MODULE 7MODULE 7

CORPORATE DIVERSIFICATION

STRATEGIES

MODULE OUTLINEMODULE OUTLINEFrom single-business to Diversification From single-business to Diversification Building Shareholder ValueBuilding Shareholder ValueDiversification Strategies Diversification Strategies Related Diversification StrategiesRelated Diversification StrategiesUnrelated Diversification StrategiesUnrelated Diversification StrategiesDivestiture and Liquidation Strategies Divestiture and Liquidation Strategies Corporate runaround,Retrenchment,Corporate runaround,Retrenchment,and Portfolio Restructuring Strategiesand Portfolio Restructuring StrategiesMultinational Diversification StrategiesMultinational Diversification StrategiesCombination Diversification StrategiesCombination Diversification Strategies

CORPORATE DIVERSIFICATION & CORPORATE DIVERSIFICATION &

CORPORATECORPORATE STRATEGYSTRATEGY

A diversified firm is a COLLECTION of A diversified firm is a COLLECTION of individual businessesindividual businesses

Diversification makes corporate strategy-Diversification makes corporate strategy-Making a bigger picture exercise than Making a bigger picture exercise than

crafting strategy for a single businesscrafting strategy for a single businessIn a diversified firm, corporate managersIn a diversified firm, corporate managersMust craft a MULTI-BUSINESS, MULTI-Must craft a MULTI-BUSINESS, MULTI-

INDUSTRY strategy action plan for aINDUSTRY strategy action plan for anumber of different businesses number of different businesses

competing competing in diverse industry environmentsin diverse industry environments

FROM SINGLE-BUSINESFROM SINGLE-BUSINESTO DIVERSIFICATIONTO DIVERSIFICATION

STAGE 1STAGE 1 Most firms begin as small Most firms begin as small single- business enterprises single- business enterprises serving a local or regional serving a local or regional marketmarket

STAGE 2STAGE 2 Geographical expansion Geographical expansion STAGE 3STAGE 3 Vertical integration Vertical integrationSTAGE 4STAGE 4 As growth slows, strategic options As growth slows, strategic options

include : include : Take market from rivals Take market from rivals Focus on diversificationFocus on diversification

MAJOR GROWTH MAJOR GROWTH STRATEGIESSTRATEGIES

( The Growth Matrix)( The Growth Matrix)

Growth via Market Penetration (Concentration)Growth via Market Penetration (Concentration)Growth via Market Development Growth via Market Development Growth via Product DevelopmentGrowth via Product DevelopmentGrowth via DiversificationGrowth via Diversification

Related ( “ Concentric” ) DiversificationRelated ( “ Concentric” ) DiversificationUnrelated (“ Conglomerate”) DiversificationUnrelated (“ Conglomerate”) Diversification

MAJOR GROWTH STRATEGIESMAJOR GROWTH STRATEGIES(The Growth Matrix)(The Growth Matrix)

Growth via Market Penetration (Concentration)Growth via Market Penetration (Concentration)

Growth via Market Development Growth via Market Development

Growth via Product DevelopmentGrowth via Product Development

Growth via DiversificationGrowth via Diversification

Related ( “ Concentric”) Related ( “ Concentric”) DiversificationDiversification

Unrelated (“ Conglomerate”) DUnrelated (“ Conglomerate”) D

MAJOR GROWTH STRATEGIESMAJOR GROWTH STRATEGIES(The Growth Matrix)(The Growth Matrix)

Growth via Market Penetration (Concentration)Growth via Market Penetration (Concentration)

Growth via Market DevelopmentGrowth via Market Development

Growth via Product Development Growth via Product Development

Growth Via Diversification Growth Via Diversification

Related (“ Concentric”) DiversificationRelated (“ Concentric”) Diversification

Unrelated (“Conglomerate”) Unrelated (“Conglomerate”) DiversificationDiversification

MARKET PENERATION MARKET PENERATION (Same Products, Same Markets)(Same Products, Same Markets)

When current markets are not saturated with your When current markets are not saturated with your particular products/servicesparticular products/services

When the usage rate of present customers could be When the usage rate of present customers could be significantly increased significantly increased

