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13
EXAMPLES
Exhibit 8.8 illustrates types of corporate diversification and provides examples of each type.
EXPERIENCED FACULTY: New-media firms, like BuzzFeed and Vice Media, are diversifying from their original business of
producing buzz-worthy articles and videos for online viewers into television content production (see “New media companies
product combinations through technology synergies between the chips made by each company (see “Intel CEO accelerates
shift from PCs” D Clark 6/2/15 The Wall Street Journal).
An example that students might find engaging is HTC’s diversification into virtual reality. It illustrates the propensity of tech
firms to diversify into adjacent industries when growth tapers off in a more mature tech industry (see “HTC wanders into
virtual reality gear” A Poon 3/2/15 The Wall Street Journal).
DISCUSSION TOPICS
POWERPOINT SLIDE 34
What makes a diversification related? While at first Ecolab’s (disinfectants and detergents for restaurants and hospitals) 2013
acquisition of Champion Technologies (oil and gas drilling chemicals) may appear unrelated, the firm viewed it as related
diversification. Certainly from a customer perspective they are unrelated. However, the underlying technology in both cases
INTEGRATION
Interactive Labeling: Corporate Diversification and Firm Performance
This click-and-drag activity builds student confidence with the different types of diversified businesses. The student will
drag each element to the correct location out of the four provided. Next a related set of three questions is provided for the
student. Difficulty: Medium Blooms: Apply AACSB: Analytic
Follow-Up Activity: The instructor can expand on the concepts from this click-and-drag activity by using the BCG
growth-share matrix for classroom and/or small-group homework assignments. Ask the students to research a large
company with widely known products and place some of their various products and services into the most appropriate
location of the matrix. GE, Tata, Amazon, and Disney would be good candidates for this type of analysis. Sometimes we
tie this discussion to a larger case analysis, thus much of the needed research is IN the case. Rothaermel full cases on
Amazon, Microsoft, and IBM would be examples of cases that could be used here.
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Strategy Highlight 8.2
POWERPOINT SLIDE 35: THE TATA GROUP: INTEGRATION AT THE CORPORATE LEVEL
STRATEGY SMART VIDEO EXAMPLES
POWERPOINT SLIDE 66: JAY LENO LOOKS AT TATA’S NANO.
EXERCISE
The Tata group is engaged in a wide range of diversified businesses. Ask students to create a grid with each business listed as
both column headings and row headings. Then ask them to identify in each cell of the table any competencies that might be
leveraged across the two intersecting businesses.
8.4 Corporate Diversification: Expanding Beyond a
Single Market LO 8-8
POWERPOINT SLIDE 36
END OF CHAPTER DISCUSSION QUESTION 2
POWERPOINT SLIDE 36
How can related diversification create a competitive advantage for the firm? Keeping the advantages of related
diversification in mind, think back to the example in this chapter of Delta’s vertical integration decision to acquire an
oil refinery—clearly an unrelated diversification move. What challenges might Delta confront in operating this
refinery? Think of the strategic concepts you have learned and how they can help you evaluate Delta’s decision.
As discussed in the Corporate Diversification and Firm Performance section, previous research has shown related
diversification has the highest level of performance improvement. Although Exhibit 8.10 shows securing critical supplies as a
value creating effect of vertical integration, Delta’s refinery acquisition seems to be an odd choice for vertical integration.
First, jet fuel is a fungible product widely available under short-term and long-term contract worldwide. Second, oil refining
Research Update
Sakhartov, A. V. and Folta, T. B. (2015), Getting beyond relatedness as a driver of corporate value.
Strat. Mgmt. J.
, 36: 1939–1959.
doi: 10.1002/smj.2327
EXPERIENCED FACULTY: This research presents a more complex approach to why some conglomerates are successful and
why some related diversification does not add value, in other words, inadequacies of the model presented in Exhibit 8.10
in the textbook. They argue that relatedness alone is insufficient as a predictor. They propose that the redeployability of
potentially shared resources and the inducement to redeploy resources created by higher performance in new industries
versus existing industries are also important factors.
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EXERCISES
POWERPOINT SLIDES 36 AND 39
Here is an example that could be used to teach or assess critical reasoning skills. Rovio, the maker of the Angry Birds game,
has diversified into videos. (See “Rovio mines video with ‘Angry Birds Toons’” 3/11/13 The Wall Street Journal.) What type
of diversification is this? What are the benefits and risks of diversification into media other than games? Can you think of
other related businesses that Rovio could profitably enter? On balance what diversification strategy would you recommend
for Rovio? Justify your position with logical reasoning based on theory from the textbook. Students should be encouraged to
refer to Exhibit 8.9 and provide arguments for their position that describe the applicability of Rovio’s core competencies,
such as their characters and story lines to film and other media. They also should have arguments on the impact of this
diversification strategy on Rovio’s value creation and costs, using Exhibit 8.11.
