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 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? Transferring Core Competencies Walt Disney using its capability for family entertainment to  enter into the cruise ship industry Developing New Competencies Stretching core competencies Laidlaw Inc. (school buses, ambulances, emergency  rooms) UPS (messenger business to common carrier business to  overnight delivery to logistics services)
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This note was uploaded on 02/17/2012 for the course MGMT 478 taught by Professor May during the Fall '11 term at South Carolina.

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Lecture 6 Diversification Strategy - Diversification...

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