strategy & competitive advantage in diversified companies

Presenter:

Qamar Bilal Syed

Strategy & Competitive Advantage in Diversified

Companies

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Strategy-making for single business enterprise

Strategy-making for diversified enterprise

Moving up a level…

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The task of crafting corporate strategy for a diversified company encompasses four (4) areas:1. Picking the new industries to enter and

deciding on the means of entry – The 1st concern in diversifying is what new industries to get into and whether to enter by:

starting a new business from ground up,acquiring a company already in the target

industry, orforming a strategic alliance or joint venture with

another company

Diversification: Things to consider

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2. Initiating actions to boost the combined performance of the business the firm has entered – As positions are created in the chosen industries, corporate strategists typically focus on ways to strengthen the long term competitive advantage. The corporate parents can help their business subsidiaries be more successful by

providing financial resources, supplying missing skills or technological know-

how, providing new cost reduction avenues


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3. Pursuing opportunities to leverage cross-business value chain relationships & strategic fits into competitive advantage – A company that diversifies into a related value-chain business gains competitive advantage potential not open to a company that diversifies into a business that value-chain are totally unrelated.

Pertaining to technology, Supply-chain logistics, Overlapping distribution channels


• Common customers

• Production

4. Establishing investment priorities & steering corporate resources into the most attractive business unit –


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WHEN TO DIVERSIFY?

When to diversify depends:partly on a company’s growth opportunities in

its present industry; and partly on the opportunities to utilize its

resources, technology, expertise, competencies, and capabilities to other market area.

A company must ask itself,“what type and how much diversification?”Related business v totally unrelated business.

There is no urgency to diversification, wait for the best time but be attentive!

When to diversify?

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Companies that continue to concentrate on a single business can achieve enviable success over many decades without relying on diversification to sustain their growth. McDonald’s, Coca-Cola, Apple Computers,

Wal-Mart, FedEx, Timex, Cam[bell Soup, Xerox, Ford Motor Company all won their reputations in a single business.

Why rushing to diversify isn’t necessarily a good strategy?

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Concentrating on a single line of business (totally or with a small close of diversification) has important organizational, managerial & strategic advantages.It entails less ambiguity about “who we are and

what we do?”The energies of whole organization are

directed down one business path, creating less chance of loss of managerial time & resources.

Why rushing to diversify isn’t necessarily a good strategy? (Cont..)

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The big risk of remaining concentrated on a single business is putting all of a firm’s eggs in one industry basket.

The market may become saturated, competitively un-attracted, or eroded by the appearance of new technologies or new products or fast-shifting buyer preferences.

The risk of concentrating on a single business:

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Examples:What digital cameras are doing to the market

for films and film-processing, andWhat computer disk technology is doing to the

market for cassette tapes and 3.5” floppy disks.

The risk of concentrating on a single business: (Cont..)

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There is no formula for determining when a company ought to diversify.

Judgments about when to diversify have to be made on the basis of a company’s own situation.

However, we can identify the symptoms & trace out the genuine need for diversification.

Factors that signal when it's time to diversify:

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Generally speaking, a company is a prime candidate for diversification when it has:1.Diminishing growth prospects in its present

business,2.Opportunities to add value for its customers or

gain comp adv by broadening its present business to include complementary products or technologies,

3.Attractive opportunities to transfer its existing competencies & capabilities to new business arenas,

4.Cost saving opportunities that can be exploited by diversifying into closely related businesses, and

5.The financial & org resources to support a diversification effort.

Factors that signal when it's time to diversify: (Cont..)

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The ultimate justification for diversification

BUILDING SHAREHOLDER VALUE:

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Diversification is justifiable only if it builds shareholder value.

To create shareholder value, a diversified company must get into businesses that can perform better under common management than they could perform as stand-alone enterprises.

The ultimate justification for diversification:

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1. The industry attractiveness test

2. The cost-of-entry test

3. The better-off test:1+1 = 3

Three (3) tests for judging a diversification move:

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Related v Unrelated Businesses

CHOOSING THE DIVERSIFICATION PATH

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Businesses are said to be related when they are competitively valuable relationship among the activities comprising their respective value chains. The 1+1=3 rules definitely applies here.

Related versus unrelated business

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Businesses are said to be unrelated when the activities comprising their respective value chain are so dissimilar that no real potential exists to transfer skills or technology from one business to another or to combine similar activities and reduce costs or to otherwise produce competitively valuable benefits from operating and under a common corporate umbrella.

Related versus unrelated business (Cont..)

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Diversify Into Related Businesses:Build shareholder value by capturing cross-business strategic fits•Transferring skills & capabilities from one business to another•Sharing facilities or resources to reduce costs•Leveraging use of a common brand name•Combining resources to create new competitive strengths and capabilities

Diversify Into Unrelated Businesses:•Spread risk across diverse businesses.•Build shareholder value by doing a superior job of choosing businesses to diversify into & of managing the whole collections of businesses in the co.’s profile.