When the market shares of some major When the market shares of some major Competitors have been declining while total industry Competitors have been declining while total industry Demand has been rising Demand has been rising When the correlation between sales and marketingWhen the correlation between sales and marketingExpenditures has historically been high Expenditures has historically been high When increased economies of scale provide major When increased economies of scale provide major

competitive competitive AdvantagesAdvantages

MARKET DEVELOPMENTMARKET DEVELOPMENT(Same Products, New Markets)(Same Products, New Markets)

When new channels of distribution are When new channels of distribution are available that are reliable, inexpensive,available that are reliable, inexpensive,

And of good quality when an organization is And of good quality when an organization is very successful at what it doesvery successful at what it does

When new untapped or unsaturated markets When new untapped or unsaturated markets markets exists markets exists

When the firm has the needed capital and When the firm has the needed capital and human resources to manage expanded human resources to manage expanded operations operations

When an organization an organization’s basic When an organization an organization’s basic industry is rapidly becoming global in scopeindustry is rapidly becoming global in scope

PRODUCT DEVELOPMENTPRODUCT DEVELOPMENT (New Products, Same Markets) (New Products, Same Markets)

When the has successful products that are in When the has successful products that are in the product life cycle (I.e. , attract satisfied the product life cycle (I.e. , attract satisfied customers to try new, improved products as customers to try new, improved products as a result of their prior experiences) a result of their prior experiences) When an organization competes in an When an organization competes in an industry that is characterized by rapid industry that is characterized by rapid technological change when major technological change when major competitors competitors offer better quality products at competes in a offer better quality products at competes in a high-growth industry when an organization high-growth industry when an organization has especially strong research and has especially strong research and development capabilities.development capabilities.

STRATEGIC MANAGEMENT STRATEGIC MANAGEMENT PRINCIPLEPRINCIPLE

Diversification doesn’t need to Diversification doesn’t need to become a strategic priority until a become a strategic priority until a

company begins to run out of company begins to run out of growth opportunities in its core growth opportunities in its core

business!business!

COMPETITIVE STRENGTHS OF A COMPETITIVE STRENGTHS OF A SINLE BUSINESS STRATEGYSINLE BUSINESS STRATEGY

Less ambiguity about “ who we are”Less ambiguity about “ who we are”Energies of firm directed down one pathEnergies of firm directed down one pathEntrepreneurial efforts focused on keeping Entrepreneurial efforts focused on keeping strategy responsive to industry change strategy responsive to industry change Less chance limited resources will be thinly Less chance limited resources will be thinly stretched stretched Managers maintain hands-on contact with Managers maintain hands-on contact with core businesscore business

COMPETITIVE STRENGTHS OF A COMPETITIVE STRENGTHS OF A SINGLE BUSINESS STRATEGYSINGLE BUSINESS STRATEGY

Dependence on one business Dependence on one business provides incentive positionprovides incentive positionFull force of firm’s resources used toFull force of firm’s resources used tobecome better at what firm does become better at what firm does important competencies more likely important competencies more likely to emergeto emergeHigher probability innovative ideas Higher probability innovative ideas will will emergeemerge

RISK OF A SINGLE RISK OF A SINGLE BUSINESS STRATEGY BUSINESS STRATEGY

Putting all firm’s “ eggs” in one industry Putting all firm’s “ eggs” in one industry

basket basket

If industry stagnates, then If industry stagnates, then

Firm’s growth rate tougher to sustain Firm’s growth rate tougher to sustain

Profits harder to achieve Profits harder to achieve

Changing customer needs, Changing customer needs,

Technological innovation, or new substitutes Technological innovation, or new substitutes cancan

Undermine a single-business firmUndermine a single-business firm

WHEN DOES DIVERSIFICATION WHEN DOES DIVERSIFICATION START TO MAKE SENSE?START TO MAKE SENSE?

WHEN to DIVERSIFY depends on WHEN to DIVERSIFY depends on

Firm’s competitive position Firm’s competitive position ANDAND

Remaining opportunities in Remaining opportunities in home home

base industry base industry

WHEN DOES DIVERSIFICATION WHEN DOES DIVERSIFICATION START TO MAKE SENSE?START TO MAKE SENSE?

