Resource Strategies in a

declining business
Session 11

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Assignment- by 12th session
• The topic of the assignment can be study of a single
competency/resource in one or more organizational
contexts. This can be a cross case analysis of 4-5 cases that
you have covered in other courses(it could be 4-5 cases of
the same organization or different firms). Format- Around 6-
8 pages of text, analysis in your own words, 12 font, 1.5 line
spacing, 1 inch margins, no photographs, On cover page-
only title and names/roll numbers of all group members.

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Corporate strategy: dimensions
• Context of growth
• Business Decline
• Business growth
• Business consolidation
• Directions of growth-
• diversification and
• international expansion
• Methods of growth-
• Organic (innovation),
• acquisitions,
• alliances

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Decline may happen in terms of
• Business decline- loss of business model efficacy e.g. platform models
in newspaper industry
• Industry decline
• Temporary crisis
• Affected by long term trends- eg sustainability

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Impact on firms in terms of (Response by
firms in terms of the nature of impact)
• Stable equilibrium- revival, correcting the business model-
turnaround
• Unstable equilibrium- salvaging useful resources, trying to create new
models out of useful resources
• Neutral equilibrium- diversification, niche focus, reduce scope,
consolidate a fragmented market

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Managing in a state of decline through
diversification

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Causes of industry decline (Harrigan and Porter, 1983)

• Technological advances fostering substitute products, often of lower

cost and higher quality
• Shrinking customer group (caused by e.g. demographic changes)
• Buyers are in trouble
• Changes in life-style, buyers' needs, or tastes
• Rising costs of inputs or complementary products

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Other causes of decline

• Limited supply of natural resources (Hamermesh and Silk 1979)

• Regulation and deregulation (Taggart 1995)
• Product or downstream product found environmentally hazardous
(Lieberman 1990)

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Conditions of demand- declining industries

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Exit barriers

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Nature of threats in industries (Mcgahan, 2004)

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Resource partitioning Concept derived from evolutionary biology

• Firms in different niches within the industry specialize on different

aspects to prevent intense competition

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Actions
•
of managers wrt resources
Structuring
• acquiring, accumulating, and divesting resources to form the
firm’s resource portfolio
• Bundling
• stabilizing, or minor incremental improvements to existing
capabilities;
• enriching, which extends current capabilities;
• pioneering, which creates new capabilities.
• Leveraging the firm’s resources- for creating value for
customers and competitive advantage of the firm-
sequence of processes to exploit the firm’s capabilities
and take advantage of specific market opportunities
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Leveraging includes
• mobilizing, which provides a plan or vision for capabilities
needed to form requisite capability configurations;
• coordinating, which involves integrating capability
configurations
• deploying, where a resource advantage, market
opportunity, or entrepreneurial strategy is used to exploit
capability configurations formed by the coordinating
subprocess

• While each process and its subprocesses are important, several different
paths can be pursued in the resource management framework; however,
creating value and developing competitive advantages requires
synchronization of the processes

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Managerial actions

• Exploiting growth segments (analogous with Harrigan and Porter's (1983) niche strategy)
• Emphasizing product quality and innovative product improvement
• Systematically improving efficiency of production and distribution

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Resource related actions may depend on the
nature of failure- e.g.
• Kodak
• Anderson Consulting
• Air India/BSNL

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Diversification

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Directions of growth

Source: Adapted from H. Ansoff, Corporate Strategy, Penguin, 1988, Chapter 6

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Reasons for diversification
• Enhancing competitiveness through
• Economies of scope
• Market power
• Financial economics

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Incentives to Diversify
External Incentives:
• Relaxation of anti-trust regulation allows more related
acquisitions than in the past
• Higher taxes on dividends that favored spending retained
earnings on acquisitions
• With lower taxes on dividends firms made fewer
acquisitions with retained earnings, shifting to the use of
debt to take advantage of tax deductible interest payments

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Incentives to Diversify
Internal Incentives:
• Poor performance may lead some firms to diversify an
attempt to achieve better returns
• Firms may diversify to balance uncertain future cash flows
• Firms may diversify into different businesses in order to
reduce risk

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Resources and Diversification
• Besides strong incentives, firms are more likely to diversify if they
have the resources to do so
• Value creation is determined more by appropriate use of resources
than incentives to diversify

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Managerial Motives to Diversify
Managers have motives to diversify
• diversification increases size; size is associated with executive compensation
• diversification reduces employment risk
• effective governance mechanisms may restrict such motives

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Classification in terms of value
• Value creating
• Value neutral
• Value destroying

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Relationship Between
Diversification and Performance

Performance

Dominant Related Unrelated

Business Constrained Business
Level of Diversification
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Relationship Between Firm Performance and
Diversification

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Options for the firm
• Horizontal integration
• The process of acquiring or merging with industry competitors
• Acquisition and merger
• Vertical integration
• Expanding operations backward into an industry that produces inputs for the
company or forward into an industry that distributes the company’s products
• Strategic outsourcing
• Letting some value creation activities within a business be performed by an
independent entity

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Benefits of Horizontal Integration
• Reducing costs
• Increasing value
• Product bundling
• Cross selling
• Managing industry rivalry
• Increasing bargaining power
• Market power (monopoly power)

