Module 7 - Corporate Diversification Strategies

7/28/2019 Module 7 - Corporate Diversification Strategies

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Module 7

Corporate Diversification

Strategies


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Module Outline

From Single-Business to Diversification

Building Shareholder Value Diversification Strategies

Related Diversification Strategies

Unrelated Diversification Strategies

Divestiture and Liquidation Strategies

Corporate Turnaround, Retrenchment, andPortfolio Restructuring Strategies

Multinational Diversification Strategies

Combination Diversification Strategies


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Corporate Diversification and Corporate

Strategy A diversified firm is an collection of

individual businesses Diversification makes corporate strategy-

making a bigger picture exercise than

crafting strategy for a single business

In a diversified firm, corporate managers

must craft a multi-business, multi-industrystrategic action plan for a

Number of different businesses competing in

diverse industry environments


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Main Tasks in Crafting Corporate

Strategy Decide on moves to position firm in

industries chosen for diversification Devise actions to improve long-termperformance of corporations portfolio of

businesses Capture strategic fit benefits existing within

business units, turning them into competitive

advantage Evaluate profit prospects of each business

unit and steer corporate resources into most

attractive strategic opportunities


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From Single-Business To

Diversification

As growth slows, strategic options

include:

Take market share from rivals

Focus on diversification

Stage 4:

Vertical integrationStage 3:

Geographical expansionStage 2:

Most firm begin as small single-

business enterprises serving a localor regional market

Stage 1:


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The Growth Matrix

Market

Penetration

(Concentration)

Product

Development

Market

DevelopmentDiversification

Present New

Present

New

Product

Market


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Major Growth Strategies

(The Growth Matrix) Growth via Market Penetration

(Concentration) Growth via Market Development

Growth via Product Development

Growth via Diversification

Related (Concentric) Diversification

Unrelated (Conglomerate) Diversification


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Market Penetration

(Same Products, Same Markets) When current market are not saturated with your

particular products / services

When the usage rate of present customers could

be significantly increased

When the market shares of some majorcompetitors have been declining while total industry

demand has been rising

When the correlation between sales and marketingexpenditures has historically been high

When increased economies of scale provide major

competitive advantages


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Market Development

(Same Product, New Market) When new channels of distribution are available

that are reliable, inexpensive, and of good quality

When an organization is very successful at what it

does

When new untapped or unsaturated markets exist When the firm has the needed capital and human

resources to manage expanded operations

When an organization has excess productioncapacity

When an organizations basic industry is rapidly

becoming global in scope


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Product Development

(New Products, Same Markets) When the firm has successful products that are in

the maturity stage of the product life cycle (i.e.,

attract satisfied customers to try new, improved

products as a result of their prior experiences)

When an organization competes in an industry that

is characterized by rapid technological change

When major competitors offer better quality

products at comparable prices

When the firm competes in a high-growth industry

When an organization has especially strong

research and development capabilities


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Strategic Management Principle

Diversification doesnt need to become a

strategic priority until a company begins torun out of growth opportunities in its core

business!


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Competitive Strengths of a Single

Business Strategy Less ambiguity about who we are

Energies of firm directed down one path Entrepreneurial efforts focused on keeping

strategy responsive to industry change

Less chance limited resources will be thinly

stretched

Managers maintain hand-on contact withcore businesses


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Competitive Strengths of a Single

Business Strategy Dependence on one business provides

incentive to capture stronger long-termcompetitive position

Full force of firms resources used to become

better at what firm does Important competencies more likely to

emerge

Higher profitability innovative ideas will

emerge


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Risk of a Single Business Strategy

Putting all firms egg in one industry basket

If industry stagnates, then Firms growth rate tougher to sustain

Profits harder to achieve

Changing customer needs, technologicalinnovation, or new substitutes can

Undermine a single-business firm


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When Does Diversification Start to

Make Sense? When to diversify depends on

Firms competitive position and Remaining opportunities in home-base industry


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When Does Diversification Start to

Make Sense?

Strong competitive

position, rapid marketgrowth

Not a good time to

diversify

Weak competitive

position, rapid marketgrowth

Not a good time to

diversify

Strong competitive

position, slow marketgrowth

Diversification is top

priority consideration

Weak competitive

position, slow marketgrowth

Diversification merits

consideration


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Why Diversify?

To build shareholder value

A diversification move is capable ofincreasing shareholder value if it passes 3

tests:

1. Attractiveness Test

2. Cost of Entry Test

3. Better-Off Test


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To create shareholder value, a diversifying

firm must get into businesses that canperform better under common management

than they could perform operating as

independent enterprises!


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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 Entering New Businesses

1. Acquire existing firm in target industry

2. Start new company internally3. Form joint venture


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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

and costs Getting adequate distribution access


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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 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


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Diversification via Joint Ventures

Good way to diversify when:

Uneconomical or risky o 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


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Drawbacks of Joint Ventures

Raises questions about

Which partner will do what, and Who has effective control

Potential conflicts

Sourcing of components

Exporting

Whether operations should conform to foreign

firms standards or to local preferences

Control over cash flows and profits


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What is Related Diversification?

