Effects of corporate diversification on firm performance ...
Diversification B189. DiversificationDiversification ► Diversification: The entry into product...
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Transcript of Diversification B189. DiversificationDiversification ► Diversification: The entry into product...
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DiversificationDiversification
B189B189
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DiversificationDiversificationDiversificationDiversification
►Diversification:• The entry into product markets in which the firm
has had no prior activities, e.g. ► Sprits from beer (Whitbread)► Bricks, coal mining (Hanson)► Computers from HiFi (Sony)
►1960s and 1970s saw the rise of the conglomerate (a large, highly diversified firm)
• e.g. ITT, Beatrice Foods, Greyhound
►Diversification:• The entry into product markets in which the firm
has had no prior activities, e.g. ► Sprits from beer (Whitbread)► Bricks, coal mining (Hanson)► Computers from HiFi (Sony)
►1960s and 1970s saw the rise of the conglomerate (a large, highly diversified firm)
• e.g. ITT, Beatrice Foods, Greyhound
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RationaleRationaleRationaleRationale
►Not so good reasons for diversifying…• Revenue growth
► Not always accompanied by profit growth
• Risk pooling (predictable cash-flows)► Markets do a better job here
• Profit growth► Not always accompanied sustained profitability
►Not so good reasons for diversifying…• Revenue growth
► Not always accompanied by profit growth
• Risk pooling (predictable cash-flows)► Markets do a better job here
• Profit growth► Not always accompanied sustained profitability
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Types of diversificationTypes of diversificationTypes of diversificationTypes of diversification
► Key findings from 20 years of strategy research
► Two kinds of diversification: • Related – lines of business that share some common input, resource, or
market► economies of scale – sharing production capacity (e.g. Bombardier)► economies of scope – sharing / combining capabilities (e.g. Canon, Honda)► Exploiting distinctive competencies (=> a core competence )
• Unrelated – no linkage between lines of business ► Exploiting general managerial expertise ► Turning around underperforming firms
► Related is marginally more profitable
► Key findings from 20 years of strategy research
► Two kinds of diversification: • Related – lines of business that share some common input, resource, or
market► economies of scale – sharing production capacity (e.g. Bombardier)► economies of scope – sharing / combining capabilities (e.g. Canon, Honda)► Exploiting distinctive competencies (=> a core competence )
• Unrelated – no linkage between lines of business ► Exploiting general managerial expertise ► Turning around underperforming firms
► Related is marginally more profitable
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Ways of diversifyingWays of diversifyingWays of diversifyingWays of diversifying
►Organic• The firm sets up its own operation in the
industry into which it wants to move
►Through Acquisition• The firm buys an existing firm in the industry
into which it wants to move
►Organic• The firm sets up its own operation in the
industry into which it wants to move
►Through Acquisition• The firm buys an existing firm in the industry
into which it wants to move
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IBM mainframe and peripheralsIBM mainframe and peripheralsIBM mainframe and peripheralsIBM mainframe and peripherals
3284 dot matrix printer
4380 Cartridge tapedrives
3880 DASD(12GB)
3083 CPU3705 Communications controller
3800 pageprinter
4332 line printer
3274 Terminal controller
3278, 3178 Displays http://www-1.ibm.com/ibm/history/exhibits/mainframe/mainframe_album.html
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The ‘IBM’ mainframe value chainThe ‘IBM’ mainframe value chainThe ‘IBM’ mainframe value chainThe ‘IBM’ mainframe value chain
Mainframe
Consumer
Retail Distribution
Business Customer
B2B Distribution
MotorPlatter Disc. Elec. CompCRT
Memory CPU Disk Monitor
Vertical Integration
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The ‘IBM’ PC value chainThe ‘IBM’ PC value chainThe ‘IBM’ PC value chainThe ‘IBM’ PC value chain
P.C.
Consumer
Retail Distribution
Business Customer
B2B Distribution
MotorPlatter Disc. Elec. CompCRT
Memory CPU Disk Monitor CDRom
IBM IBM
Vertical Integration
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The ‘IBM’ PC value chainThe ‘IBM’ PC value chainThe ‘IBM’ PC value chainThe ‘IBM’ PC value chain
P.C.
Consumer
Retail Distribution
Business Customer
B2B Distribution
MotorPlatter Disc. Elec. CompCRT
Memory CPU Disk Monitor CDRomIBMIntelNEC
IBMSeagateConnor
IBM IBM
IBMIntelAMD
Vertical Integration
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The ‘IBM’ PC value chainThe ‘IBM’ PC value chainThe ‘IBM’ PC value chainThe ‘IBM’ PC value chain
P.C.
Consumer
Retail Distribution
Business Customer
B2B Distribution
MotorPlatter Disc. Elec. CompCRT
Memory CPU Disk Monitor CDRomIBMIntelNEC
IBMSeagateConnor Sony
SonySony
Sony
IBM IBM
IBMIntelAMD
Sony
Vertical Integration
Sony’s related diversification
TV HiFi
Sony
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Cost of coordinationCost of coordinationCost of coordinationCost of coordination
Cost
Number of bus. units
Cost
Conglomerates and Unrelated diversification
Related diversification1063
432
Number of bus. units
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Coordination problemsCoordination problemsCoordination problemsCoordination problems
“I tried to review each plan in great detail. This effort took untold hours and placed a tremendous burden on the corporate executive office. After a while I began to realize that no matter how hard we would work we could not achieve the necessary in-depth understanding of the 40-odd business unit plans.”
Reg Jones, CEO, General Electric, 1972 to 1981
“I tried to review each plan in great detail. This effort took untold hours and placed a tremendous burden on the corporate executive office. After a while I began to realize that no matter how hard we would work we could not achieve the necessary in-depth understanding of the 40-odd business unit plans.”
Reg Jones, CEO, General Electric, 1972 to 1981
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SummarySummarySummarySummary
► Diversification generates coordination costs► Related diversification
• more profitable than unrelated diversification• Should exploit economies of scale
► common productive capacity, markets or inputs, • or economies of scope
► exploiting a distinctive competence► Unrelated diversification
• “Fixing” underperforming firms► Not for appropriate
• For risk pooling alone• Top line growth at the expense of profits• Bottom line growth at the expense of profitability
► Diversification generates coordination costs► Related diversification
• more profitable than unrelated diversification• Should exploit economies of scale
► common productive capacity, markets or inputs, • or economies of scope
► exploiting a distinctive competence► Unrelated diversification
• “Fixing” underperforming firms► Not for appropriate
• For risk pooling alone• Top line growth at the expense of profits• Bottom line growth at the expense of profitability