Diversify Into Both Related & Unrelated Businesses

Strategy

Options for

Company

Looking to

Diversify

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Finding the strategic fit…

THE CASE FOR RELATED DIVERSIFICATION

STRATEGIES

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A related diversification strategy involves adding business whose value chain possess competitively valuable “strategic-fit” with the value chain of the company’s present business.

Strategic-Fit

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Value chain for related business

Supply Chain Activiti

es

Technology

Operations

Sales &

Marketing

Distribution

Customer

Service


es

Technology

Operations

Sales &

Marketing

Distribution

Customer

Service

Company A

Company B

Representative Value Chain Activities

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R&D and Technology Activities:AT&T – from telephones to cable TV & Internet

accessSupply chain Activities:

Dell’s strategic partnership with leading suppliers of microprocessors, mother boards, disk drives, memory chips monitors, modems, long-life batteries & other laptop and desktop PC components.

Manufacturing Activities:Emerson electrics diversified in chain-saw

business. Become cost-leader by using joint assembly facilities.

Cross-business strategic-fit along the value chain

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Distribution Activities:Sunbeam (FMCG Co.) acquire Mr. Coffee since

retailers were same ; Wal-Mart, Kmart, department stores ,etc.

Sales & Marketing Activities:P&Gs lineup products like Ivory soap, Crest

toothpaste, Jif peanut butter & Duncan Hines cake mix have different competitors, suppliers & production requirements, but they all move through the same wholesale distribution system.

Cross-business strategic-fit along the value chain (Cont..)

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Managerial & Administrative Support Activities:Ford transferred its automobile financing &

credit know-how to the savings-and-loan industry by acquiring some failing S&L associations during the 1989 bailout.

Cross-business strategic-fit along the value chain (Cont..)

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Economies of scope - a concept distinct from economies of scale arise from the ability to eliminate costs b y operating two or more businesses under the same corporate umbrella; the cost saving opportunities can stem from strategic fit relationships anywhere along the business’ value chain.These are cross-business cost-saving

opportunitiesThe greater the economies of scope

associated with cross-business cost-saving opportunities, the greater the potential for creating a competitive advantage based on lower costs.

Strategic-fit, Economies of scope, & Competitive advantage

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A diversified firm can achieve a consolidated performance greater than the sum of what the businesses can earn pursuing independent strategies.Cross-business strategic-fits adds potential of

the firms individual businesses.

Strategic-fit, Economies of scope, & Competitive advantage (Cont..)

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The related value chain activities must be merged into a single functional unit and coordinated; then the cost savings must be squeezed out.

A company that can expand its stock of strategic assets faster & at lower cost than rivals, obtain sustainable competitive advantage .Related know-how must be utilized to

accelerate the creation of valuable new competencies & competitive capabilities.

Capturing strategic-fit benefits:

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No strategic fit…

THE CASE FOR UNRELATED

DIVERSIFICATION STRATEGIES

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Despite the strategic fit benefits associated with related diversification, many companies opt for unrelated diversification.It involves diversifying into whatever industries

and businesses hold promise for attractive financial gain; exploiting strategic fit relationship is secondary!

Unrelated diversification

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Such companies go for opportunistic search for “good companies” to acquire.The premise of unrelated diversification is that

any company that can be acquired on good financial terms & has satisfactory profit prospects represents a good business to diversify into.

Like ARY-group and mostly famous Deewan-group!

Unrelated diversification (Cont..)

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No Strategic-Fit for Unrelated Business


es

Technology

Operations

Sales &

Marketing

Distribution

Customer

Service


es

Technology

Operations

Sales &

Marketing

Distribution

Customer

Service

Company A

Company B

An absence of completely valuable strategic fits b/w the value chain for Business-A and the

value chain for Business-B

Representative Value Chain Activities

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Whether the business can meet corporate targets for profitability& ROI?

Whether the business will require substantial infusions of capital to replace out-of-date plants & equipment, fund expansion & provide WC?

Whether the business is in the industry with significant growth potential?

Whether the business is big enough to contribute significantly to the parent firm’s bottom line?

The Criteria for unrelated diversification strategies

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Whether there is potential for union difficulties or adverse government regulations concerning product safety or environment?

Whether there is industry vulnerability to recession, inflation, high interest rates, or shifts in government policy?

The Criteria for unrelated diversification strategies (Cont..)

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Companies whose assets are undervalued:Opportunities may exist to acquire such

companies for less than full market value & make substantial capital gains by reselling their assets and businesses for more than their acquired costs.

