Diversification Strategy Presentation

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Strategic Mgt. In Diversified Companies:

Strategic Mgt. In Diversified Companies The tribal wisdom of the Lakota Indians passed on from one generation to the next, says that when you discover that you are riding a dead horse, the best strategy is to dismount. However, members of modern, corporate management teams have developed new techniques.


a. Buying a stronger whip. b. Changing riders.. c. Threatening the horse with termination... d. Appointing a committee to study the horse.... e. Arranging to visit other sites to see how they ride dead horses... f. Lowering the standards so that dead horses can be included..... g. Reclassifying the dead horse as living impaired..... h. Hiring outside contractors to ride the dead horse.....

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i . Harnessing several dead horses together to increase speed..... j. Providing additional funding to increase the dead horse's performance. k. Doing a productivity study to see if lighter riders would improve the dead horse's performance. l. Declaring that the dead horse carriers lower overhead and therefore performs better than some other horses.... m. Rewriting the expected performance requirements for all horses. n. Promoting the dead horse to a supervisory position

Overview :

Overview What is Diversification What is senior Mgt’s responsibility in Diversified Companies? Why and When does a company diversify? How does a company accomplish it Related and Unrelated Diversification When to stop.

What is Diversification?:

What is Diversification? A collection of businesses under one corporate umbrella

Diversification and Corporate Strategy :

Diversification and Corporate Strategy A company is diversified when it is in two or more lines of business Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business A diversified company needs a multi-industry, multi-business strategy A strategic action plan must be developed for several different businesses competing in diverse industry environments

Diversification and Corporate Strategy:

Diversification and Corporate Strategy In addition to a business strategy which identifies and maintains a sustainable competitive advantage in each of the business units, a coherent corporate strategy is needed which creates value and is internally consistent.

Diversification and Corporate Strategy:

Diversification and Corporate Strategy A coherent corporate strategy can best be thought of as how, in pursuit of a vision , the corporation aligns its goals and objectives , organizational structure, systems and processes , and choice of industries and strategies to build and leverage the unique resources to give it a corporate advantage. It is through these actions that the corporation will create value and so justify its existence as a multi-business entity

Five Components of Corporate Strategy:

Five Components of Corporate Strategy Vision- For the corporation as a whole Goals and Objectives Structure, systems and procedures Deploy corporate resources into the businesses Establish the context for decentralized decision making Routine public company functions Contain multiple elements e.g. structure, budgeting,strategic planning, management style etc.

Five Components of Corporate Strategy-Resources:

Five Components of Corporate Strategy-Resources Set of tangible and intangible assets, established over time, which can’t be readily imitated, acquired or duplicated. Make the corporation unique When they are competitively superior and they contribute to sustainable competitive advantage in the SBU’s, they become a corporate advantage . Resources, effectively used, create value One time=restructuring Ongoing=use of corporate brand

Five Components of Corporate Strategy-Businesses and Industries:

Five Components of Corporate Strategy-Businesses and Industries Industries in which the corporation chooses to compete Competitive strategies adopted by the business units in those industries. How the units are related to each other.

Tasks of Senior Management :

Tasks of Senior Management Create an appropriate vision Establish goals and objectives Finding and moving into compatible businesses and industries Leverage Resources Boost combined performances Find synergies among related businesses that result in competitive advantage Move resources into businesses

Because you are dealing with multiple industries, businesses and locations, Diversified businesses are harder to manage:

Because you are dealing with multiple industries, businesses and locations, Diversified businesses are harder to manage

Why and When does a company diversify?:

Why and When does a company diversify?


FROM SINGLE-BUSINESS TO DIVERSIFICATION STAGE 1 : Most firms begin as small single-business enterprises serving a local or regional market STAGE 2 : Geographical expansion STAGE 3 : Vertical integration STAGE 4 : As growth slows, strategic options include: Take market share from rivals Focus on diversification

When do we diversify?:

When do we diversify? When a company runs out of growth opportunities in the core business and not before! When diversification results in creation of value


WHEN DOES DIVERSIFICATION START TO MAKE SENSE? Strong competitive position, rapid market growth -- Not a good time to diversify Strong competitive position, slow market growth -- Diversification is top priority consideration Weak competitive position, rapid market growth -- Not a good time to diversify Weak competitive position, slow market growth -- Diversification merits consideration

When you can increase value based on three tests:

When you can increase value based on three tests Attractiveness Test-The industry must be attractive Cost of Entry Test - Cost has to be reasonable ( Catch 22) Better off Test - Diversification results in a competitive advantage and creation of value.

How to Diversify:

How to Diversify Find ways to enter new industries Decide whether the businesses related to each other or not? Strengthen the performance of the businesses you’ve got Get rid of the bad ones that can’t be fixed Fix the bad ones that can be fixed


STRATEGIES FOR ENTERING NEW BUSINESSES 1. Acquire existing firm in target industry 2. Start new company internally 3. Form joint venture


ACQUIRING AN EXISTING COMPANY Most popular approach to diversification Advantages Quicker entry into target market Hurdling certain entry barriers Technological inexperience Gaining access to reliable suppliers Being of a size to match rivals in terms of efficiency & costs Getting adequate distribution access


DIVERSIFICATION VIA INTERNAL STARTUP More attractive WHEN : Ample time exists Incumbent firms slow in responding It involves lower costs than acquiring existing firm Firm already has most of needed skills Additional capacity will not adversely impact supply-demand balance in industry New start-up does not have to go head-to-head against powerful rivals


DIVERSIFICATION VIA JOINT VENTURES Good way to diversify WHEN: Uneconomical or risky to go it alone Pooling competencies of two partners provides more competitive strength Foreign partners needed to surmount Import quotas Tariffs Nationalistic political interests Cultural roadblocks


DRAWBACKS OF JOINT VENTURES Raises questions about - Which partner will do what & Who has effective control Requires precise agreements

Related Diversification:

Related Diversification Are the businesses that we are divesting into related to one another and if so, how?


