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Chapter #8
Corporate Diversification
Opening Case: Pepsi
• Revenues over $27 billion (bigger than coke)
• 57% of revenues comes from snack foods (Lay’s, Frito-lay, Doritos)
• Now controls 64% of U.S. snack food market
• Diversified geographically (1/3 comes from non-US sales)
• Good for you (Gatorade) Better for you (baked Doritos) Fun for you (60%)
What is corporate Diversification?Product Diversification
When a firm operates in multiple industries simultaneously
Geographic market diversification
When a firm operates in multiple geographic markets simultaneously
Product-market diversification
International Box
• How global is global?
• 3 geographic zones– North America, Europe and Asia
• Only 2.4% had 20% or more of their sales in all three of these global regions
• Only 5% had 20% or more of their sales in two of the three
Types of corporate Diversification • Limited diversification
– Single business: 95% or more of firm revenues comes from a single product market
• Example: WD-40
– Dominant business: Between 70 and 95% of a firm revenues comes from a single product market
• Example: Donatos Pizza
Types of corporate Diversification• Related Diversification
– Related Constrained: Less than 70% of firm revenues come for a single product market, and different business share numerous links and common attributes
• Example: PepsiCo
– Related Linked: Less than 70% of firm revenues come for a single product market, and different business share only a few links and common attributes or differnte links and common attributes
• Example: Disney
Types of corporate Diversification• Unrelated diversification
– Less than 70 % of firm revenues comes for a single product market, and there are few, if any, links or common attributes among businesses
• Example: GE
Economies of Scope
• When the value of the products or services a firm sells increases as a function of the number of businesses that a firm operates in.
• Exploiting activity sharing– Bundling– Reputation
• Limits of activity sharing– Cross-business relationships difficult to
manage– Limit flexibility– Reputation
• Core Competencies – Example: Virgin
• Brand• Richard Branson CEO
• Limits of Core competencies– Organizational issues– Dominant logic (intangible)
• Invented competencies• Competency not that impactful
Financial economies of scope• Capital Allocation
– Internal capital markets– May create an advantage in terms of
knowledge
• Limits– Types of diversification may make it more
difficult to allocate capital– Higher quality information not
guaranteed– Business managers inflate numbers
• Excalation of commitment
Financial economies of scope
• Risk Reduction
• Tax Advantages– Losses to offset profits– Increase debt capacity
Anti-competitive economies of scope• Multi-point competition
– Mutual forbearance
• Market Power– Cross-subsidization
• Predatory pricing• Deep pockets model