STRATEGY SMART VIDEO EXAMPLE
POWERPOINT SLIDE 67: FAIR OAKS FARM
END OF CHAPTER SMALL GROUP EXERCISE 1
POWERPOINT SLIDES 60–61
Agriculture is one of the largest and oldest industries in the world. In the U.S. and many other countries, farmers often
struggle to turn a profit given the variances of weather and commodity prices. Some working farms are turning to tourism as
an additional and complementary revenue source. A study from the U.S. Census of Agriculture in 2007 found nearly 25,000
farms providing some level of agri-tourism and recreation services. There were 2.2 million farms in the census, almost triple
the number from 2002. In 2010, the Department of Agriculture announced a new grant program aimed at providing public
access to private farms for such purposes. Small farms worldwide are participating in this trend by offering “pick your own”
crops in season, as well as small bed-and-breakfast experiences.
Perhaps one of the most successful large companies leading this marriage of industries is a dairy farm in Indiana:
Fair Oaks Farms. Fair Oaks Farms is home to 30,000 cows and produces enough milk to feed 8 million people. Fair
Oaks is also participating in the education market as a popular destination for school field trips. Other attractions
include the “Birthing Barn,” where calf births can be viewed live; the Cheese Factory; and Mooville—a themed
outdoor play area. Fair Oaks Farms hosts some 500,000 tourists each year, who come to see the hands-on adventure
center and the working milking operations. A video of the operation is available. Such ingenious business
diversification can offer many benefits to the agriculture industry.
What other industrial or commercial industries could benefit from such potential tourist or recreational revenues?
Discuss what new and complementary capabilities would need to be developed in order to succeed.
As the number of assembly and manufacturing locations decreases within industrialized nations, those remaining have
In your group, list other industry combinations you have seen be successful. Consider why you think the combination
has been a success.
Students will likely have many examples from their own experience or knowledge. Here are two examples to get the
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POWERPOINT SLIDES 36 AND 39
Hon Hai, DBA Foxconn Technology Group, assembles PCs, video game consoles, mobile phones, and tablets for leading
tech firms. Its primary growth driver in recent years has been its contract manufacturing of Apple devices. As Apple’s growth
has slowed, Hon Hai has begun to consider diversification into accessories marketed under its own brand and into contract
8.4 Corporate Diversification: Expanding Beyond a
Single Market LO 8-9
POWERPOINT SLIDES 37–41
EXAMPLES
NEWER FACULTY: In Exhibit 8.10 we present empirical findings from prior research showing that some types of
diversification produce better performance than others (on the average… but what CEO thinks they will get “average”
results?!). Although diversification can create shareholder value in theory, it is often difficult to realize in practice. Why then
do we see so much diversification taking place? One answer is the principal–agent problem discussed earlier, in which the
interests of managers and shareholders diverge. Diversification generally leads to larger entities and thus bestows more
power, prestige, and pay on corporate executives. In Chapters 11 and 12, we study organizational structure and corporate
governance to understand how to align interests of managers and shareholders.
EXPERIENCED FACULTY: An example of overdiversification that would be very difficult to restructure is 3M. The firm
is highly diversified, but its motivation for the diversification has been leveraging its technology across multiple
product lines in different industries. If they were to spin-off or sell assets to pull back the scope of diversification and
focus the company, they would risk selling technology to rivals that is used in their products in other industries (see
“3M’s image problem: Its products are everywhere, but often overlooked” JR Hagerty 3/11/15 The Wall Street
Journal).
Globally, conglomerate firm stocks have been priced at a 10 percent discount versus single industry firm, up from 5 percent
in prior years, to reflect the pattern shown in Exhibit 8.10. An example of the impact this has on firm portfolios is W.R.
Grace’s movement from being a highly diversified conglomerate to be a much more focused firm in response to both external
investor pressure for “pure plays” and negative synergies internally (see “W.R. Grace: The end of an empire” JR Hagerty
2/12/15 The Wall Street Journal).
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DISCUSSION TOPICS
POWERPOINT SLIDE 37
If you have international students from Asia in your class, you might invite a discussion about why conglomerates, like Tata,
and conglomerate-like structures (keiretsu and chaebol) are so much more important to the competitive landscape than
unrelated diversified firms are in the U.S. and European markets. Western investors have pushed firms to break up unrelated
diversifications due to the performance disadvantage illustrated in Exhibit 8.10, but this trend has not carried into Asia.
