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STRATEGY AND STRATEGY AND COMPETITIVE ADVANTAGE COMPETITIVE ADVANTAGE

IN DIVERSIFIED IN DIVERSIFIED COMPANIESCOMPANIES

CHAPTER 7

Screen graphics created by:Jana F. Kuzmicki, PhD, Indiana University Southeast

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Chapter Outline

When to Diversify Building Shareholder Value Entering New Businesses Related Diversification Strategies Unrelated Diversification Strategies Divestiture and Liquidation Strategies Corporate Turnaround, Retrenchment, and

Portfolio Restructuring Strategies Multinational Diversification Strategies Combination Diversification Strategies

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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

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Stages in Transitioning from a Single Business to a Diversified Company

STAGE 1STAGE 1: Small single-business serving a regional market

STAGE 2STAGE 2: Geographic expansion

STAGE 3STAGE 3: Vertical integration (optional)

STAGE 4STAGE 4: Diversification--usually initiated when growth opportunities dwindle in the company’s present business

What next?

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When to Diversify?

When it makes sense to diversify depends on Growth potential in present business Attractiveness of opportunities to

transfer existing competencies to new businesses

Potential cost-saving opportunities to be realized by entering related businesses

Availability of adequate financial and organizational resources

Managerial expertise to cope with complexity of operating a multi-business enterprise

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When Does DiversificationStart 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

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Strategic Management Principle

To create shareholder value, a diversifying firm must get into

businesses that can perform better under common management than they could perform operating as

independent stand-alone enterprises!

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Corporate Strategy Alternatives

Vertical Integration

Single Business

Concentration

Diversify into Related Businesses

Diversify into

Unrelated Businesses

Diversify into Related & Unrelated Businesses

Make new acquisitions

Divest weak units

Restructure portfolio

Retrench

Become a DMNC

Liquidate

Post-Diversification

Strategic Alternatives

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Diversification Strategies

Entering new industries

Related diversification

Unrelated diversification

Divestiture and liquidation

Corporate turnaround, retrenchment, and restructuring

Multinational diversification

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Strategies for EnteringNew Businesses

Acquire existing company

Start-up new business internally

Joint venture with another company

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Concept: Economies of Scope

Arise from ability to eliminate costs by operating two or more businesses under same corporate umbrella

Exist when it is less costly for two or more businesses to operate under centralized management than to function independently

Cost saving opportunities can stem from interrelationships anywhere along businesses’ value chains

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Concept: Strategic Fit

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

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Types of Strategic Fit

Technology Fits

Distribution &Customer-

RelatedFits

Operating Fits

Managerial Fits

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Involves diversifying into businesses with

No strategic fit

No meaningful value chainrelationships

No unifying strategic theme

Approach is to venture into “any business in which we think we can make a profit”

Firms pursuing unrelated diversification are often referred to as conglomerates

What Is Unrelated Diversification?

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Basic Premise ofUnrelated Diversification

Any company that can be

acquired on good financial

terms and offers good

prospects for profitability is a

good business to diversify into!

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Acquisition Criteria For Unrelated Diversification Strategies

Can business meet corporate targets for profitability and ROI?

Will business require substantial infusions of capital?

Is business in an industry with growth potential? Is business big enough to contribute to the parent

firm’s bottom line? Is there potential for union difficulties or adverse

government regulations? Is industry vulnerable to recession, inflation, high

interest rates, or shifts in government policy?

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Attractive Acquisition Targets

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 prospects but limited capital

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Appeal of Unrelated Diversification

Business risk scattered over different industries

Capital resources can be directed to those industries offering best profit prospects

Stability of profits -- Hard times in one industry may be offset by good times in another industry

If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced

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Drawbacks of Unrelated Diversification

Difficulties of competently managing many diverse businesses

There are no strategic fits which can be leveraged into competitive advantage Consolidated performance of unrelated

businesses tends to be no better than sum of individual businesses on their own (and it may be worse)

Promise of greater sales-profit stability over business cycles seldom realized

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How Broadly Shoulda Company Diversify?

Two questions should guide unrelated diversification efforts:

1. What is the leastleast diversification it will take to achieve acceptable growth and profitability?

2. What is the mostmost diversification that can be managed, given its added complexity?

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Diversification and Shareholder Value

RELATED DIVERSIFICATION

A strategy-driven approach to creating shareholder value

UNRELATED DIVERSIFICATION

A finance-driven approach to creating shareholder value

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Post-Diversification Strategies

Divestiture and liquidation

Corporate turnaround

Corporate retrenchment

Portfolio restructuring

Multinational diversification

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Multinational Diversification Strategies

Distinguishing characteristic

Diversity of businesses and diversity of national markets

Presents a big strategy-making challenge

Strategies must be conceived and executed for each industry, with as many multinational variations as is appropriate