diversification strategies 31 mar 12

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Salah uddin IQRA 1

Corporate Strategy for Diversification

Why Diversify & When Diversified Strategy: Four Steps

Strategies for entering into new Business

Related Vs Un-related Diversification

Strategic Alternatives for Diversification

Core Concepts: Strategic Fit & Scale Economies

Types of Strategic Fit

Evaluating / Indentifying a Diversified Companysstrategy

Cash Hog Vs Cash Cow Options for Allocating a Diversified Companys Financial

resources

Options after Diversification


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DIVERSIFIED COMPANY: when it is in two or morelines of business that operate in diverse marketenvironments

Corporate Strategy in a diversified company ismore complex than a strategy deployed for asingle line-of-business

It is a multi-industry, multi-business strategy Strategic action plan required for several differentbusinesses competing in diverse industry

conditions

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To build shareholder value!

A move to diversify into new business must passthree tests:

1. Industry attractiveness test:- must be attractive to yield consistently goodreturns on investment- industry and competitive conditions conducivefor earning good or better profits and ROI thanthe company is earning in its present situation

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1 + 1 = 3 phenomenon


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3. The better off test:

Thecompanys different businesses shouldperform better together than as stand-aloneenterprises, such that company Asdiversification into business B produces

a 1 + 1 = 3 effect for shareholders

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Diminishing growth prospects in present business Opportunities to expand into industries whosetechnologies and products complement present

business Leverage existing competencies and capabilitiesby expanding into businesses where these resource

strengths are key success factors Reduce costs by diversifying into closely related

businesses Transfer powerful brand name to products of

other businesses to increase sales and profits ofthese businesses

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1. Picking new industries to enter and deciding onthe means of entry what industry to get in

starting a new business from the ground up

acquiring a company already in the targetindustry

forming a joint venture or strategic alliance withanother company

diversify narrowly in few industries or broadlyinto many industries

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2. Boost combined performance of the businesses: Help business subsidiaries by:o providing financial resourceso supplying missing skills or technological know how, or

managerial expertise to better perform key value chain

activitieso providing new avenues for cost reduction Typically, a company will pursueo rapid growth strategies in most promising businesseso initiate turn around efforts in a weak performing

businesses with potentialo divest businesses that is no longer attractive or that

does not fit into managements long range plans

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3. Pursuing opportunities to leverage cross businessvalue chain relationship and strategic fits intocompetitive advantage: Competitive advantage of businesses that diversify

with value chain matchups vs. those with unrelated

value chain activities Capturing this competitive advantage requires

corporate strategies to capitalize on;o transferring skills or technologyo reducing costs via sharing common facilities and

resourceso using well known brand names and distribution

muscle to grow the sales of newly acquiredproducts

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4. Establishing investment priorities and steeringcorporate resources into most attractive businessunits:

Decide on priorities for investing capital in thecompanys different businesses

Channel resources into areas where earningpotentials are higher and away from areas wherethey are lower

Divest businesses units that are chronically poorperformers or are in an increasingly unattractive

industry

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1. Acquire existing company2. Internal start-up3. Joint ventures/strategic partnerships

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Most popular approach to diversification

Acquisition helps to:

gain quicker entry into target market

easily overcome certain entry barriers Acquiring technological know-how

Establishing supplier relationships

Having to spend large sums onintroductory advertising and promotion

Securing adequate distribution access

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More feasible when Parent firm already has most of needed

resources to build a new business

Ample time exists to launch a new business

Internal entry has lower coststhan entry via acquisition

New start-up does not have to go

head-to-head against powerful rivals Additional capacity will not adversely impact

supply-demand balance in industry

Incumbents are slow in responding to new entry

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Suitable when

Uneconomical or risky for single ownership joint competencies provide more competitive

strength

Only way to gain entry into a desirable foreign

market Foreign partners are needed to

Surmount tariff barriers and import quotas

Offer local knowledge about

Market conditions

Customs and cultural factors

Customer buying habits

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Creates confusion as to

Which partner will do what

Who has effective control

Potential conflicts

Conflicting objectives

Disagreements over how to best operate theventure

Culture clashes

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Salah uddin IQRA 16

RelatedDiversification:Diversifying intobusinesses whosevalue chains possesscompetitively valuablestrategic fits withvalue chains of firmspresent businesses

