Introduction

• Definition of Corporate Strategy

– Address the question: “What is the appropriate scale
and scope of the enterprise?”
• Influences how large and how diversified firms will be.
• Successful corporate strategies are not only the product
of successful definition
– Also the result of organizational capabilities or competencies that
allow firms to exploit potential economies/synergies that large
size or diversity can offer.
 Introduction (cont.)
• Why Firms Diversify
– To grow
– To more fully utilize existing resources and
capabilities.
– To escape from undesirable or unattractive
industry environments.
– To make use of surplus cash flows.
 Introduction (cont.)
• Horizontal or related diversification
– Strategy of adding related or similar
product/service lines to existing core business,
either through acquisition of competitors or
through internal development of new
products/services.
 Introduction (cont.)
• Horizontal or related diversification
– Advantages
• Opportunities to achieve economies of scale and scope.
• Opportunities to expand product offerings or expand
into new geographical areas.
Disadvantages of related diversification
• Complexity and difficulty of coordinating different but
related businesses.
 Introduction (cont.)
Conglomerate or unrelated diversification
– Firms pursue this strategy for several reasons:
• Continue to grow after a core business has matured or
started to decline.
• To reduce cyclical fluctuations in sales revenues and
cash flows.
– Problems with conglomerate or unrelated
diversification:
• Managers often lack expertise or knowledge about
their firms’ businesses.
 Relatedness
Relatedness in
in Diversification
Diversification

Synergy in diversification derives from two main types of

relatedness:
• Operational Relatedness-- synergies from sharing
resources across businesses (common distribution
facilities, brands, joint R&D)
• Strategic Relatedness-- synergies at the corporate level
deriving from the ability to apply common management
capabilities to different businesses.

Problem of operational relatedness:- the benefits in terms

of economies of scope may be dwarfed by the
administrative costs involved in their exploitation.
 Strategies of related diversification

• TIMING

Offensive:-leveraging existing
Strength:- pre-empting rival
Defensive:-escaping weak core
• INDUSTRY

– What are the key sources of competition?

– How vulnerable is intended positiong strategy to
these competitive forces?
• SYNERGIES

– Common resources

– Sharing activities
 Common traps and Flawed reasons for
expansion
• TIMING

– Defensive expansion :-To escape problem in core

business
– External pressure:-Capital market
– Internal Slack:-Flush with cash
• INDUSTRY

– Interpret threats as opportunities.

– Ignore impact of company
– Forces on target position
– Identify similarities with existing business not
different.
• SYNERGIES

– Overestimate or misidentify key resources

– Ignore commonalities in activities
– Rely on WTP enhancement(Subjective , non-
quantified)