Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create “synergy” – creating value through entering new markets or developing new technologies, either through related or unrelated diversification.
Diversificationis the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Some possibilities include:
- Mergers and acquisitions
- Strategic alliances
- Joint ventures
- Internal development
Whatever the choice, it should create value for all stakeholders – employees, suppliers, distributors, and the organization’s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own.
When achieving synergy through diversification, a firm has two choices: related diversification through horizontal relationships with related businesses, sharing tangible and intangible resources, and leveraging core competencies; and unrelated diversification though hierarchical relationships with unrelated business. In this case, value creation derives from the corporate office by leveraging support activities.
Acquisitionisthe incorporation of one firm into another through purchase. It can be a means of obtaining valuable resources that can help an organization expand its product offerings and services. Acquisition can lead to consolidation within an industry and can force other players to merge. Corporations can also enter new market segments by way of acquisitions.
eBay had countered the intense competition in the online auction industry by engaging in aggressive acquisitions of online businesses worldwide, and by forming joint venture partnerships with providers and marketers in both related and unrelated businesses. In addition, eBay pursued strategic alliances, both with its joint venture partners like Tom Online, and competitors such as Yahoo, partly to minimize the intense competition from rivals like Google.
eBay also expanded into new markets by focusing on business-to-consumer in addition to consumer-to-consumer transactions, and by generating revenue through fees from PayPal and Skype in addition to fees from merchandise listings.
With increased competition from Google and other major online companies, eBay had to continue to diversify and provide depth in its product offerings to remain competitive. In most cases, eBay expanded into new markets through acquisitions and slowly incorporated the newly acquired site into its global platform. This approach had been ineffective in the Asia Pacific region, and therefore prevented eBay from successfully competing in key markets like China and Japan. In the case, eBay ex-CEO Meg Whitman indicated that eBay competed through its specialties in e-commerce, payment, and voice communication, and was primarily focused on these areas, not competing with the likes of Google in search, or Yahoo in content. As of 2008, eBay therefore had no plans for further big acquisitions, intending instead to grow by identifying synergies in its existing businesses.
Growth strategies should create value for all stakeholders: employees, strategic partners, and owners. The choice of growth strategy should create synergy so all parties gain something they would not have on their own.Corporations can achieve synergy by sharing tangible and value-creating activities across their business units; or through the use of common facilities, distribution channels, and sales forces, or through venture partnerships. However, cultural issues can doom intended benefits.