UnrelatedDiversification:Diversifying intobusinesses with nocompetitively valuablevalue chain match-upsor strategic fits withfirms presentbusinesses


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DIVERSIFY INTO RELATED BUSINESS:Enhance share-holder value by capturing cross-business strategic-fits:

Transfer Skills & Capabilities from one business toanother

Share facilities & Resources to reduce costs

Leverage use of a common brand name

Combine resources to create new strengths &capabilities

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DIVERSIFY INTO UN-RELATED BUSINESS: Spread Risks across completely different

businesses

Build shareholder value by doing a superior job ofchoosing businesses and managing the wholecollection of businesses in the companys portfolio

DIVERSIFY INTO BOTH RELATED and UN-RELATEDBUSINESS

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Involves diversifying into businesses whose valuechains possess competitively valuable strategicfits with the value chain of the present business

Capturing the strategic fits makes relateddiversification a 1 + 1 = 3 phenomenon

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1. Transferring competitively valuable expertise,technological know how, or other capabilities

2. Combining the related value chain activities ofseparate businesses into single operations toachieve lower costs- manufacture products of different business in asingle plant

- use the same warehouse for shipping anddistribution- have a single sales force for the products ofdifferent businesses because they are marketedto the same type of customers (Sony)

3. Exploiting common use of well known andpotent brand name ( Honda, Cannon, Sony)4. Cross business collaboration to create

competitively valuable resource strengths andcapabilities


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Strategic Fit is present whenever one or moreactivities in the value chains ofdifferentbusinesses are sufficiently similar to offeropportunities for Transferring competitively valuable

expertise or technological know-howfrom one business to another

Combining performance of commonvalue chain activities to achieve lower costs

Exploiting use of a well-known brand name Cross-business collaboration to create

competitively valuable resource strengths andcapabilities

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Reap competitive advantage benefits of Skills transfer

Lower costs

Common brand name usage Stronger competitive capabilities

Spread investor risks over a broader base Preserve strategic unity across businesses Achieve consolidated performance greater than

the sum of what individual businesses can earnoperating independently (1 + 1 = 3 phenomenon)


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R&D and Technology Activities- sharing common technology

- transferring technological know-how from onebusiness to another

- cost savings in R&D- shorter times in getting new products to themarket

Examples

- technological innovations being the driverbehind the efforts of cable TV companies todiversify into high speed internet access via theuse of cable modems

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Supply Chain activities- potential for skill transfer procuring materials- greater bargaining power in negotiating withcommon suppliers- added leverage with shippers in securing

volume discounts on inbound logistics- added collaborations with common supplychain partners

Example :Dell computers strategic partnershipwith leading suppliers of microprocessors,

motherboards, disc drives, memory chips etcleading to diversify into servers, data storagedevices,MP3 players, and LCD TVs

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Manufacturing Related Strategic Fits- diversifier expertise in quality manufacture andcost efficient methods can be transferred inanother business

- ability to consolidate production into smallernumber of plants and significantly reduce theoverall costs

Example : snowmobile maker Bombardier

diversified into motorcycle business was able to setup motorcycle assembly lines in the same assemblyline

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Distribution-Related Strategic Fits- potential cost saving in sharing the samedistribution facilities- using many of the same wholesale distributorsan retail dealers to access customers

Strategic Fits in Sales and Marketing- same distribution centers can be used- using single sales force- promoted through same Web site- after sales service and repair for the products

can be consolidated into single businessoperations

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Strategic Fits in Managerial and AdministrativeSupport Serviceso Comparable types managerial know-how in one

line of business to be transferred to another

- experience of expanding into new geographicmarket

o Electric utility that diversifies into natural gas,water, appliance sales, home security service canuse the same:

- customer data network,- customer call centers and local offices,

- billing and customer accounting systems

- customer service infrastructure

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Related diversification presents opportunities toeliminate or reduce costs of performing certainvalue chain activities, such cost savings are termedeconomies of scope

Economies of Scope are cost reductions that flowfrom operating multiple businesses under samecorporate umbrella

such economies stem directly from strategic fitefficiencies along the value chains of relatedbusinesses

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Involves diversifying into businesses with No strategic fit No meaningful value chain relationships No unifying strategic theme

Basic approachDiversify into any industry wherepotential exists to realize good financial results

While industry attractiveness and cost-of-entry

tests are important, better-off test is secondary

Also known as Conglomerates

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Unrelated Businesses Have Unrelated Value Chains and


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Unrelated Businesses Have Unrelated Value Chains andNo Strategic Fits

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Can business meet corporate targets forprofitability and ROI? Is business in an industry with growth potential? Is business big enough to contribute to parent

firms bottom line? Will business require substantialinfusions of capital? Is there potential for union difficulties

or adverse government regulations? Is industry vulnerable to recession, inflation, highinterest rates, or shifts in government policy?