Collective cultures in some Asian countries place a stronger value on relationships, which creates an important type of core
competency that can be leveraged across businesses, even unrelated businesses. AACSB 2015 Standard 9 Managing in a
global context
Honeywell has been highly successful as a conglomerate and has not yet received pressure from investors to divest
businesses into “pure plays.” Have students read the article, “Honeywell finds love amid the breakups” (T Mann 7/2/15 The
Wall Street Journal), and discuss what advantages Honeywell brings to its acquisitions as a conglomerate and what
characteristics of Honeywell and its strategy have made it successful. The article quotes Steve Winoker, an analyst at
Bernstein Research as saying “Companies aren’t born with a right to be a conglomerate. That’s a right only earned over time.
And until you earn it, the presumption should be you can’t do it.” Ask students whether they think that conclusion is correct.
Why or why not?
EXPANDED THEORY
POWERPOINT SLIDE 38
Some researchers suggest that bandwagon effects occur—firms copying moves of industry rivals. A bandwagon effect can be
observed, for example, in the recent related-diversification moves in the computer industry, in which hardware companies
have moved into the software and services sector and vice versa: IBM transformed itself from a hardware company into a
global-services company. To further strengthen its strategic position in IT services, IBM acquired PricewaterhouseCoopers
Consulting in 2002 for $3.5 billion and divested its low-margin PC business to the Chinese technology company Lenovo in
2005. In 2008, computer maker HP bought EDS, an IT services company, for more than $13 billion. HP followed the
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8.5 Implications for Strategists
POWERPOINT SLIDES 41–44
EXERCISES
POWERPOINT SLIDE 44
EXPERIENCED FACULTY: McKinsey consultants argue that firms are too slow to change their corporate asset allocation.
They attribute this portfolio inertia to both internal resistance to change and the stock market’s aversion to the short-term pain
of the changes. They suggest that new CEOs should take quick bold action to reallocate resources. Choose a new CEO who
has just taken the helm of a firm at the time that your course is offered. At the time of this writing, for example, Twitter
(ChapterCase 1) has a “new” CEO, the returning founder and Nintendo has a new CEO (see “Nintendo names top executive”
POWERPOINT SLIDE 44
EXPERIENCED FACULTY: To illustrate a practical example of dynamic corporate strategy, invite students to explore IBM’s
strategy for continually adjusting their portfolio to generate higher value. In a Wall Street Journal interview with Rometty,
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Extended Discussion
POWERPOINT SLIDES 36, 41, AND 44
EXPERIENCED FACULTY: Most students will be familiar with General Electric from their long history and the many
consumer products they have produced over the years. The students, however, are less likely to know about GE’s large
investments in clean-technology and health care. To prepare for this discussion, ask students to look up on GE’s
website the ecomagination, ecomagination and healthymagination, healthymagination initiatives and GE’s digital focus
in 2015 described in a McKinsey Quarterly interview. AACSB 2015 Standard 9 Analytical thinking (able to analyze
and frame problems)
Where do ecomagination and healthymagination fit on the core competence–market matrix for GE? (See Exhibit
8.9.) GE is looking to build upon some of their excellent engineering skills and expand into new energy markets,
particularly internationally. This would correspond to the lower right box of Exhibit 8.9 (existing competence and new
market). GE already has a substantial health care business and it would seem, based on the data in Chapter 7 on
innovations such as the handheld ultrasound scanner, that GE is extending an existing market with new core
competencies, which is the upper left quadrant of Exhibit 8.9.
Take either the energy or health care industry and draw the industry value chain. What areas of potential
vertical integration should GE consider? If we look at the health care picture, and place GE in the medical devices
industry, we can think through a simple industry value chain. Medical devices need raw materials and components from
a number of different suppliers. Once the devices are assembled and tested, they are sold through several channels.
Let’s assume they sell to large hospitals directly. Then, once a major device such as an MRI is operational in the
a forward integration, moving GE closer to the medical customers from its customary position of designing and
manufacturing large medical systems.
What related diversification would you suggest for GE in reference to its focus for the future? Suggest that
students learn what businesses the firm is already in. If we stick with the health care example from question 2 earlier,
one could suggest that GE look into building on some of its risk management and health systems expertise and move
reinforce each other in several ways. At a very basic level, success in one or two initiatives can provide investment
resources for other areas of GE to grow and develop. More directly, they can reinforce each other, particularly in rural
or underdeveloped areas. Many medical facilities around the globe do not have a reliable source of power. Clearly,
possible of course as different businesses vie for resources even within large organizations such as GE. It is also not
hard to imagine situations where global solutions vary and the European team, for example, has very different ideas
about development of future energy products than say South American GE teams.
