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DiversificationDiversification

Presented by Group 1

Yogendra A.Girase (07)Mohamed Anish Iqbal Hafizi (09)

Vaibhav Mahadik (18)Sreehari Nair (27)

Abhinav Savla (59)

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DiversificationDiversification

The process of firms expanding their operation by entering new businesses.

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Diversification implies two levels of strategy

1. Business-Level Capabilities/resources to create competitive advantage within each business - low cost - differentiation

2. Corporate-Level Capabilities/resources needed to create value across businesses

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Corporate Strategy DecisionsCorporate Strategy Decisions

1. What businesses to be in?

2. How to manage interrelationships?

3. Who decides what?

Corporate Strategy is focused on generating returns in excess of those that shareholders can obtain for themselves by diversifying investments

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Corporate StrategyCorporate Strategy

Principal concern:To identify the business areas in which a company

should participate in order to maximize long-run profitability & should value across it’s businesses

Options: Focus on one business Vertical integration Strategic alliances

Diversification

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Chapter 4Chapter 4The InternalThe InternalOrganizationOrganization

Chapter 6Chapter 6Competitive Rivalry andCompetitive Rivalry andCompetitive DynamicsCompetitive Dynamics

Chapter 9Chapter 9International StrategyInternational Strategy

Chapter 3Chapter 3The ExternalThe ExternalEnvironmentEnvironment

Chapter 5Chapter 5Business-LevelBusiness-Level

StrategyStrategy

Chapter 8Chapter 8Acquisition andAcquisition and

Restructuring StrategiesRestructuring Strategies

Strategic IntentStrategic IntentStrategic MissionStrategic Mission

Chapter 7Chapter 7Corporate-Level StrategyCorporate-Level Strategy

Chapter 10Chapter 10Cooperative StrategyCooperative Strategy

StrategicAnalysis

CreatingCompetitiveAdvantage

The Strategic Management ProcessThe Strategic Management Process

Chapter 5Chapter 5Business-LevelBusiness-Level

StrategyStrategy

Chapter 6Chapter 6Competitive Rivalry andCompetitive Rivalry andCompetitive DynamicsCompetitive Dynamics

Chapter 7Chapter 7Corporate-Level StrategyCorporate-Level Strategy

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Growth through Growth through

Strategic Directions Strategic Directions (Ansoff Matrix)(Ansoff Matrix)

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Types of DiversificationTypes of Diversification

Related diversification Firm creates value by building upon or

extending its:

– Resources , Capabilities ,Core competencies

Economies of scope Based on transferring and leveraging

competencies, sharing resources, and bundling products

Unrelated diversification :Entry into industries that have no obvious connection to any of a company’s value-chain activities in its present industry or industries

Based on using only general organizational competencies to increase profitability of each business unit

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Levels and Types of DiversificationLevels and Types of Diversification

Low Levels of DiversificationLow Levels of DiversificationSingle BusinessSingle Business> 95% of business from a single > 95% of business from a single business unitbusiness unit

Dominant BusinessDominant BusinessBetween 70 and 95% of business Between 70 and 95% of business from a single business unitfrom a single business unit

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Related ConstrainedRelated Constrained< 70% of revenues from < 70% of revenues from dominant business; all dominant business; all businesses share product, businesses share product, technological and distribution technological and distribution linkageslinkages

Levels and Types of DiversificationLevels and Types of Diversification

Moderate to High Levels of Moderate to High Levels of

DiversificationDiversification

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Related Linked (Mixed)Related Linked (Mixed)< 70% of revenues from < 70% of revenues from dominant business, and only dominant business, and only limited links existlimited links exist

Levels and Types of DiversificationLevels and Types of Diversification

Moderate to High Levels of Moderate to High Levels of

DiversificationDiversification

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Levels and Types of Levels and Types of DiversificationDiversification

UnrelatedUnrelated< 70% of revenue comes < 70% of revenue comes from the dominant business, from the dominant business, and there are no common links and there are no common links between businessesbetween businesses

Very High Levels of Very High Levels of

DiversificationDiversification

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Reasons for DiversificationReasons for Diversification

Reasons to Enhance Strategic Reasons to Enhance Strategic CompetitivenessCompetitiveness

• Economies of scope

• Market power

• Financial economics

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Adding Value by DiversificationAdding Value by DiversificationDiversification most effectively adds value by either Diversification most effectively adds value by either of two mechanisms:of two mechanisms:

– Economies of scope:Economies of scope: cost savings attributed to cost savings attributed to transferring the capabilities and competencies developed transferring the capabilities and competencies developed in one business to a new businessin one business to a new business

