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

Ethics•WTO•Protests