The Multi-Business, Diversified Firm

David J. Bryce © 2002David J. Bryce © 2002

The Multi-Business, Diversified FirmThe Multi-Business, Diversified Firm

MANEC 387Economics of Strategy

MANEC 387Economics of Strategy

David J. BryceDavid J. Bryce


Corporate vs. Business Unit StrategyCorporate vs. Business Unit Strategy

• Business Unit Strategy– To whom will we sell, for what price?

– How will we source, manufacture, distribute, etc. our product?

• Corporate Strategy– What business(es) should we be in?

– How will we get in (or out) of them?

– How will we coordinate or integrate businesses to create value?

• Business Unit Strategy– To whom will we sell, for what price?

– How will we source, manufacture, distribute, etc. our product?

• Corporate Strategy– What business(es) should we be in?

– How will we get in (or out) of them?

– How will we coordinate or integrate businesses to create value?

Adapted from M. Porter, 2001, HBR


Corporate-Level Strategy and the Multi-business FirmCorporate-Level Strategy and the Multi-business Firm

• Corporate strategy is action taken to gain competitive advantage through multiple business units

• Value is created through the configuration and coordination of multi-business activities

• Corporate strategy is action taken to gain competitive advantage through multiple business units

• Value is created through the configuration and coordination of multi-business activities


Scope of the FirmScope of the FirmHorizontal Scope

Ver

tical

Sco

pe

Manuf.

Distrib

Sales

Prod./Ind. A

Manuf.

Distrib

Sales

Manuf.

Distrib

Sales

outp

ut-p

rodu

cts

Prod./Ind. B Prod./Ind. C

Manuf.

Distrib

Sales

Manuf.

Distrib

Sales

Manuf.

Distrib

Sales. . .

Inpu

t-pr

oduc

ts

. . .“Vertical

Integration”

“Horizontal Integration”


Wal-martWal-martHorizontal Scope

Ver

tical

Sco

pe

Manuf.

Distrib

Sales

Prod./Ind. A

Manuf.

Distrib

Sales

Manuf.

Distrib

Sales

outp

ut-p

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cts

Prod./Ind. B Prod./Ind. C

Manuf.

Distrib

Sales

Manuf.

Distrib

Sales

Manuf.

Distrib

Sales. . .

Inpu

t-pr

oduc

ts

. . .


GEGEHorizontal Scope

Ver

tical

Sco

pe

Manuf.

Distrib

Sales

Refrigerators

Manuf.

Distrib

Sales

Manuf.

Distrib

Sales

outp

ut-p

rodu

cts

Aircraft Engines Prod./Ind. C

Manuf.

Distrib

Sales

Manuf.

Distrib

Sales

Manuf.

Distrib

Sales. . .

Inpu

t-pr

oduc

ts

. . .Compressors


Why Diversify? Why Diversify?

• Secure Market Power– Cross-subsidization, mutual forbearance,

reciprocal buying

– Shown to be an incomplete, if not an incorrect view

• Mitigate Business (Cycle) Risk– Perspective from finance

– Few firms are just “portfolio” investors

• Secure Market Power– Cross-subsidization, mutual forbearance,

reciprocal buying

– Shown to be an incomplete, if not an incorrect view

• Mitigate Business (Cycle) Risk– Perspective from finance

– Few firms are just “portfolio” investors


Why Diversify?Why Diversify?

• Achieve Efficiency (or “Synergy”)– Pursue related or complementary activities

– Most common type of diversification

– Associated with higher levels of performance than previous two types

• Dynamic Learning– Related to the efficiency motivation

– Firms invest in activities that leverage existing skills and knowledge

– Firms introduce new activities to build skills and knowledge

– Objective is to develop a “capabilities portfolio” that is ready for new opportunities when they emerge

• Achieve Efficiency (or “Synergy”)– Pursue related or complementary activities

– Most common type of diversification

– Associated with higher levels of performance than previous two types

• Dynamic Learning– Related to the efficiency motivation

– Firms invest in activities that leverage existing skills and knowledge

– Firms introduce new activities to build skills and knowledge

– Objective is to develop a “capabilities portfolio” that is ready for new opportunities when they emerge


How to Choose Industries/Products for ExpansionHow to Choose Industries/Products for Expansion

1. Strategically Important 2. Strategically Related; i.e.

commonality in one of the following:1. Customers2. Channels3. Inputs4. Processes5. Market Knowledge

1. Strategically Important 2. Strategically Related; i.e.

commonality in one of the following:1. Customers2. Channels3. Inputs4. Processes5. Market Knowledge


Sequential Entry and Dynamic Learning: ExampleSequential Entry and Dynamic Learning: Example

Texas InstrumentsTexas Instruments

IBMIBMComputer Storage

Devices (3572)

Electronic Computers (3571)

Computer Terminals (3575)

Computer Peripherals (3577)

Software (7372)Semi-conductors

(3674)

Semi-conductors

(3674)


Search & Navigation (3812)

Software (7372)Texas InstrumentsTexas Instruments

IBMIBMComputer Storage

Devices (3572)