– Market power:Market power: when a firm is able to sell its products when a firm is able to sell its products above the existing competitive level or reduce the costs of above the existing competitive level or reduce the costs of its primary and support activities below the competitive its primary and support activities below the competitive level, or bothlevel, or both

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Diversification to achieve, Value creation and Diversification to achieve, Value creation and growth objective of a business………Throughgrowth objective of a business………Through

•Economies of scope adapting/transferring resources and activities across businesses

•Market power - e.g., Vertical & horizontal integration, scale economies (Porter)

•Financial economics (e.g., advantages w.r.t. time, uncertainty, options, information)

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Incentives with Neutral Incentives with Neutral Effects on Strategic Effects on Strategic CompetitivenessCompetitiveness

• Anti-trust regulation

• Tax laws

• Low performance

• Uncertain future cash flows

• Firm risk reduction

IncentivesIncentives

ResourcesResources

ManagerialManagerialMotivesMotives

Reasons for DiversificationReasons for Diversification

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Incentives to DiversifyIncentives to Diversify

External Incentives:External Incentives:

Relaxation of anti-trust regulation allows more Relaxation of anti-trust regulation allows more related acquisitions than in the pastrelated acquisitions than in the past

Before 1986, higher taxes on dividends favored Before 1986, higher taxes on dividends favored spending retained earnings on acquisitionsspending retained earnings on acquisitions

After 1986, firms made fewer acquisitions with After 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to retained earnings, shifting to the use of debt to take advantage of tax deductible interest take advantage of tax deductible interest paymentspayments

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Incentives to DiversifyIncentives to DiversifyInternal Incentives:Internal Incentives:

Poor performance may lead some firms to diversify an Poor performance may lead some firms to diversify an attempt to achieve better returnsattempt to achieve better returns

Firms may diversify to balance uncertain future cash flowsFirms may diversify to balance uncertain future cash flows

Firms may diversify into different businesses in order to Firms may diversify into different businesses in order to reduce riskreduce risk

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Resources and DiversificationResources and Diversification Besides strong incentives, firms are more Besides strong incentives, firms are more

likely to diversify if they have the likely to diversify if they have the resources to do so.resources to do so.

Value creation is determined more by Value creation is determined more by appropriate use of resources than appropriate use of resources than incentives to diversify.incentives to diversify.

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Managerial Motives to DiversifyManagerial Motives to Diversify

Managers have motives to diversifyManagers have motives to diversify

– diversification increases size; size is diversification increases size; size is associated with executive compensationassociated with executive compensation

– diversification reduces employment riskdiversification reduces employment risk

– effective governance mechanisms may restrict effective governance mechanisms may restrict such motivessuch motives

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Reasons for Pursuing DiversificationReasons for Pursuing Diversification

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When Should a Firm Diversify?When Should a Firm Diversify?When Should a Firm Diversify?When Should a Firm Diversify?

It is faced with diminishing growth prospects in present business

It has opportunities to expand into industries whose technologies and products complement its present business

It can leverage existing competencies and capabilities by expanding into businesses where these resource strengths are key success factors

It can reduce costs by diversifying into closely related businesses

It has a powerful brand name it can transfer to products of other businesses to increase sales and profits of these businesses

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Relationship Between Relationship Between Diversification and PerformanceDiversification and Performance

Per

form

ance

Per

form

ance

Level of DiversificationLevel of Diversification

DominantBusiness

UnrelatedBusiness

RelatedConstrained

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Relationship Between Relationship Between Firm Performance and Firm Performance and DiversificationDiversification

IncentivesIncentives

ManagerialManagerialMotivesMotives

ResourcesResources DiversificationDiversificationStrategyStrategy

FirmFirmPerformancePerformance

InternalInternalGovernanceGovernance

StrategyStrategyImplementationImplementation

Capital MarketCapital MarketIntervention and theIntervention and theMarket forMarket forManagerial TalentManagerial Talent

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Corporate Parenting and RestructuringCorporate Parenting and Restructuring

Parenting advantage The positive contributions of the

corporate office to a new business as a result of expertise and support provided

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Managing the Industrial BusinessManaging the Industrial Business

2 main approaches to “Parenting Influence”

Input (or behavioral) control

Monitoring & approving business level decisions

Output ( or performance) control

Setting & monitoring the achievement of

performance targets

Primarily through strategic planning system & capital

expenditure approval system

Primarily through performance management system,

incl. budgetary process, & HR appraisal system

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Corporate RestructuringCorporate RestructuringCorporate management must

– Have insight to detect undervalued companies or businesses with high potential for transformation

– Have requisite skills and resources to turn the businesses around

Can involve changes in– Assets– Capital– Management

6-27

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Portfolio ManagementPortfolio ManagementPortfolio management

– assessing the competitive position of a portfolio of businesses within a corporation,

– suggesting strategic alternatives for each business

– identifying priorities for the allocation of resources across the businesses.

