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 Companys strategy Cash Hog Vs Cash Cow Options for Allocating a Diversified Companys Financial resources Options after Diversification
Salah uddin IQRA 1

DIVERSIFIED COMPANY: when it is in two or more

lines of business that operate in diverse market environments Corporate Strategy in a diversified company is
more complex than a strategy deployed for a single line-of-business

It is a multi-industry, multi-business strategy

Strategic action plan required for several different businesses competing in diverse industry conditions
Salah uddin IQRA 2

To build shareholder value!

1 + 1 = 3 phenomenon

A move to diversify into new business must pass three tests: 1. Industry attractiveness test: - must be attractive to yield consistently good returns on investment - industry and competitive conditions conducive for earning good or better profits and ROI than the company is earning in its present situation

Salah uddin

IQRA

2. Cost of entry test: The cost of entering should not be so high as to spoil the profit opportunities Catch 22 situation: o The more attractive the industry prospects are for growth and long term profitability, the more expensive it can be to get into o Entry barriers for start-up companies are likely to be high in attractive industry The cost of entry should at least assure the targeted ROI

Salah uddin

IQRA

3. The better off test:

The companys different businesses should perform better together than as stand-alone
enterprises, such that company As diversification into business B produces a 1 + 1 = 3 effect for shareholders

Salah uddin

IQRA

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

Leverage existing competencies and capabilities

by 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 of these businesses

Salah uddin

IQRA

1.

Picking new industries to enter and deciding on the means of entry what industry to get in starting a new business from the ground up acquiring a company already in the target industry forming a joint venture or strategic alliance with another company diversify narrowly in few industries or broadly into many industries

Salah uddin

IQRA

2. Boost combined performance of the businesses: Help business subsidiaries by: o providing financial resources o supplying missing skills or technological know how, or managerial expertise to better perform key value chain activities o providing new avenues for cost reduction Typically, a company will pursue o rapid growth strategies in most promising businesses o initiate turn around efforts in a weak performing businesses with potential o divest businesses that is no longer attractive or that does not fit into managements long range plans

Salah uddin

IQRA

3. Pursuing opportunities to leverage cross business value chain relationship and strategic fits into competitive 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 technology o reducing costs via sharing common facilities and resources o using well known brand names and distribution muscle to grow the sales of newly acquired products
Salah uddin IQRA 9

4. Establishing investment priorities and steering corporate resources into most attractive business units: Decide on priorities for investing capital in the companys different businesses Channel resources into areas where earning potentials are higher and away from areas where they are lower Divest businesses units that are chronically poor performers or are in an increasingly unattractive industry

Salah uddin

IQRA

10

1. 2.

3.

Acquire existing company Internal start-up Joint ventures/strategic partnerships

Salah uddin

IQRA

11

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 on introductory advertising and promotion

Securing adequate distribution access

Salah uddin

IQRA

12

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 costs than 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

Salah uddin IQRA 13

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 Access to distribution outlets
Salah uddin IQRA 14

Creates confusion as to
Which partner will do what Who has effective control

Potential conflicts
Conflicting objectives Disagreements over how to best operate the venture Culture clashes
Salah uddin IQRA 15

Related Diversification:
Diversifying into businesses whose value chains possess competitively valuable strategic fits with value chains of firms present businesses

Unrelated Diversification:
Diversifying into businesses with no competitively valuable value chain match-ups or strategic fits with firms present businesses

Salah uddin

IQRA

16

DIVERSIFY INTO RELATED BUSINESS: Enhance share-holder value by capturing crossbusiness strategic-fits: Transfer Skills & Capabilities from one business to another Share facilities & Resources to reduce costs Leverage use of a common brand name Combine resources to create new strengths & capabilities

Salah uddin

IQRA

17

DIVERSIFY INTO UN-RELATED BUSINESS: Spread Risks across completely different businesses Build shareholder value by doing a superior job of choosing businesses and managing the whole collection of businesses in the companys portfolio

DIVERSIFY INTO BOTH RELATED and UN-RELATED BUSINESS

Salah uddin

IQRA

18

Involves diversifying into businesses whose value chains possess competitively valuable strategic fits with the value chain of the present business
Capturing the strategic fits makes related diversification a 1 + 1 = 3 phenomenon

Salah uddin

IQRA

19

1. 2.

3. 4.

Transferring competitively valuable expertise, technological know how, or other capabilities Combining the related value chain activities of separate businesses into single operations to achieve lower costs - manufacture products of different business in a single plant - use the same warehouse for shipping and distribution - have a single sales force for the products of different businesses because they are marketed to the same type of customers (Sony) Exploiting common use of well known and potent brand name ( Honda, Cannon, Sony) Cross business collaboration to create competitively valuable resource strengths and capabilities
Salah uddin IQRA 20

Strategic Fit is present whenever one or more activities in the value chains of different businesses are sufficiently similar to offer opportunities for Transferring competitively valuable expertise or technological know-how from one business to another Combining performance of common value chain activities to achieve lower costs Exploiting use of a well-known brand name Cross-business collaboration to create competitively valuable resource strengths and capabilities
Salah uddin IQRA 21

Salah uddin

IQRA

22

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 earn operating independently (1 + 1 = 3 phenomenon)
Salah uddin IQRA 23

R&D and Technology Activities - sharing common technology - transferring technological know-how from one business to another - cost savings in R&D - shorter times in getting new products to the market Examples - technological innovations being the driver behind the efforts of cable TV companies to diversify into high speed internet access via the use of cable modems
Salah uddin IQRA 24