Strong competitiveStrong competitive

Position, rapid Position, rapid marketmarket

Growth– NOT a Growth– NOT a good good

Time to diversifyTime to diversify

Weak competitive Weak competitive

Position, rapid Position, rapid marketmarket

Growth – NOT a Growth – NOT a good time to good time to

diversifydiversify

Strong competitive Strong competitive

position , slow position , slow market growth—market growth—

Diversification is Diversification is top top

Priority Priority considerationconsideration

Weak competitive Weak competitive position, slow position, slow

market market

Growth– Growth–

Diversification Diversification merits considerationmerits consideration

WHY DIVERSIFY?WHY DIVERSIFY?

To build SHAREHOLDER VALUETo build SHAREHOLDER VALUE

A diversification move is capable of A diversification move is capable of increasing SHAREHOLDER VALUE if increasing SHAREHOLDER VALUE if it passes 3 tests:it passes 3 tests:

Attractiveness TestAttractiveness Test

Cost of Entry TestCost of Entry Test

Better-Off TestBetter-Off Test

STRATEGIC MANAGEMENT STRATEGIC MANAGEMENT PRINCIPLEPRINCIPLE

To create shareholder value, a To create shareholder value, a diversifying firm must get into diversifying firm must get into

businesses that can perform better businesses that can perform better under common management than under common management than they could perform operating as they could perform operating as

independent enterprise.independent enterprise.

DIVERSIFICATION STARTEGIESDIVERSIFICATION STARTEGIES

Entering new industriesEntering new industries

Related diversificationRelated diversification

Unrelated diversification Unrelated diversification

Divestiture & LiquidationDivestiture & Liquidation

Corporate turnaround,Corporate turnaround,

Retrenchment , & restructuring Retrenchment , & restructuring

Multinational diversification Multinational diversification

STRATEGIES FOR ENTERINGSTRATEGIES FOR ENTERINGNEW BUSINESSESNEW BUSINESSES

Acquire existing firm in target Acquire existing firm in target industryindustry

Start new company internallyStart new company internally

Form joint ventureForm joint venture

ACQUIRING AN EXISTING ACQUIRING AN EXISTING COMPANYCOMPANY

Most popular approach to diversificationMost popular approach to diversificationAdvantagesAdvantages

Quicker entry into target market Quicker entry into target market Hurdling certain entry barriersHurdling certain entry barriersTechnological inexperienceTechnological inexperienceGaining access to reliable suppliersGaining access to reliable suppliersBeing of a size to match rivals in Being of a size to match rivals in

terms of terms of efficiency & costsefficiency & costsGetting adequate distribution accessGetting adequate distribution access

DIVERSIFICATION VIADIVERSIFICATION VIAINTERNAL START UPINTERNAL START UP

Ample time existsAmple time existsIncumbent firms slow in responding Incumbent firms slow in responding It involves lower costs than acquiring existing It involves lower costs than acquiring existing

firmfirmFirm already has most of needed skillsFirm already has most of needed skillsAdditional capacity will not adversely impact Additional capacity will not adversely impact

supply-demand balance in industrysupply-demand balance in industryNew start-up does not have to go head-to-New start-up does not have to go head-to-

head head Against powerful rivals.Against powerful rivals.

DIVERSIFICATION VIADIVERSIFICATION VIA JOINT VENTURES JOINT VENTURES

Uneconomical or risky to go it alone Uneconomical or risky to go it alone

Pooling competencies of two partnersPooling competencies of two partners

Provides more competitive strengthProvides more competitive strength

Foreign partners needed to surmount Foreign partners needed to surmount

import quotas import quotas

TariffsTariffs

Nationalistic political interestsNationalistic political interests

Cultural roadblocksCultural roadblocks

DRAWBACKS OF JOINT VENTURESDRAWBACKS OF JOINT VENTURES

Raises questions about-Which partner will do what & Who has effective control

Potential conflictsSourcing of components ExportingWhether operations should conform toforeign firm’s standards or to local preferencesControl over cash flows & profits

WHAT IS RELATED WHAT IS RELATED DIVERSIFICATION?DIVERSIFICATION?

DEFINITION

Diversification is RELATED When a firm has several lines of business that,

although distinct, possess some kind ofSTRATEGIC FIT

WHAT IS WHAT IS RELATEDDIVERSIFICATION?RELATEDDIVERSIFICATION?