6-28

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BCG Portfolio MatrixBCG Portfolio Matrix

Key

Each circle represents one of the firm’s business units

Size of circle represents the relative size of the business unit in terms of revenue

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ParentingParenting Managers try to strike a balance between:Managers try to strike a balance between:

– competing among divisions for scarce capital competing among divisions for scarce capital resourcesresources

– creating opportunities for cooperation to creating opportunities for cooperation to develop synergiesdevelop synergies

The goal is to maximize overall firm The goal is to maximize overall firm performanceperformance

The decision-making of managers in a The decision-making of managers in a multidivisional structure may be:multidivisional structure may be:– centralized or decentralizedcentralized or decentralized– bureaucratic or non-bureaucraticbureaucratic or non-bureaucratic

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ParentingParenting Balance on these dimensions may change Balance on these dimensions may change

over timeover time Structure will evolve over time with:Structure will evolve over time with:

– changes in strategychanges in strategy– degree of diversificationdegree of diversification– geographic scopegeographic scope– nature of competitionnature of competition

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SBU Form of Parenting:SBU Form of Parenting:

Structural integration devices create tight links Structural integration devices create tight links among all divisionsamong all divisions

Corporate office emphasizes centralized strategic Corporate office emphasizes centralized strategic planning, human resources, and marketing to planning, human resources, and marketing to foster cooperation between divisionsfoster cooperation between divisions

R&D is likely to be centralizedR&D is likely to be centralized Rewards are subjective and tend to emphasize Rewards are subjective and tend to emphasize

overall corporate performance, in addition to overall corporate performance, in addition to divisional performancedivisional performance

Culture emphasizes cooperative sharingCulture emphasizes cooperative sharing

Related-Linked StrategyRelated-Linked Strategy

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Organizational Structure of Diversified Group:Organizational Structure of Diversified Group:

Unrelated Diversification StrategyUnrelated Diversification Strategy

PresidentPresident

LegalLegalAffairsAffairs

FinanceFinance AuditingAuditing

Headquarters OfficeHeadquarters Office

DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision

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Benefits of ParentingBenefits of Parenting

Strategic controlStrategic control– operating divisionsoperating divisions– each division is separate business or profit each division is separate business or profit

centercenter Top corporate officer delegates Top corporate officer delegates

responsibilities to division managersresponsibilities to division managers– for day-to-day operationsfor day-to-day operations– for business-unit strategyfor business-unit strategy

Appropriate when the firm grows through Appropriate when the firm grows through diversificationdiversification

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Value activities Value activities

Value-Adding Activities

Value-Destroying Activities

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..

Portfolio and Synergy Managers and Parental Developers

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Increasing Profitability Through DiversificationIncreasing Profitability Through Diversification

A diversified company can create value by:

Transferring competencies among existing businessesLeveraging competencies to create new businessesSharing resources to realize economies of scopeUsing product bundlingManaging rivalry by using diversification as a means in one or more industriesExploiting general organizational competencies that enhance performance within all business units

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Impacts of Diversification

Related : Value chains

strategic fits : cross-biz relationships Combined performance

Industry structure entry barriers : new, existing

Unrelated : Financial capital ↑

investment priorities ↑ Biz scope ↑

spread risks

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Dilemmas of DiversificationDilemmas of Diversification

– If a biz is attractive and prospective

rush new entrants (hi competition)

– If existing resources are effectively utilized

transmit existing competitive

relationships to new biz domain

– If new biz requires different behavior or culture as the KSFs

conflict w/o existing system or culture

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Strategies for Entering New BusinessesStrategies for Entering New BusinessesStrategies for Entering New BusinessesStrategies for Entering New Businesses

Acquire existing company

Internal start-up

Joint ventures/strategic partnerships

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TWO KINDS OF RELATEDNESSTWO KINDS OF RELATEDNESS

Similarities in resources

Similarity in strategies

RESOURCE RELATEDNESS AND

STRATEGIC SIMILARITY

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Commonalities Between Value Chains of Commonalities Between Value Chains of Three Business UnitsThree Business Units

THANK YOUTHANK YOU

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