Supply Chain activities - potential for skill transfer procuring materials - greater bargaining power in negotiating with common suppliers - added leverage with shippers in securing volume discounts on inbound logistics - added collaborations with common supply chain partners Example :Dell computers strategic partnership with leading suppliers of microprocessors, motherboards, disc drives, memory chips etc leading to diversify into servers, data storage devices,MP3 players, and LCD TVs

Salah uddin

IQRA

25

Manufacturing Related Strategic Fits - diversifier expertise in quality manufacture and cost efficient methods can be transferred in another business - ability to consolidate production into smaller number of plants and significantly reduce the overall costs Example : snowmobile maker Bombardier diversified into motorcycle business was able to set up motorcycle assembly lines in the same assembly line

Salah uddin

IQRA

26

Distribution-Related Strategic Fits - potential cost saving in sharing the same distribution facilities - using many of the same wholesale distributors an 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 business operations

Salah uddin

IQRA

27

Strategic Fits in Managerial and Administrative Support Services Comparable types managerial know-how in one line of business to be transferred to another - experience of expanding into new geographic market Electric utility that diversifies into natural gas, water, appliance sales, home security service can use the same: - customer data network, - customer call centers and local offices, - billing and customer accounting systems - customer service infrastructure
Salah uddin IQRA 28

Related diversification presents opportunities to eliminate or reduce costs of performing certain value chain activities, such cost savings are termed economies of scope Economies of Scope are cost reductions that flow from operating multiple businesses under same corporate umbrella such economies stem directly from strategic fit efficiencies along the value chains of related businesses

Salah uddin

IQRA

29

Involves diversifying into businesses with

No strategic fit No meaningful value chain relationships

No unifying strategic theme

Basic approach Diversify into any industry where potential 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

Salah uddin

IQRA

30

Unrelated Businesses Have Unrelated Value Chains and No Strategic Fits

Salah uddin

IQRA

31

Can business meet corporate targets for profitability and ROI? Is business in an industry with growth potential? Is business big enough to contribute to parent firms bottom line? Will business require substantial infusions of capital? Is there potential for union difficulties or adverse government regulations? Is industry vulnerable to recession, inflation, high interest rates, or shifts in government policy?
Salah uddin IQRA 32

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 short

on investment capital

Cash-poor, opportunity-rich companies are coveted acquisition candidates

Salah uddin IQRA 33

Business risk scattered over different industries

Financial resources can be directed to those industries offering best profit prospects If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced Stability of profits Hard times in one industry may be offset by good times in another industry

Salah uddin

IQRA

34

Demanding managerial Requirements Limited Competitive Advantage potential

Salah uddin

IQRA

35

Dominant-business firms
One major core business accounting for 50 80 % revenues, with remaining several small, related or unrelated 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 unrelated groups of related businesses
Salah uddin IQRA 36

Salah uddin

IQRA

37

1.

Assess long-term attractiveness of each industry firm is in Assess competitive strength of firms business units

2.

3.

Check competitive advantage potential of cross-business strategic fits among business units
Check whether firms resources fit requirements of present businesses Rank performance prospects of businesses and determine priority for resource allocation

4.

5.

6.

Craft new strategic moves to improve overall company performance

Salah uddin IQRA 38

Attractiveness of Each Industry in Portfolio

Each Industrys attractiveness relative to others Attractiveness of all Industries as a Group

Salah uddin

IQRA

39

Salah uddin

IQRA

40

Objectives
Appraise how well each business is positioned in its industry relative to rivals Evaluate whether it is or can be competitively strong enough to contend for market leadership

Salah uddin

IQRA

41

Salah uddin

IQRA

42

Salah uddin

IQRA

43

Examine strategic fit based on

Whether one or more businesses have valuable strategic fits with other businesses in portfolio Whether each business meshes well with firms long-term strategic direction

Salah uddin

IQRA

44

Salah uddin

IQRA

45

Objective: Determine how well firms resources

match 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 support requirements of its businesses as a group

Salah uddin

IQRA

46

Internal cash flows are inadequate to fully fund

needs for working capital and new capital investment

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

Salah uddin

IQRA

47

Generate cash surpluses over what is needed to sustain present market position
Such businesses are valuable because surplus cash can 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
Salah uddin IQRA 48

Factors to consider in judging business-unit

performance

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
Salah uddin IQRA 49

The Chief Strategic and Financial Options for Allocating a Diversified Companys Financial Resources

Salah uddin

IQRA

50

Stick closely with existing business lineup

and pursue opportunities it presents

Broaden companys business scope by Divest certain businesses and retrench

making new acquisitions in new industries

to a narrower base of business operations

Restructure companys business lineup, putting a

whole new face on business makeup Pursue multinational diversification, striving to globalize operations of several business units
Salah uddin IQRA 51

1.

BROADEN DIVERSIFICATION BASE:

Acquire more Businesses & build positions in new related or Un-related industries Add Businesses that will complement/ strengthen the market position and competitive capabilities of businesses in industries where the company already has a stake

Salah uddin

IQRA

52

2.

NARROW DIVERSIFICATION BASE; DIVEST OR RETRENCH:

Get out of Businesses that are competitively weak, that are in unattractive industries or that lack adequate strategic & resource fit Focus corporate resources on Businesses in a few, carefully selected industries

Salah uddin

IQRA

53

3.

RESTRUCTURE THE COMPANY's BUSINESS LINE UP:

Sell off competitively weak Businesses, in unattractive industries, with little strategic or resource fit, and non core businesses Use cash form divesture plus unused debt capacity to make acquisitions in other, more promising industries

Salah uddin

IQRA

54

d.

PURSE MULTI-NATIONAL DIVERSIFICATION:

Enter more country markets for sustained growth

More competitive advantage potential than any other diversification strategy

Salah uddin

IQRA

55