Principle

What makes related Diversification attractive is the opportunity

to turn Strategic fit into competitive Advantage!

RELATED DIVERSIFICATION & RELATED DIVERSIFICATION & STRATEGIC FITSTRATEGIC FIT

STRATEGIC FIT be based onShared technology Common labor skillsCommon distribution channelsCommon suppliers & raw materials sourcesSimilar operating methodsSimilar kinds of managerial know-howAbility to share common sales forceCustomer overlapAny area where meaningful sharing opportunities exist in businesses’ value chains

COMMON APPROACHES TO COMMON APPROACHES TO RELATED RELATED

DIVERSIFICATIONDIVERSIFICATION

Entering businesses where sales force, advertising, & distribution activities can be shared.Exploiting closely related technologiesSharing manufacturing facilitiesTransferring know-how & expertise from one Business to anotherTransferring firm’s brand name & reputation withCustomers to a new product/service Acquiring new businesses to uniquely help firm’s position In existing businesses.

APPEAL OF RELATED APPEAL OF RELATED DIVERSIFICATIONDIVERSIFICATION

Allows firm to maintain unity in business activities & gain benefits of skills transfer or cost sharing while

Spreading risks over broader base Exploits what firm does best & allows transfer of core competencies from one business to anotherHelps achieve ECONOMIES OF SCOPE

APPEAL OF RELATED APPEAL OF RELATED DIVERSIFICATIONDIVERSIFICATION

Strategic fits among related businessesStrategic fits among related businessesOffer competitive advantage potential ofOffer competitive advantage potential of

Lower costs via sharing common Lower costs via sharing common resources & combining related resources & combining related

activities efficient transfer ofactivities efficient transfer ofKey skills or core competenciesKey skills or core competenciesTechnological expertise or Technological expertise or Managerial know-howManagerial know-how

Common use of same brand nameCommon use of same brand name

CONCEPT: ECONOMIES OF CONCEPT: ECONOMIES OF SCOPESCOPE

Arise from ability to Arise from ability to eliminate costseliminate costs by byOperating two or more businesses under Operating two or more businesses under

same corporate umbrellasame corporate umbrellaExist whenever it is Exist whenever it is less costlyless costly for two or for two or

more businesses to operate under more businesses to operate under centralized management than to centralized management than to function independently.function independently.

Cost savingsCost savings opportunities can stem opportunities can stem from interrelationships anywhere along from interrelationships anywhere along businesses’ businesses’ value chainsvalue chains

CONCEPT: STRATEGIC FITCONCEPT: STRATEGIC FITExists when different businesses have Exists when different businesses have

sufficiently related value chains that permitsufficiently related value chains that permitTransferring skills & expertise from Transferring skills & expertise from

one business to another one business to another Combining performance of related Combining performance of related

activities so as to reduce costsactivities so as to reduce costsPresence of strategic fit in a diversified Presence of strategic fit in a diversified firm’s portfolio, along with corporate firm’s portfolio, along with corporate management’s skill in capturing benefits of management’s skill in capturing benefits of the interrelationships the interrelationships

Makes related diversification capable Makes related diversification capable Of being a2+2=5 phenomenonOf being a2+2=5 phenomenon

TYPES OF STRATEGIC FITTYPES OF STRATEGIC FIT

Market-Related FitsMarket-Related Fits

Operating FitOperating Fit

Management FitManagement Fit

MARKET-RELATED FITSMARKET-RELATED FITS

Arise when value chains of different Arise when value chains of different businesses overlap so products can be businesses overlap so products can be

Used by same customers Used by same customers

Marketed & promoted in similar Marketed & promoted in similar waysways

Distributed through common Distributed through common dealers dealers

& retailers& retailers

TYPES OF MARKET-RELATED FITSTYPES OF MARKET-RELATED FITS

Common sales force to call on customersCommon sales force to call on customersAdvertising related products togetherAdvertising related products togetherUse of same brand namesUse of same brand namesJoint delivery & shipping Joint delivery & shipping Joint after-sales service & repair workJoint after-sales service & repair workJoint order processing & billingJoint order processing & billingJoint promotional tie-insJoint promotional tie-ins

Cents-off couponing,trial offers, trial offers, Cents-off couponing,trial offers, trial offers, specials joint dealer networksspecials joint dealer networks