Companies that are financially distressed:Such businesses can be purchased at a bargain

price.Their operations turned around with the aid of

the parent company financial resources.As these businesses re-grow, they can be

converted into long-term investment area for the company.

Unrelated diversification opportunities:2 Special Situations!

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WALT DISNEY COMPANYTheme parksDisney cruise lineResort propertiesMovie production (for both children and adults)Video productionTV Broadcasting (ABC, Disney Channel, Toon

Disney, Classic Sports Network, ESPN, E!, Lifetime, and A&E Networks)

Radio broadcasting (Disney Radio)Theatrical productions

A real time example (Table page:305)

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WALT DISNEY COMPANY (Cont..)Musical recordingsAnimation are salesAnaheim Mighty Ducks NHL franchiseAnaheim Angels Major League Baseball

franchiseBook and magazine publishingInteractive software and internet sitesThe Disney Store retail shops

A real time example (Table page:305)

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Advantages:Business risk is scattered over a set of diverse

industries.

Cash flows from company businesses with lower growth and profit prospects can be diverted to acquiring & expanding businesses with higher growth and profit potentials.

The Pros & Cons of unrelated diversification

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Advantages (Cont..):Company overall profitability may prove

somewhat more stable because hard times in one industry may be partially offset by good times in another.

If the corporate managers are exceptionally smart at spotting bargain-priced companies with big upside profit potential, shareholder wealth can be enhanced.

The Pros & Cons of unrelated diversification (Cont..)

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Disadvantages – 2 biggest drawbacks are:The difficulties of competently managing many

different businesses, and

Being without the added source of competitive advantage that cross-business strategic-fit provides.


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Corporate managers have to be talented enough to:Discern a good acquisition from a bad

acquisition,Select capable managers to run each of many

different businesses,Discern when the major strategic proposals of

strategic business unit managers are sound,Know what to do when a business unit

stumbles.“never acquire a business you don’t know how to run.”


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Some more drawbacks:It offers no basis for cost reduction, skills

transfer, or technology sharing.Although in theory unrelated diversification

offers the potential for greater sales-profit stability over the course of the business cycle, in practice, attempts at countercyclical diversification fall short of the mark.


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Despite these drawbacks, unrelated diversification can sometimes be a desirable corporate strategy.

It certainly merits consideration when a firm needs to diversify away from an endangered or unattractive industry and has no distinctive competencies or capabilities it can transfer to an adjacent industry.


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Unrelated diversification is a financial approach to creating shareholder value;

Related diversification, in contrast, represents a strategic approach

Unrelated diversification &Shareholder Value

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Corporate strategists must exhibit superior skills in creating and managing a portfolio of diversified business interest:Doing a superior job of diversifying into new

businesses that can produce consistently good returns on investment (satisfying the attractive test).

Doing an excellent job of negotiating favorable acquisition price (satisfying the cost-of-entry test).

Making smart moves to sell previously acquired business subsidiaries at their peak & getting premium price.

Unrelated diversification &Shareholder Value (Cont..)

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Corporate strategists must exhibit superior skills in creating and managing a portfolio of diversified business interest: (Cont..)Being sharp in shifting corporate financial

resources out of the businesses where profit opportunities are dim & into businesses where rapid earnings growth and high ROI are occurring.

Smartly managing firm subsidiaries (by providing expert problem-solving skills, creative strategy suggestions, and decision-making guidance to business-level managers.

Unrelated diversification &Shareholder Value (Cont..)

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Opting for every possible opportunity!

COMBINATIONRELATED-UNRELATED

DIVERSIFICATION

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There is nothing to exclude a company from diversifying into both related and unrelated businesses.

In practice, the business make up of diversified companies varies considerably.Dominant business enterprisesNarrowly diversified enterprisesBroadly diversified enterprisesSeveral unrelated groups of related businesses

Combination related-unrelated diversification strategies

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1. Dominant business enterprises:One major “core” business accounts for 50-80%

of total revenues & a collection of small related or unrelated businesses accounts for the remainder.

2. Narrowly diversified enterprises:Narrowly diversified around a few (2-5) related

or unrelated businesses.

3. Broadly diversified enterprises:Have a wide ranging collection of either related

or unrelated businesses or a mix of both.

Combination related-unrelated diversification strategies (Cont..)

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4. Several unrelated groups of related businesses:

Few multi-business enterprises have diversified into unrelated areas but have a collection of related businesses within each other.

There is ample room for companies to customize their diversification strategies to incorporate elements of both related & unrelated diversification, as may suit their own risk preference and strategic vision

Combination related-unrelated diversification strategies (Cont..)

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CASE ON UNILEVERSupportive Study

By: Mr. Abid Iqbal

strategy & competitive advantage in diversified companies

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