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Companies with undervalued assets Capital gains may be realized

Companies in financial distress May be purchased at bargain prices and turned

around

Companies with bright growth prospects but shorton investment capital Cash-poor, opportunity-rich companies are

coveted acquisition candidates

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Business risk scattered over different industries Financial resources can be directed to

those industries offering best profit prospects Ifbargain-priced firms with big profit potential are

bought, shareholder wealth can be enhanced

Stability of profits Hard times in one industrymay be offset by good times in another industry

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Demanding managerial Requirements

Limited Competitive Advantage potential

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Dominant-business firms

One major core business accounting for 50 80 %revenues, with remaining several small, related orunrelated businesses

Narrowly diversified firms Diversification includes a few (2 - 5) related or

unrelated businesses

Broadly diversified firms Diversification includes a wide collection of either

related or unrelated businesses or a mixture Multi-business firms

Diversification portfolio includes several unrelatedgroups of related businesses

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1. Assess long-term attractiveness of eachindustry firm is in2. Assess competitive strength of firmsbusiness units

3. Check competitive advantage potential ofcross-business strategic fits among businessunits

4. Check whether firms resources fitrequirements of present businesses5. Rank performance prospects of businessesand determine priority for resource allocation6. Craft new strategic moves to improve overallcompany performance


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Objectives Appraise how welleach business is positionedin

its industry relative to rivals

Evaluate whether it is or can be competitivelystrongenough to contend for market leadership

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Examine strategic fit based on Whether one or more businesses

have valuable strategic fits withother businesses in portfolio

Whether each business meshes wellwith firms long-term strategic direction

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Objective: Determine how well firms resourcesmatch business unit requirements

Good resource fit exists when A business adds to a firms resource strengths,

either financially or strategically

Firm has resources to adequately supportrequirements of its businesses as a group


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Internal cash flows are inadequate to fully fundneeds for working capital and new capitalinvestment

Parent company has to continually pump in

capital to feed the hog Strategic options

Aggressively invest in attractive cash hogs Divest cash hogs lacking long-term potential

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Generate cash surpluses over what is needed tosustain present market position

Such businesses are valuable because surplus cashcan be used to

Pay corporate dividends

Finance new acquisitions

Invest in promising cash hogs

Strategic objectives Fortify and defend present market position

Keep the business healthy

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Factors to consider in judging business-unitperformance Sales growth

Profit growth

Contribution to company earnings

Return on capital employed in business

Economic value added

Cash flow generation

Industry attractiveness and business strength ratings

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The Chief Strategic and Financial Options forAllocating a Diversified Companys Financial Resources


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Stick closely with existing business lineupand pursue opportunities it presents

Broaden companys business scope bymaking new acquisitions in new industries

Divest certain businesses and retrenchto a narrower base of business operations

Restructure companys business lineup, putting awhole new face on business makeup

Pursue multinational diversification, striving toglobalize operations of several business units

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1. BROADEN DIVERSIFICATION BASE: Acquire more Businesses & build positions in new

related or Un-related industries

Add Businesses that will complement/ strengthenthe market position and competitive capabilities

of businesses in industries where the companyalready has a stake

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2. NARROW DIVERSIFICATION BASE; DIVEST ORRETRENCH: Get out of Businesses that are competitively

weak, that are in unattractive industries or thatlack adequate strategic & resource fit

Focus corporate resources on Businesses in afew, carefully selected industries

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3. RESTRUCTURE THE COMPANY's BUSINESS LINE UP: Sell off competitively weak Businesses, in

unattractive industries, with little strategic orresource fit, and non core businesses

Use cash form divesture plus unused debt

capacity to make acquisitions in other, morepromising industries

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d. PURSE MULTI-NATIONAL DIVERSIFICATION: Enter more country markets for sustained growth

More competitive advantage potential than anyother diversification strategy

diversification strategies 31 mar 12

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