OPERATING FITSOPERATING FITS

Arise when different businesses present Arise when different businesses present opportunities for cost-sharing or skills opportunities for cost-sharing or skills transfertransfer

Procurement of purchased inputs Procurement of purchased inputs R&D/technology R&D/technology

Manufacture & assembly Manufacture & assembly

Administrative support functions Administrative support functions

Marketing & distributionMarketing & distribution

POTENTIAL BENEFITSPOTENTIAL BENEFITSOF OPERATING FITSOF OPERATING FITS

Cost savings Cost savings

Tapping into more scale economiesTapping into more scale economies

and/or economies of scopeand/or economies of scope

Increased operating efficiency Increased operating efficiency through through

sharing of related activities sharing of related activities

MANAGEMENT FITSMANAGEMENT FITS

Emerge when different business units Emerge when different business units

have comparable types of have comparable types of

EntrepreneurialEntrepreneurial

Administrative orAdministrative or

Operating problemsOperating problems

Allow accumulated managerial knowAllow accumulated managerial know

how in one business to be useful inhow in one business to be useful in

managing another business managing another business

CAPTURING BENEFITSCAPTURING BENEFITSOF STRATEGIC FITOF STRATEGIC FIT

Management must take actions to capture Management must take actions to capture benefitsbenefits

Benefits don’t just happenBenefits don’t just happenBusinesses with sharing potentialBusinesses with sharing potential must be must be reorganized so activities to be shared are reorganized so activities to be shared are merged & coordinatedmerged & coordinatedWhere skills transfer is comer stone of Where skills transfer is comer stone of strategic fit, a means must be found to make strategic fit, a means must be found to make transfer effectivetransfer effective

Management must access that some centralized Management must access that some centralized Strategic control is great enough to centralized Strategic control is great enough to centralized Strategic control is great enough to justify Strategic control is great enough to justify Sacrificing business-unit autonomy Sacrificing business-unit autonomy

WHAT IS UNRELATEDWHAT IS UNRELATEDDIVERSIFICATION?DIVERSIFICATION?

Unrelated diversification involves NO Unrelated diversification involves NO Common linkage of strategic fit among a Common linkage of strategic fit among a diversified firm’s lines of business diversified firm’s lines of business Meaningful value chain interrelationshipsMeaningful value chain interrelationships

Corporate strategy approach Corporate strategy approach Venture into “ any industry & any business Venture into “ any industry & any business In which we think we can make a profit”In which we think we can make a profit”Firms pursuing unrelated diversification are Firms pursuing unrelated diversification are referred to as referred to as CONGLOMERATESCONGLOMERATESNO unifying strategic themeNO unifying strategic theme

ACQUISITION CRITERIA:PURSUINGACQUISITION CRITERIA:PURSUINGUNRELATED DIVERSIFICATIONUNRELATED DIVERSIFICATION

Can business meet corporate target for Can business meet corporate target for profitability & Rol?profitability & Rol?Will business require substantial infusions of capital?Will business require substantial infusions of capital?Is business in industry with growth potential ?Is business in industry with growth potential ?Is business big enough to contribute to parent firm’s Is business big enough to contribute to parent firm’s bottom line?bottom line?Is business big enough to contribute to contribute to Is business big enough to contribute to contribute to parent firm’s bottom line?parent firm’s bottom line?Is there potential for union difficulties or adverse Is there potential for union difficulties or adverse government regulations?government regulations?Is industry vulnerable to recession, inflation, high Is industry vulnerable to recession, inflation, high interest rates, or shifts in government policy? interest rates, or shifts in government policy?

COMPETITIVE STRENGHT OF COMPETITIVE STRENGHT OF A DMNC IN GLOBAL MARKETSA DMNC IN GLOBAL MARKETS

A DMNC has a strategic arsenal capable A DMNC has a strategic arsenal capable

Of defeating bothOf defeating both

A SINGLE-BUSINESS MNC and A SINGLE-BUSINESS MNC and

A SINGLE-BUSINESS domestic A SINGLE-BUSINESS domestic

firm in a long-term competitive firm in a long-term competitive

struggle struggle

ATTRACTIVE ACQUISITION ATTRACTIVE ACQUISITION TARGETSTARGETS

Companies with undervalued assetsCompanies with undervalued assets

Capital gains may be realized Capital gains may be realized

Companies that are financially Companies that are financially distresseddistressed

May be purchased at bargain prices May be purchased at bargain prices

Companies with bright prospects, but Companies with bright prospects, but limited capital.limited capital.