Concept: Exists among different businesses when their value chains are sufficiently similar to offer opportunities Offers competitive advantage potential of Lower costs Efficient transfer of Key skills Technological expertise Managerial know-how Use of a common brand name Presence of strategic fit in a diversified firm’s portfolio, along with corporate management’s skill in capturing benefits of the interrelationships makes related diversification capable of being a 2 + 2 = 5 phenomenon Strategic Fit

Types of Strategic Fit:

Types of Strategic Fit Technology Fits Distribution & Customer-Related Fits Operating Fits Managerial Fits

Several lines of business with a strategic fit that becomes a strategic advantage:

Several lines of business with a strategic fit that becomes a strategic advantage


RELATED DIVERSIFICATION & STRATEGIC FIT STRATEGIC FIT can be based on Shared technology Common labor skills Common distribution channels Common suppliers & raw materials sources Similar operating methods Similar kinds of managerial know-how Ability to share common sales force Customer overlap Any area where meaningful sharing opportunities exist in businesses’ value chains


COMMON APPROACHES TO RELATED DIVERSIFICATION Entering businesses where sales force, advertising, & distribution activities can be shared Exploiting closely related technologies Sharing manufacturing facilities Transferring know-how & expertise from one business to another Transferring firm’s brand name & reputation with customers to a new product/service Acquiring new businesses to uniquely help firm’s position in existing businesses

Value of Related Diversification:

Value of Related Diversification Allows a company to enjoy economies of scope


CONCEPT: ECONOMIES OF SCOPE Utilize strategic fits to gain cost or other competitive advantage. Economies of scale use size to gain advantage Arise from ability to eliminate costs by operating two or more businesses under same corporate umbrella Exist whenever it is less costly for two or more businesses to operate under centralized management than to function independently Cost savings opportunities can stem from interrelationships anywhere along businesses’ value chains

Unrelated Diversification:

Unrelated Diversification If the businesses we diversify into aren’t related to each other, what’s the point?

Unrelated Diversification :

Unrelated Diversification Financially driven rather than Strategically driven Strategic fit, value chain relationships or strategic theme are not important Profitability and size are key. Look for a bargain undervalued assets, financially distressed, turnarounds, bright future with limited capital

Unrelated diversification:

Unrelated diversification Go into any business where we can make a profit Referred to as conglomerates No unifying strategic theme


APPEAL OF UNRELATED DIVERSIFICATION Business risk scattered over different industries Capital resources invested in 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 profit potential, then - Shareholder wealth can be enhanced

Tasks of Senior Management :

Tasks of Senior Management When you aren’t looking for businesses, what do you do? Leverage the Resource base Boost combined performances

Strengthen the Performances of Companies we own:

Strengthen the Performances of Companies we own Fix what can be fixed Get rid of what cannot be fixed If it isn’t broken, please don’t fix it.

When it can’t be fixed:

When it can’t be fixed Divest Liquidate


DIVESTITURE & LIQUIDATION STRATEGIES Situations arise when one or more subsidiaries have to be sold or shut down Misfits cannot be completely avoided Industry attractiveness changes over time Subpar performance of some subsidiaries is bound to occur Diversification appearing sensible based on strategic fit lacks compatibility of values essential to CULTURAL FIT

Divestiture :

Divestiture Spin off Sale

When it can be fixed:

When it can be fixed Turnaround Cure the problems that make the losing business unsuccessful Done when the business is in an attractive industry And when divesting doesn’t make strategic sense


COMMENT: TREND IN DIVERSIFICATION The present trend toward narrower diversification has been driven by a growing preference to gear diversification around creating strong competitive positions in a few, well-selected industries as opposed to scattering corporate investments across many industries!


STRATEGY OF MULTINATIONAL DIVERSIFICATION DIVERSITY of BUSINESSES & DIVERSITY of NATIONAL MARKETS Presents a big strategy-making challenge Distinguishing Characteristic


MULTI-NATIONAL DIVERSIFICATION: THE 1960s Multi country approach Management tasks at headquarters focused on Finance functions Technology transfer Export coordination Primary competitive advantage of an MNC - Ability to transfer certain skills from country to country efficiently & cheaply MNC’s market position in a country negotiated with host government, not due to pressures of international competition


MULTI-NATIONAL DIVERSIFICATION: THE 1970s Traditional MNCs driven to integrate operations across national borders Manufacturing a complete product range in each country became less prevalent Gains in manufacturing efficiencies from converting to world-scale plants more than offset increased international shipping costs In many industries, firms moved to locate plants in low-wage countries to achieve labor cost savings


MULTI-NATIONAL DIVERSIFICATION: THE 1980s Another source of competitive advantage emerged Using strategic fit advantages of related diversification to build a stronger global position Often, being a DMNC was competitively superior to an MNC due to ECONOMIES OF SCOPE

When to Stop Diversifying:

When to Stop Diversifying When you achieve acceptable levels of growth and profitability Before complexity outstrips management's ability to manage

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