Definition

Diversification is related when a firm hasseveral lines of business that, although

distinct, possess some kind ofstrategic fit


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What is Related Diversification?

Principle

What makes related diversification attractiveis the opportunity to turn strategic fit into

competitive advantage!


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Related Diversification and Strategic Fit

Strategic Fit can be based on

Shared technology Common labor skills

Common distribution channels

Common suppliers and raw materials sources Similar kinds of managerial know-how

Ability to share common scales force

Customer overlap

Any area where meaningful sharing opportunities

exist in businesses value chains


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Common Approaches to Related

Diversification Entering businesses where sales force, advertising,

and distribution activities can be shared

Exploiting closely related technologies

Sharing manufacturing facilities

Transferring know-how and expertise from onebusiness to another

Transferring firms brand name and reputation with

customers to a new product / service Acquiring new businesses to uniquely help firms

position in existing businesses


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Appeal of Related Diversification

Allows firm to maintain unity in business

activities and gain benefits of skills transferor cost sharing while

Spreading risks over broader base

Exploits what firm does best and allowstransfer of core competencies from one

business to another

Helps achieve economies of scope


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Appeal of Related Diversification

Strategic fits among related businesses offer

competitive advantage potential of Lower costs via sharing common resources andcombining related activities

Efficient transfer of Key skills or core competencies

Technological expertise or

Managerial know-how Common use of same brand name


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Concepts: Economies of Scope

Arise from ability to eliminate costs by

operating two or more businesses undersame corporate umbrella

Exist whenever it is less costly for two or

more businesses to operate undercentralized management than to function

independently

Cost savings opportunities can stem from

interrelationships anywhere along

businesses value chain


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Concept: Strategic Fit

Exist when different businesses havesufficiently related value chains that permits

Transferring skills and expertise from onebusiness to another

Combining performance of related activities so

as to reduce costs Presence of strategic fit in a diversified firms

portfolio, along with corporate managements

skill in capturing benefits of theinterrelationships Makes related diversification capable of being a

2 + 2 = 5 phenomenon


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Types of Strategic Fit

Market-Related Fits

Operating Fit

Management Fit


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Market-Related Fits

Arise when value chains of different

businesses overlap so products can be Used by same customers

Marketed and promoted in similar ways

Distributed through common dealers andretailers


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Types of Market-Related Fits

Common sales force to call on customers

Advertising related products together Use of same brand names

Joint delivery and shipping

Joint after-sale service and repair work

Joint order processing and billing

Joint promotional tie-ins Cents-off couponing, trial offers, specials

Joint dealer networks


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Operating Fits

Arise when different businesses present

opportunities for cost-sharing or skillstransfer

Procurement of purchased inputs

R&D / technology Manufacturer and assembly

Administrative support functions

Marketing and distribution


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Potential Benefits of Operating Fits

Cost savings

Tapping into more scale economies and / oreconomies of scope

Increased operating efficiency through

sharing of related activities


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Management Fits

Emerge when different business units have

comparable types of

Entrepreneurial,

administrative, or

Operating problems Allow accumulated managerial know-how in

one business to be useful in managing

another business


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Capturing Benefits of Strategic Fit

Management must take actions to capturebenefits

Benefits dont just happen!

Businesses with sharing potential must bereorganized so activities to be shared aremerged and coordinated

Where skills transfer is cornerstone of strategicfit, a means must be found to make transfer

effective Management must access that some

centralized strategic control is great enough

to justify sacrificing business-unit autonomy


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What is Unrelated Diversification?

Unrelated diversification involves no

Common linkage of strategic fit among adiversified firms line of business

Meaningful value chain interrelationships

Corporate strategy approach Venture into any industry and any business in

which we think we can make a profit

Firms pursuing unrelated diversification arereferred to as Conglomerates

No unifying strategic theme

cquisition Criteria: Pursuing Unrelated


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cquisition Criteria: Pursuing Unrelated

Diversification Can business meet corporate targets for

profitability and ROI?

Will business require substantial infusions ofcapital?