GE has transformed its business portfolio many times over the years. Check GE’s website for a summary of the
current strategy and how it has driven changes in the firm’s portfolio of businesses and watch the video of
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END OF CHAPTER SMALL GROUP EXERCISE 2
POWERPOINT SLIDE 44
Target and Walmart are significant rivals in the retailing industry. Though Walmart is the world’s largest company (2012
sales of $466 billion), Target had been growing faster than Walmart until the 2008 recession. From 2003 to 2007, same-store
sales at Target grew an average of 4.6 percent, while Walmart’s comparable growth was 2.9 percent. However, in 2008
Target’s same-store sales fell 2.6 percent, while Walmart’s rose 3.3 percent. What drove this difference? Product mix seems
What should Target do to get back on a growth track?
Target may well want to continue following Walmart into groceries, but they need to recognize that the logistical challenges
Is Target’s problem strategy or execution?
This is a difficult question. Many times we can’t tell if poor performance is actually related to a good strategy poorly
What action plan would you recommend?
Students will have a variety of answers here. In keeping with the subject of this chapter, our goal is to bring out options for
Research Update
Kaul, A. (2012), Technology and corporate scope: Firm and rival innovation as antecedents of corporate transactions.
Strat. Mgmt.
J.,
33: 347–367. doi: 10.1002/smj.1940
EXPERIENCED FACULTY: This research identifies corporate strategy implications from the innovation business strategy
discussed in Chapter 7. The authors find that innovation spurs portfolio changes by leading firms to enter new businesses
through acquisition and exit out of marginal businesses through divestment. The extent to which the innovative firm
pursues these changes in scope is limited by the availability of investment capital. Innovations by rivals also have an
impact on corporate scope as knowledge spillover can drive reinvestment in existing businesses. The work also links back
to Chapter 4 by identifying resources as drivers of firm direction and limits on growth.
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Strategy Term Project
Term Project Module 8
Draw out the vertical value chain for your firm’s industry. List the major firms in each important activity along the
chain (see Exhibits 8.5 and 8.6 as examples). Note that a firm’s name may appear multiple times in the value chain.
This indicates some level of vertical integration by the firm. If your firm is in many different industries (e.g., GE),
then choose the dominant industry or the one that intrigues you the most and use only that one for this analysis.
AACSB 2015 Standard 9 Application of knowledge (able to translate knowledge of business and management into practice)
Is your firm highly vertically integrated? If yes, does it also employ taper integration?
Remember, taper integration is when a firm, for example, will produce a raw material for its focal product AND also
Are any of the vertical value chain operations off-shored? If so, list some of the pros and cons of having this part of
the value chain outside the home country.
Use the preceding vertical value chain to identify the corporate strategy of the firm. In other words, where within the
industry has the firm chosen to compete? Based on where it competes, describe what you now see as its corporate
strategy.
In Module 2, you were asked to identify the mission and major goals for your selected company. Go back to that
information now and compare the mission and goals to what you have found as the corporate strategy. Are the
mission, goal, and corporate strategy in alignment? Do you see any holes or conflicts among these three elements? Can
you relate the performance of the firm to this finding in any way? (If all three are consistent, is this a well-performing
unit?) If there is a conflict between the corporate strategy and the mission, does this lack of alignment contribute to
performance problems? Why or why not?
We find a surprising number of firms with fairly significant conflicts between the mission and goals and the actual actions
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my
Strategy
POWERPOINT SLIDE 59: HOW DIVERSIFIED ARE YOU?
Using Exhibit 8.8 as a guide, list each of your major activity areas. Think of each of these as a business. (If you are
literally “all work and no play,” you are a single-business type of personal diversification.) Instead of revenues,
estimate the percentage of time you spend per week in each activity. (Most people will be diversified, though some
may be dominant perhaps in school or work.) To assess your degree of related- and unrelatedness, consider the
subject matter and community involved with each activity. For example, if you are studying ballet and working as an
accountant, those would be largely unrelated activities (unless you are an accountant for a ballet company!). AACSB
2015 Standard 9 Reflective thinking (able to understand oneself in the context of society)
What conclusions do you derive based on your personal diversification strategy?
This is intended as a mostly fun exercise; however, we have found some students who have benefited from spending a few
Do you need to make adjustments to your portfolio of activities? Explain the reasons for your answer.
We are of the view that strategy can have benefits at all levels, including those of the individual. Thinking about how a
INTEGRATION
HP Running Case: Module 8
While offering each student the opportunity to explore and analyze the company of his/her choice can add interest to the
exercise, there are many advantages for an instructor when the entire class works on the same firm. Connect allows you to
do this with a running case for a single firm that encompasses every chapter in the textbook and tracks the Strategy Term
Project. Hewlett-Packard is provided as an example firm your students can use to see what information and analysis
would be helpful to cover this portion of the term project.