Business risk scattered over different industriesCAPITAL RESOURCES INVESTED I THOSE

INDUSTRIES OFFERING BEST PROFIT PROSPECTS

Stability of profits – Hard times in one industry may be offset by good times in another industry if management is exceptionally astute at spotting bargain-priced firms with big profitpotential, then-Shareholder wealth can be enhanced

APPEAL OF UNRELATED DIVERSIFICATION

DRAWBACKS OF UNRELATEDDRAWBACKS OF UNRELATEDDIVERSIFICATIONDIVERSIFICATION

Places big demand on corporate managementPlaces big demand on corporate managementMore divers the businesses, harder it is to More divers the businesses, harder it is to

oversee each subsidiary & spot problemsoversee each subsidiary & spot problemsjudge caliber of strategic plans of subsidiaries judge caliber of strategic plans of subsidiaries consolidated performance of unrelated portfolio consolidated performance of unrelated portfolio tends to betends to beNo better than sum of individual businesses on No better than sum of individual businesses on their own and their own and it may be worseit may be worse

Promises greater sales –profit stability over Promises greater sales –profit stability over business cycles, but is seldom realizedbusiness cycles, but is seldom realized

HOW BROADLY SHOULD HOW BROADLY SHOULD A COMPANY DIVERSIFY?A COMPANY DIVERSIFY?

With unrelated diversification, corporate With unrelated diversification, corporate managers have to be shrewd enough to managers have to be shrewd enough to discern good acquisitions from bad ones discern good acquisitions from bad ones select capable managers to run many select capable managers to run many different businessesdifferent businessesjudge soundness of strategic proposals of judge soundness of strategic proposals of business-unit managers business-unit managers Know what to do if a subsidiary stumblesKnow what to do if a subsidiary stumbles

HOW BROADLY SHOULDHOW BROADLY SHOULDA COMPANY DIVERSIFY?A COMPANY DIVERSIFY?

Two questions should guide a firm’s Two questions should guide a firm’s unrelated diversification effortsunrelated diversification efforts

what is the LEAST diversification what is the LEAST diversification it will take to achieve acceptable it will take to achieve acceptable growth & profitability?growth & profitability?what is the MOST diversification that what is the MOST diversification that can be managed, given its added can be managed, given its added complexity?complexity?

DIVERSIFICATION & DIVERSIFICATION & SHAREHOLDER VALUESHAREHOLDER VALUE

RELATED DIVERSIFICATION RELATED DIVERSIFICATION

STRATEGY-DRIVERN approach STRATEGY-DRIVERN approach to creating shareholder valueto creating shareholder value

UNRELATED DIVERSIFICATION UNRELATED DIVERSIFICATION

FINANCE –DRIVEN approach to FINANCE –DRIVEN approach to creating shareholder valuecreating shareholder value

DIVESTITURE &DIVESTITURE &LIQUIDATION STRATEGIESLIQUIDATION STRATEGIES

situations arise when one or more subsidiaries situations arise when one or more subsidiaries to be sold or shut down to be sold or shut down

misfits cannot be completely avoided misfits cannot be completely avoided industry attractiveness changes over industry attractiveness changes over

timetimesubpart performance of some subsidiaries subpart performance of some subsidiaries is bound to occuris bound to occurdiversification appearing sensible based diversification appearing sensible based

on on strategic fit lacks compatibility of values strategic fit lacks compatibility of values essential to CULTURAL FIT essential to CULTURAL FIT

Divestiture & liquidationDivestiture & liquidationstrategy optionsstrategy options

Two types of divestiture options Two types of divestiture options Divest business by spinning it off as Divest business by spinning it off as independent companyindependent companydivest business by selling itdivest business by selling it

liquidation liquidation Most painful option Most painful option Involves terminating firm’s existence Involves terminating firm’s existence

