group 2 diversification

7/27/2019 Group 2 Diversification

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Diversification As a

Strategy

GROUP 2

ROSELINE DMARY| ROHIT JHARIA | ALOK SINGHNITIN I HARINATH BABU | ROHAN PAUNIKAR |

YESHWANTHI AC


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DIVERSIFICATIONDevelopmental Diversification

Functional diversification

Product diversification

Customer diversification

Geographic diversification

Financial diversification

Based on specialization

Serve similar markets

similar distribution syst

Employ similar producti

technologies

Exploit similar science-b

research

Dominant Business Companies

70-95% of sales from a single business orvertical integration of chain of businesses

Ex: GM, IBM, Texaco

Related Business Companies

adding activities that are tangibly related tothe collective skills and strengths possessed bythe company

adding activities that are tangibly related tothe collective skills and strengths possessed bythe company

Ex: DU Pont, GE,GF

Unrelated B

conglomerates

Ex: Litton, Rockwe

Rumeltsthree major categories of diversified companies


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Performance of Diversified companies

(Studies)

1. Accounting-based performance studies (1950-1970)

Corporate growth rates: Unrelated business > Related business >Dominantbusiness

Capital productivity: Related business > Dominant business > Unrelatedbusiness

2. Capital market performance studies: confirms Rumeltsfindings

3. Forbes and Business week:

Unrelated business: volatile capital productivity due to extensive use offinancial leverage

Average PE ratio < Market PE ratio

Gulf & Western companies which has divested operations showed debtreduced pe ratio increased


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COMPONENTS OF STRATEGYFOR A DIVERSIFIED COMPANY

Concept of fitamong

businesses

Concept of corporatemanagement of business

units

Corporate Goals

Concept ofassembly of the

portfolio

GenericFunctional

policies


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Concept of fitamong businesses


units

Corporate Goals


portfolio

Generic Functionalpolicies

Corporate Goals: These are broad corporate level goals which are made to achieve

economic and non-economic objectives They reflect how top management intends to create economic value for

investors These include areas such as profitability, growth, financial stability and social

responsibility


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Concept of fit among businesses: This explains the relation between individual businesses Various possible range of fits:

Unrelated businesses integrated by financial criteria

Highly related businesses sharing assets and skills



units

Corporate Goals


portfolio



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Concept of assembly of the portfolio:

Approach of finding and acquiring new business units to the corporateportfolio

Levels: Broadest level: Creation of a mix of internal development of new

businesses, acquisitions, venture capital subsidiaries and joint ventures Operational level: Approach and mechanism for assembling new

businesses

Finally, company must have an organizational mechanism in place to carryout its concept of assembly



units

Corporate Goals


portfolio



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Concept of corporate management of businesses units:

Range of concepts of management Individual units having complete autonomy (unrelated diversifier) Business units have more autonomy regarding strategy and divisional issues

Involvement of corporate management in divisional affairs (relateddiversifier)

Corporate management plays a key role in R&D, divisional strategy

formulation and personnel selection



units

Corporate Goals


portfolio



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Generic Functional policies: Corporate wide philosophies or approaches to managing functional areas of busin Functional areas exist in areas of:

Finance: capital structure, cash reserves etc. Labor: desirability of unionization, collective bargaining



units

Corporate Goals


portfolio



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Value Creation and Strategic Fit

Strategy of adiversified companyis fit or relationship

among distinctbusinesses in the

portfolio

Fit can take varietyof different forms

and lead to a varietyof economic

benefits

Strategic fit can bediversified in terms of

financial, genericfunctional skills,complementarystrategic assets,

compatible

management styles

Goal of fit is tocreate real

economic value forshareholders

Shareholdinterests in vcreation mu

prioritized oothers in ordretain econo

and social val

the compa

i i i


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Value Creation and Strategic Fitcontinued

How diversifyingcompany createreal economicvalue for itsshareholders ?

How does notion ofstrategic fit relate tovalue creation ?

Questions can beanswered when skills &resources of 2 businessessatisfies at least one of thefollowing conditions :

1. An income stream >portfolio investment in 2companies

2. Reduction in variabilityof income stream >portfolio investment in 2business

Comparison between

Corporate diversification on

shareholders behalf &

independent portfolio

diversification on investors

part

Trade-offs between return achieved by dcompany is superior t

of single busine

In efficient capital maunsystematic risk is irre

equity valuation pro

A diversifying compacreate value only whe

return trade-offs inbenefits unavailable simple portfolio divers


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Seven principal ways:

SYNERGY:

Google acquired Andriod Inc. in 2005

REDUCE AVERAGE COST

Investment in closely related current operations field

P&G invested in I.T. infrastructure and achieved cost sa

EXPANSION IN COMPETENCE AREA

Investment to closely related diversifying acquisitions Walmart

REDUCE SYSTEMATIC RISK

Diversifying by acquiring a company reduce its tech, m

Translate into less variable income stream

M&M acquired Punjab Tractors Ltd. (PTL)

Skills Re

Related

Diversification


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Seven principal ways contd

BALANCING THE CYCLICAL WORKING CAPITALREQUIREMENTS

Route cash from units operating wit surplus to deficit

Reducing need for working capital funds from outside

IMPROVE LONG RUN PROFITABILITY

RISK POOLING

Diversified company can have lower cost of capital

Unrelated

Diversification


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Conclusion

In related diversification, skills and resources are transferable.

Knowledge from one can be applied to problem and opportunity facing byother.

In unrelated and conglomerate diversification, efficient corporatemanagement leads to a larger return for corporate investors.

Only financial benefits can be achieved after the unrelated diversifyingacquisition.


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Thank You

group 2 diversification

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