Strategies of related diversification

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REV: APRIL 11, 2005


Strategies of Related Diversification
Which businesses should a firm expand into? This question of corporate scope is central to
corporate strategy. Flawed scope decisions can have severe consequences, and the trauma
experienced by many companies as a result of mistaken decisions to expand scope is often large.
What leads tosuch mistakes? Where do managers go wrong? And, what might be a sensible logic by
which to approach the question of scope expansion? This note examines these questions and the logic
of the scope decision in those instances where the target business is ostensibly related in some way to
a company’s existing ones.
A decision logic that might inform a firm’s choice to expand scope is summarized inexhibit 1 and
described in detail below. This logic builds on the conceptual framework of the course, and
highlights the principle of alignment—between a company’s choice of scope and its other strategic
choices. Specifically, firms that expand scope successfully do so not only based on sound arguments
for “relatedness,” but also effect organizational changes that can realize the benefits fromsuch
expansions, and make sensible decisions around the question of ownership (i.e., where the boundaries
of the firm should be drawn in such expansions).
Exhibit 1 identifies a series of questions that are useful to ask when evaluating any scope
expansion. In addition to its prescriptive use these questions can also be used in diagnosing a
company’s existing corporate strategy, byevaluating the logic underlying a company’s existing choice
of businesses.

Professor Bharat N. Anand prepared this note as the basis for class discussion with the assistance of Ph.D. Candidate Noorein Inamdar.

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This document is authorized for use only in MEX strategic management 2013 by Alvaro B. Cyrino at Fundacao
Getulio Vargas-FGV EBAPE from February 2013 to April 2013.


Strategies of Related Diversification

Exhibit 1

Strategies of Related Diversification



Strategies of Related Diversification
What is themotive to
expand now?



How attractive is the
targeted industry?


Where are the scope
economies with our
existing businesses?


Offensive: Leveraging existing
strengths; Pre-empting rivals
Defensive: Escaping weak core
What are key sources of competition?
How vulnerable is intended positioning strategy to these
competitive forces?
in costsWhat organizational

Implement- changes are necessary to

exploit scope

in WTP

Front end or back-end integration?
Organize by SBUs or functions?
Informal coordinating mechanisms?
Markets are absent

Ownership Where should boundaries

Grow the pie
(market failure)

Increase efficiency through coordination

of firmbe drawn?

© 2005 Bharat N. Anand

Specific investments and holdup

Capture more of
the pie
(market power)

Foreclosure/entry barriers
Use integration as leverage

Source: Casewriter

Not all managers need such a decision-making logic as a crutch. Some, indeed, have good
instincts about when and where to expand. Therefore, one should view this decision template not as
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