TURNAROUND, TURNAROUND, RETRENCHMENT, & RETRENCHMENT, &

PORTFOLIO RESTRUCTURINGPORTFOLIO RESTRUCTURING

STRATEGY OPTIONS for diversified firm with STRATEGY OPTIONS for diversified firm with AILING SUBSIDARIES AILING SUBSIDARIES

Conditions losses in one or more subsidiaries Conditions losses in one or more subsidiaries

disproportionate number of businesses in disproportionate number of businesses in unattractive industries unattractive industries

bad economic conditions bad economic conditions

excessive debt loadexcessive debt load

acquisitions that perform worse than expectedacquisitions that perform worse than expected

Corporate turnaroundCorporate turnaroundstrategies strategies

CORPORATE CORPORATE TURNAROUND TURNAROUND

STRATEGIESSTRATEGIES

Focus

Restore money- losing business to profitability to rather Than divest them

Objective

Get whole firm back in the black by curing problems of those businesses in portfolio responsible for pulling downoverall performance

CORPORATE CORPORATE TURNAROUND TURNAROUND

STRATEGIESSTRATEGIES

Most appropriate WHERE Most appropriate WHERE reasons for poor performance reasons for poor performance

are short-termare short-termAiling businesses are in Ailing businesses are in

attractive industriesattractive industriesDivesting money-losers doesn’t Divesting money-losers doesn’t make long-term strategic sensemake long-term strategic sense

CORPORATE RERETRENCHMENT CORPORATE RERETRENCHMENT STRATEGIESSTRATEGIES

Focus

Reduce scope of diversification to a smaller number of businesses

When to Consider

Certain businesses can’t be made can’t be made profitable Diversification efforts have become too broad & building strongpositions in fewer businesses is key to improving long-term performance

CORPORATE RETRENCHMENT CORPORATE RETRENCHMENT STRATEGIESSTRATEGIES

Options

Divest businessesToo small to make sizable contribution to earnings

Having little or no strategic fit with firm’s core businesses

COMPETITIVE STRENGTH OFCOMPETITIVE STRENGTH OFA DMNC GLOBAL MARKETSA DMNC GLOBAL MARKETS

Competitive advantages hinge upon Competitive advantages hinge upon

Employing a related diversificationEmploying a related diversification

strategy based on exploiting a core strategy based on exploiting a core

competencecompetence

Managing related businesses to Managing related businesses to capture capture strategic fit benefitsstrategic fit benefits

Using cross-subsidization to win solidUsing cross-subsidization to win solid

footholds in attractive country footholds in attractive country marketsmarkets

Portfolio Portfolio restructuring strategyrestructuring strategy

Making radical changes in in mix & Making radical changes in in mix & percentage makeup of types of business percentage makeup of types of business In portfolio via both In portfolio via both

Divestitures AND Divestitures AND New acquisitionsNew acquisitions

Focus

PORTFOLIO PORTFOLIO RESTRUCTURING STRATEGYRESTRUCTURING STRATEGY

Long-term performance prospects are unattractive Long-term performance prospects are unattractive core business units fall upon hard times core business units fall upon hard times

“ “ Wave of the feature“ technologies or products Wave of the feature“ technologies or products emerge & major shakeup is needed to build position emerge & major shakeup is needed to build position in a potentially big new industry “ Unique in a potentially big new industry “ Unique opportunity “ emerges & some existing businesses opportunity “ emerges & some existing businesses must be sold to finance new acquisitionmust be sold to finance new acquisitionMajor businesses in portfolio become unattractiveMajor businesses in portfolio become unattractive

When To Use

COMMENT : TREND IN COMMENT : TREND IN DIVERSIFICATIONDIVERSIFICATION

The present trend toward narrower The present trend toward narrower diversification has been driven by a diversification has been driven by a growing preference to gear growing preference to gear diversification around creating strong diversification around creating strong competitive positions in a few, well competitive positions in a few, well selected industries as opposed to selected industries as opposed to scattering corporate investments scattering corporate investments acrossacross

many industries!many industries!