Is business big enough to contribute toparent firms 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 that are financially distressed

May be purchased at bargain prices

Companies with bright prospects, but limitedcapital

Dominant Philosophy of Unrelated


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Dominant Philosophy of Unrelated

DiversificationAny 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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Appeal of Unrelated Diversification

Business risk scattered over differentindustries

Capital resources invested in thoseindustries offering best profit prospects

Stability of profits Hard times in oneindustry may be offset by good times inanother industry

If management is exceptionally astute atspotting bargain-priced firms with big profitpotential, then

Shareholder wealth can be enhanced


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Drawbacks of Unrelated Diversification

Places big demand on corporate management

More diverse the business, harder it is to

Oversee each subsidiary and spot problems

Judge caliber of strategic plans of subsidiaries

Consolidated performance of unrelated portfolio

tends to be no better than sum of individual business on their own,

and

It may be worse

Promises greater sales-profit stability over business

cycles, but is seldom realized

How Broadly Should a Company


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Diversify? With unrelated diversification, corporate

managers have to be shrewd enough to

Discern good acquisition from bad ones

Select capable managers to run many different

businesses Judge soundness of strategic proposals of

business-unit managers

Know what to do if a subsidiary stumbles



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Diversify? Two questions should guide a firms

unrelated diversification efforts

1. What is the least diversification it will take to

achieve acceptable growth and profitability?

2. What is the most diversification that can bemanaged, given its added complexity?

Di ifi ti d Sh h ld V l


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Diversification and Shareholder Value

Related Diversification

Strategy-Driven approach to create shareholder

value

Unrelated Diversification Finance-Driven approach to create shareholder

value

Di tit d Li id ti St t i


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Divestiture and 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

Sub-par performance of some subsidiaries isbound to occur

Diversification appearing sensible based on

strategic fit lacks compatibility of values essentialto cultural fit

St t i M t P i i l


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A business needs to be considered when it

ceases to be an attractive investment or

business the company should be in!

Divestiture and Liquidation Strategy


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q gy

Options Two types of divestiture options

Divest business by spinning it off as independent

company

Divest business by selling it

Liquidation Most painful option

Involves terminating firms existence

Turnaround, Retrenchment, and


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, ,

Portfolio Restructuring Strategic Options for diversified firm with

ailing subsidiaries

Conditions causing poor performance

Large losses in one or more subsidiaries

Disproportionate number of businesses inunattractive industries

Bad economic conditions

Excessive debt load

Acquisitions that perform worse than expected

Corporate Turnaround Strategies


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Focus

Restore money-losing businesses toprofitability rather than divest them

Objective

Get whole firm back in the black by curing

problems of those businesses in portfolioresponsible for pulling down overall

performance



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Most appropriate where

Reasons for poor performance are short-term

Ailing businesses are in attractive industries

Divesting money-losers doesnt make long-term

strategic sense

Corporate Retrenchment Strategies


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Focus

Reduce scope of diversification to a smallernumber of businesses

When to Consider

1. Certain businesses can be made profitable

2. Diversification efforts have become too

broad and building strong positions in fewerbusinesses is key to improving long-term

performance



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Options

Divest business Too small to make sizable contribution to

earnings

Having little or no strategic fit with firms corebusinesses

Portfolio Restructuring Strategy


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Focus

Making radical changes in mix andpercentage makeup of types of businesses in

portfolio via both

Divestitures, and New acquisitions



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When to use

Long-term performance prospects are unattractive

Core business unit falls upon hard times

Wave of the future technologies or products

emerge and major shakeup is needed to build

position in potentially big new industry

Unique opportunity emerges and some existing

businesses must be sold to finance new acquisition

Major businesses in portfolio become unattractive

Comment: Trend in Diversification


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Comment: Trend in Diversification

The present tend 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 toscattering corporate investments across

many industries!

Strategy of Multinational Diversification


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Strategy of Multinational Diversification

Distinguishing Characteristic

Diversity ofBusiness and Diversity ofNational Markets

Presents a big strategy-making challenge

Management must conceive and executesubstantial number of strategies

At least one for each industry, with as manymultinational variations as is appropriate

Multinational Diversification:


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The 1960s MNCs operated autonomous subsidiaries in each

host country

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 countryefficiently and cheaply

MNCs market position in a country negotiated withhost government, not due to pressures ofinternational competition



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The 1970s Multi-country strategies based on national

responsiveness began to lose effectiveness

International competition in more industries

Relevant market arena in many industriesshifted from national to global

Traditional MNCs driven to integrateoperations across national borders

Manufacturing a complete product range ineach country became less prevalent

Instead, plants specialized in making fewer

models

Multinational diversification:


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The 1970s 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

MNCs acted to take advantage of country-to-country differences

Interest and exchange rates

Favorable credit terms

Government subsidies

Export guarantees



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The 1980s Another source of competitive advantage emerged

Using strategic it 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

Related diversification produces extra competitiveadvantage for an MNC where

Expertise in a core technology was applied in different

industries Important brand name advantages existed

Competitive Strength of a DMNC in


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Global Markets Competitive advantages hinge upon

Employing a related diversification strategy

based on exploiting a core competence

Managing related businesses to capture

strategic fit benefits

Using cross-subsidization to win solid footholds

in attractive country markets

Competitive Strength of a DMNC in


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Global Markets A DMNC has a strategic arsenal capable of

defeating both

A single-business MNC, and

A single-business domestic firm in a long-term

competitive struggle


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End of Module 7

Module 7 - Corporate Diversification Strategies

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