Applied Strategy and Organizations an der TU München

Diversification

→  increasing the range of products or markets served by an organisation

→ also described as horizontal integration

Related diversification

→ expanding into products or services with relationships to existing business

Conglomerate (unrelated) diversification

→ diversifying into products or services with no relationships to existing businesses

→ increasing share of current markets with the current product range

Constraints:

Retaliation from competitors

• market penetration  increases industry rivalry as other competitors in the market defend their share (danger higher in low-growth markets)
  → may cost more than any market-share gains are actually worth

Legal constraints

• market penetration can raise concerns from official competition regulators concerning excessive market power

→ withdrawal from marginal activities in order to concentrate on the most valuable segments and products within existing business

→ deliver modified / new products (or services) to existing markets

Risks:

New strategic capabilities

• new processes or technologies that are unfamiliar to the organisation

Project management risk

• delays and increased costs due to project complexity 
• changing project specifications over time

→ offering existing products to new market

Basic forms:

New users

• e.g. aluminium: original users packaging manufacturers, new users aerospace industry

New geographies 

• e.g. internationalisation

- Responding to market decline

- Spreading risk across a range of markets

- Managerial ambition

• managers going beyond their areas of true expertise

→ entering activities where the organisation is its own supplier or customer

Backward integration

• development into activities concerned with the inputs into the company’s current business
• e.g. car manufacturer acquires supplier

Forward integration

• development into activities concerned with the outputs of a company’s current business
• e.g. car manufacturer enters into car retail, repairs and servicing

→ process by which activities previously carried out internally are subcontracted to external suppliers

Decision based on:

- Relative strategic capabilities

• is the subcontractor better?

- Risk of opportunism

• will the subcontractor take advantage of the relationship over time?

Envisioning

• provide a clear overall vision or strategic intent for its business units

Facilitating synergies

• facilitate cooperation and sharing across business units

Coaching

• develop strategic capabilities by coaching managers from business units

Providing central services and resources

• provide capital for investments 
• provide central services (treasury, tax, HR)

Intervening

• intervene to ensure appropriate performance

Adding management cost

• actual businesses have to generate the revenues that pay for corporate centres → only beneficial if corporate centre costs are lower than the value the business units create

Adding bureaucratic complexity

• additional layer of management and the need to coordinate with sister businesses

Obscuring financial performance

• under-performance of weak businesses can be obscured
• weak businesses might be cross-subsidised by stronger ones

Excessive costs 

• managing synergistic relationships is costly

Overcoming self-interest

• managers might be unwilling to sacrifice their time and resources for the common good

Illusory synergies 

• easy to overestimate the value of skills or resources to other businesses

Definitional vagueness 

• hard to decide what high / low growth or share mean in particular situations

Capital market assumptions

• notion that a corporate parent needs a balanced portfolio to finance investment from internal sources (cash cows)
  → assumes that capital cannot be raised in external markets

Unkind to animals 

• cash cows being milked 
• dogs being cast out of the organization
  → motivation problems!

Ignores commercial linkages 

• assumes that there are no commercial ties to other business units in the portfolio