Corporate Level Strategy: Modes of Diversification

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Chapter 9
Corporate Level Strategy:
Modes of Diversification

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Overview

Internal development
Mergers and acquisitions
Joint ventures and Strategic alliances
Franchising
Licensing
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Internal Development
and Greenfield Investment

Internal development – using existing facilities for the new production
Greenfield – the establishment of a new wholly owned subsidiary
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Internal Development/ Greenfield

Reasons:
Utilizing firm-specific knowledge
Economies of scope
Better use of available resources
Resources needed
Benefits
Drawbacks
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Mergers, Acquisitions and Takeovers

Merger – two firms agree to integrate their operations on equal basis
Acquisition – one firm buys another firm
Takeover – a hostile acquisition where the target firm did not solicit the acquiring firm’s bid
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Mergers & Acquisitions

Reasons
Overcoming entry barriers
Decreased cost of new product development
Increased speed to market
Reshaping the firm’s competitive scope
Learning and developing new capabilities
Resources needed
Benefits
Drawbacks
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Partnerships (JVs & SAs)

Joint venture – a legally independent entity created by two or more firms
Equity-based strategic alliance – two or more firms buy minority % of each others shares without forming separate legal entity
Non-equity strategic alliance – two or more firms develop a contractual relationship to share some of their resources and capabilities
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Reasons for Partnering
Access to restricted markets
Share high R&D costs & high capital investments in risky projects
Speed up technology development
Establish or change industry standards
Compete against common rival
Share marketing and sales network
Resources needed
Benefits
Drawbacks
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Franchising & Licensing

Franchising – contracting another firm to manufacture and sell a firm’s products under its trademark
Franchisers: Bear the cost of marketing and branding; Receive percentage of profits
Franchisee: Guaranteed exclusive territory; Know-how support from the franchiser
Licensing – providing a firm’s brand name to another firm to manufacture and/or sell products under it in exchange for a fixed licensing fee
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Franchising & Licensing

Reasons to franchise/ license
Outsource the risk of diversification
Transfer financial costs (e.g., manufacturing, marketing, distribution) to another firm
Increase profits based on previous patents or innovations
Resources needed
Benefits
Drawbacks