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    C07a.PPT C07a.PPT Presentation Transcript

    • STRATEGY AND COMPETITIVE ADVANTAGE IN DIVERSIFIED COMPANIES CHAPTER 7 Screen graphics created by: Jana F. Kuzmicki, PhD, Indiana University Southeast
    • 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
    • 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
    • Stages in Transitioning from a Single Business to a Diversified Company
      • STAGE 1 : Small single-business serving a regional market
      • STAGE 2 : Geographic expansion
      • STAGE 3 : Vertical integration (optional)
      • STAGE 4 : Diversification --usually initiated when growth opportunities dwindle in the company’s present business
      What next?
    • 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
    • When Does Diversification Start 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
    • 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!
    • 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
    • Diversification Strategies
      • Entering new industries
      • Related diversification
      • Unrelated diversification
      • Divestiture and liquidation
      • Corporate turnaround, retrenchment, and restructuring
      • Multinational diversification
    • Strategies for Entering New Businesses Acquire existing company Start-up new business internally Joint venture with another company
    • 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
    • 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
    • Types of Strategic Fit Technology Fits Distribution & Customer-Related Fits Operating Fits Managerial Fits
      • Involves diversifying into businesses with
        • No strategic fit
        • No meaningful value chain relationships
        • 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?
    • Basic Premise of Unrelated Diversification
      • Any company that can be acquired on good financial terms and offers good prospects for profitability is a good business to diversify into!
    • 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?
    • 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
    • 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
    • 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
    • How Broadly Should a Company Diversify?
      • Two questions should guide 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 be managed, given its added complexity?
    • Diversification and Shareholder Value
        • A strategy-driven approach to creating shareholder value
        • A finance-driven approach to creating shareholder value
    • Post-Diversification Strategies
      • Divestiture and liquidation
      • Corporate turnaround
      • Corporate retrenchment
      • Portfolio restructuring
      • Multinational diversification
    • 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