STRATEGY OF MULTINATIONAL STRATEGY OF MULTINATIONAL DIVERSIFICATIONDIVERSIFICATION

DIVERSITY of BUSINESSES & DIVERSITY of DIVERSITY of BUSINESSES & DIVERSITY of NATIONAL MARKETSNATIONAL MARKETS

presents a big strategy – making challenge presents a big strategy – making challenge Management must conceive & execute Management must conceive & execute

substantial number of strategies substantial number of strategies At least one for each industry, with asAt least one for each industry, with asmany multinational variations as is many multinational variations as is

appropriateappropriate

Distinguish Characteristic

MULTI-NATIONAL MULTI-NATIONAL

DIVERSIFICATIONDIVERSIFICATION: : THE 1960sTHE 1960s

MNCs operated autonomous subsidiaries in each MNCs operated autonomous subsidiaries in each host country host country

Management tasks at headquarters focused on Management tasks at headquarters focused on Finance functionsFinance functionsTechnology transfer Technology transfer Export coordinationExport coordination

Primary competitive advantage of an MNC- Primary competitive advantage of an MNC- Ability to transfer certain skills from country to Ability to transfer certain skills from country to country efficiency & cheaply country efficiency & cheaply MNC’s market position in a country negotiated MNC’s market position in a country negotiated with host government, not due to pressures of with host government, not due to pressures of international competitioninternational competition

MULTI-NATIONAL MULTI-NATIONAL

DIVERSIFICATIONDIVERSIFICATION: : THE 1970sTHE 1970s

Multi country strategies based on national Multi country strategies based on national responsiveness began to lose effectiveness responsiveness began to lose effectiveness international competition in more industries international competition in more industries

Relevant market arena in many industries shifted Relevant market arena in many industries shifted from national to globalfrom national to global

Traditional MNCs driven to integrate operations across Traditional MNCs driven to integrate operations across national bordersnational borders

Manufacturing a complete product range in each Manufacturing a complete product range in each country become less prevalentcountry become less prevalent

Instead, plants specialized in making fewer modelsInstead, plants specialized in making fewer models

Multi-national Multi-national diversification:diversification:

The 1970sThe 1970sGains in manufacturing efficiencies fromGains in manufacturing efficiencies from

Converting to world-scale plants more than Converting to world-scale plants more than offsets increased international shipping offsets increased international shipping costs costs

In many industries, firms moved to locate In many industries, firms moved to locate Plants in low-wage countries achieve labor Plants in low-wage countries achieve labor

cost savings MNCs acted to take cost savings MNCs acted to take Advantage of country-to-country differences Advantage of country-to-country differences

Interest & exchange rates Interest & exchange rates Favorable credit termsFavorable credit termsGovernment subsidies Government subsidies Export guaranteesExport guarantees

Multi-national Multi-national diversification:diversification:

The 1980sThe 1980sAnother source of competitive advantage Another source of competitive advantage emerged emerged

Using strategic fit advantages of related Using strategic fit advantages of related diversification to build a stronger global diversification to build a stronger global

positionpositionOften, being a Often, being a DMNCDMNC was competitively superior was competitively superior to an MNC due to to an MNC due to ECONOMIES OF SCOPEECONOMIES OF SCOPE Related diversification produced extra Related diversification produced extra competitive advantage for an MNC where competitive advantage for an MNC where

Expertise in a core technology was Expertise in a core technology was applied in different industriesapplied in different industries

Important brand name advantages Important brand name advantages existedexisted

COMPETITIVE STRENGTH OF COMPETITIVE STRENGTH OF A DMNC GLOBAL MARKETSA DMNC GLOBAL MARKETS

Competitive advantages hinge upon Competitive advantages hinge upon Employing a related diversification Employing a related diversification strategy based on exploiting a core strategy based on exploiting a core competencecompetenceManaging related businesses to Managing related businesses to capture strategic fit benefits capture strategic fit benefits Using cross-subsidization to win Using cross-subsidization to win solid footholds in attractive country solid footholds in attractive country marketsmarkets

COMPETITIVE STRENGTH OFCOMPETITIVE STRENGTH OFA DMNC IN GLOBAL MARKETSA DMNC IN GLOBAL MARKETS

A DMNC has a strategic arsenal A DMNC has a strategic arsenal capable of defeating bothcapable of defeating both

A SINGLE-BUSINESS MNC and A SINGLE-BUSINESS MNC and

A SINGLE-BUSINESS domestic A SINGLE-BUSINESS domestic firm firm in a long-term competitive in a long-term competitive struggle.struggle.