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Drawbacks and Limits of Horizontal
Integration
• Majority of mergers and acquisitions do not create value
• Implementing a horizontal integration strategy is not easy
• Mergers and acquisitions often fail to produce the anticipated gains
• Can bring the company into conflict with antitrust law

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Vertical Integration: Stages in the Raw
Material to Consumer Value Chain

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Full and Taper Integration

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Increasing Profitability Through Vertical
Integration
• Building barriers to entry
• Facilitating investments in specialized assets
• Protecting product quality
• Improved scheduling

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Arguments Against Vertical Integration
• Cost disadvantages
• Company-owned suppliers that have higher costs than external suppliers
• Rapid technological change
• Tying a company to an obsolescent technology
• Demand unpredictability
• Difficulty of achieving close coordination among vertically integrated
activities
• Bureaucratic costs

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Levels of diversification
• Low levels:
• Single Business > 95% of business from a single business unit
• Dominant Business Between 70 and 95% of business from a single
business unit

• Moderate to high levels: Related constrained- <70% of

revenues from dominant business; all businesses share
product, technological and distribution linkages
• Moderate to high levels: Related linked-
linke < 70% of revenues
from dominant business, and only limited links exist
• Unrelated: < 70% of revenue comes from the dominant
business, and there are no common links between
businesses

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Value-creating Strategies of Diversification:
Operational and Corporate Readiness

Sharing: Operational Relatedness

High
Between Businesses

Low

Low High
Corporate Readiness: Transferring Skills into Businesses
Through Corporate Headquarters 35
 Adding Value by Diversification
Diversification most effectively adds value by either of two
mechanisms:
• Economies of scope: cost savings attributed to transferring the capabilities and
competencies developed in one business to a new business
• Market power: when a firm is able to sell its products above the existing
competitive level or reduce the costs of its primary and support activities below
the competitive level, or both

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 Diversification and Multidivisional Structure

• Three major benefits

• more accurate monitoring of the performance of each business, simplifying
problems of control
• facilitate comparisons between divisions, improving resource allocation
process
• stimulate managers of poorly performing divisions to look for ways of
improving performance

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Alternative Diversification
Strategies
Related Diversification Strategies
• sharing activities

• transferring core competencies

Unrelated Diversification Strategies

• efficient internal capital market allocation

• restructuring

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Sharing Activities:
• Sharing activities often lowers costs or raises
differentiation
• Sharing activities can lower costs if it:
• achieves economies of scale
• boosts efficiency of utilization
• helps move more rapidly down the Learning Curve
• Sharing activities can enhance potential for or
reduce the cost of differentiation
• Must involve activities that are crucial to
competitive advantage

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Sharing Activities: Assumptions
• Strong sense of corporate identity
• Clear corporate mission that emphasizes the
importance of integrating business units
• Incentive system that rewards more than just
business unit performance

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Transferring Core Competencies: Key
Characteristics
• Exploits interrelationships among divisions
• Start with value chain analysis
• identify ability to transfer skills or expertise among similar
value chains
• exploit ability to transfer activities

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 Transferring Core Competencies:
Assumptions
• Transferring core competencies leads to competitive advantage only
if the similarities among business units meet the following conditions:
• activities involved in the businesses are similar enough that sharing expertise
is meaningful
• transfer of skills involves activities which are important to competitive
advantage
• the skills transferred represent significant sources of competitive advantage
for the receiving unit

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 Efficient Internal Capital Market
Allocation: Key characteristics
• Firms pursuing this strategy frequently diversify by acquisition:
• acquire sound, attractive companies
• acquired units are autonomous
• acquiring corporation supplies needed capital
• portfolio managers transfer resources from units that generate cash to those
with high growth potential and substantial cash needs
• add professional management & control to sub-units
• sub-unit managers compensation based on unit results

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 Efficient Internal Capital Market
Allocation: Assumptions
• Managers have more detailed knowledge of firm relative to outside
investors
• Firm need not risk competitive edge by disclosing sensitive
competitive information to investors
• Firm can reduce risk by allocating resources among diversified
businesses, although shareholders can generally diversify more
economically on their own

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Alternatives to Vertical Integration:
Cooperative Relationships
• Short-term contracts and competitive bidding
• Strategic alliances and long-term contracting
• Building long-term cooperative relationships
• Hostage taking
• Credible commitments
• Maintaining market discipline
• Parallel sourcing policy

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Strategic Outsourcing of Primary Value
Creation Functions

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Benefits of Outsourcing
• Virtual Outsourcing
• Reducing costs
• The specialist company is less than what it would cost to
perform the activity internally
• Differentiation
• The quality of the activity performed by the specialist is greater
than if the activity were performed by the company
• Focus
• Distractions are removed; the company can focus attention and
resources on activities important for value creation and
competitive advantage

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Identifying and Managing the Risks of
Outsourcing
• Holdup
• The company can become too dependent on the provider of the outsourced
activity so that the provider can raise prices
• Scheduling of activities
• Loss of control can result in distorted signals in the supply chain
• Loss of information
• Contact with the customer may be lost

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Problems with understanding relatedness- CD
manufacturer moser baer

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Diversification as adoption of a new business
model

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