Computer Terminals (3575)

Computer Peripherals (3577)

Software (7372)Semi-conductors

(3674)

Semi-conductors

(3674)


Search & Navigation (3812)

Software (7372)

Source: COMPUSTAT Business Segment Files, 1977-1996


Patterns of Historic Entry in Industries Related to Semiconductors, 1977-1996

Patterns of Historic Entry in Industries Related to Semiconductors, 1977-1996

Semiconductors(3674)

Engineering Services(8711)

Computer Storage Devices(3572)

Radio/ TV Communication

Equip(3663)

Computer Peripherals

(3577)

Electronic Components

(3679)

Patent Owners & Lessors(6794)

Search & Navigation Equip.(3812)

Process Control Instruments

(3823)

Electronic Capacitors

(3675)

Printed Circuit Boards(3672)

Special Industries Machinery

(3559)

*

*

*

*

* p<0.10

Semiconductors(3674)

Engineering Services(8711)

Computer Storage Devices(3572)

Radio/ TV Communication

Equip(3663)

Computer Peripherals

(3577)

Electronic Components

(3679)

Patent Owners & Lessors(6794)

Search & Navigation Equip.(3812)

Process Control Instruments

(3823)

Electronic Capacitors

(3675)

Printed Circuit Boards(3672)

Special Industries Machinery

(3559)

*

*

*

*

* p<0.10


A General Inter-industry Relatedness IndexA General Inter-industry Relatedness Index

Index available for download at http://msm.byu.edu/strategy/bryce/


Examples of the Measure at WorkExamples of the Measure at Work

• Two most related industries (z = 3.51):– SIC 2131, “Tobacco, Chewing and Smoking”– SIC 2141, “Tobacco Stemming and Redrying”

• Two most unrelated industries (z = -7.0):– SIC 2097 “Ice” – SIC 2397 “Schiffli Machine Embroidery”

• Two most related industries (z = 3.51):– SIC 2131, “Tobacco, Chewing and Smoking”– SIC 2141, “Tobacco Stemming and Redrying”

• Two most unrelated industries (z = -7.0):– SIC 2097 “Ice” – SIC 2397 “Schiffli Machine Embroidery”



• Industries that don’t share same 1-digit class (percentile: 100, z = 3.07) – SIC 2951, “Paving Mixtures and Blocks” – SIC 3273, “Concrete, Ready-Mixed”

• A more interesting example (percentile: 100, z = 3.04)– SIC 2542, “Metal Partitions and Fixtures”– SIC 3581, “Automatic Vending Machines.”

• Industries that don’t share same 1-digit class (percentile: 100, z = 3.07) – SIC 2951, “Paving Mixtures and Blocks” – SIC 3273, “Concrete, Ready-Mixed”

• A more interesting example (percentile: 100, z = 3.04)– SIC 2542, “Metal Partitions and Fixtures”– SIC 3581, “Automatic Vending Machines.”


So what is related to Schiffli?So what is related to Schiffli?

• SIC 2397 Schiffli Machine Embroidery”– (91) SIC 3582, “Commercial Laundry

Equipment”– (89) SIC 3961, “Costume Jewelry”– (78) SIC 2512, “Upholstered Furniture”

• SIC 2397 Schiffli Machine Embroidery”– (91) SIC 3582, “Commercial Laundry

Equipment”– (89) SIC 3961, “Costume Jewelry”– (78) SIC 2512, “Upholstered Furniture”



• Energizer bought Schick in 2003 : Razors and Batteries– SIC 3691, “Storage Batteries” – SIC 3421, “Cutlery”

• Energizer bought Schick in 2003 : Razors and Batteries– SIC 3691, “Storage Batteries” – SIC 3421, “Cutlery”

Percentile: 62 (z = 0.31)

A stronger relatedness than average, and stronger than one might expect a priori.


Research questions that can now be tackled - Research questions that can now be tackled -

– Which markets does a firm enter as a function of its knowledge?

– How do a corporation’s capabilities evolve over time? Does the speed of this evolution affect performance, how?

– Under what conditions are long-leaps successful?

– Which markets does a firm enter as a function of its knowledge?

– How do a corporation’s capabilities evolve over time? Does the speed of this evolution affect performance, how?

– Under what conditions are long-leaps successful?

time

Relatedness Centroid

+0.2

+0.1

0

-0.1

-0.2


Summary and TakeawaysSummary and Takeaways

• Corporate Strategy is about structuring a portfolio of businesses that hang together and make strategic sense

• It is sometimes motivated by economizing on transaction costs

• Other (strategic) motivations include dynamic learning, efficiency, or sometimes market power and risk management

• New tools are emerging for examining relatedness that will help in determining optimal corporate diversification trajectories

• Corporate Strategy is about structuring a portfolio of businesses that hang together and make strategic sense

• It is sometimes motivated by economizing on transaction costs

• Other (strategic) motivations include dynamic learning, efficiency, or sometimes market power and risk management

• New tools are emerging for examining relatedness that will help in determining optimal corporate diversification trajectories

Documents

The Multi-Business, Diversified Firm