diversification strategy involves creating value  through the configuration and coordination of  multi-market activities. Examples of Diversification Pepsi:  bottled water Walt Disney:  cruise lines Sony: Sony Pictures British Petroleum moving “Beyond Petroleum”
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Two key questions: 1. What businesses should the firm be in? 2. How should the corporate office manage the  array of business units? Diversification is a value creating strategy only  if the corporate whole adds up to more than  sum of its business unit parts
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How do you diversify? Sell your current product in a new distribution  channel Sell a new product in your current distribution  channels Sell a new product in a new distribution  channel It is not necessary to do a M&A to diversify
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How do firms vary by degree of diversification? Low Levels of Diversification Single business:   95% + of revenue come  from a single business unit UPS Dominant-business:  70% to 95% of revenue … Hershey Foods (chocolate and non-chocolate  items, other grocery products like syrups, milk,  cocoa mix etc.)
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How do firms vary by degree of diversification? Moderate Levels of Diversification Related-diversified: Less than 70% of revenues  come from a single business Many product, technology, and distribution  linkages between businesses –  Related  diversification Procter & Gamble (soaps, shampoos) Limited linkages PepsiCo (drinks and snacks)
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How do firms vary by degree of diversification? High Levels of Diversification Unrelated-diversification Business units not  closely related Conglomerates
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Diversification vs. Vertical Integration Diversification Small car maker Saturn enters the SUV market Vertical Integration Honda builds car engines in house (backward vertical  integration) Coca-Cola buys its bottlers (forward vertical  integration)
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How do firms add value by diversification? “There is a perception in this country that you’re better off if  you’re in two lousy businesses than if you are in a good one-that  you’re spreading the risk.  It’s crazy.” Robert Goizueta, CEO of  Coca-Cola
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How do firms add value by diversification?
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