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  1. 1. STRATEGY AND COMPETITIVE ADVANTAGE IN DIVERSIFIED COMPANIES CHAPTER 7 Screen graphics created by: Jana F. Kuzmicki, PhD, Indiana University Southeast
  2. 2. Chapter Outline <ul><li>When to Diversify </li></ul><ul><li>Building Shareholder Value </li></ul><ul><li>Entering New Businesses </li></ul><ul><li>Related Diversification Strategies </li></ul><ul><li>Unrelated Diversification Strategies </li></ul><ul><li>Divestiture and Liquidation Strategies </li></ul><ul><li>Corporate Turnaround, Retrenchment, and Portfolio Restructuring Strategies </li></ul><ul><li>Multinational Diversification Strategies </li></ul><ul><li>Combination Diversification Strategies </li></ul>
  3. 3. Diversification and Corporate Strategy <ul><li>A company is diversified when it is in two or more lines of business </li></ul><ul><li>Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business </li></ul><ul><ul><li>A diversified company needs a multi-industry, multi-business strategy </li></ul></ul><ul><ul><li>A strategic action plan must be developed for several different businesses competing in diverse industry environments </li></ul></ul>
  4. 4. Stages in Transitioning from a Single Business to a Diversified Company <ul><li>STAGE 1 : Small single-business serving a regional market </li></ul><ul><li>STAGE 2 : Geographic expansion </li></ul><ul><li>STAGE 3 : Vertical integration (optional) </li></ul><ul><li>STAGE 4 : Diversification --usually initiated when growth opportunities dwindle in the company’s present business </li></ul>What next?
  5. 5. When to Diversify? <ul><li>When it makes sense to diversify depends on </li></ul><ul><ul><li>Growth potential in present business </li></ul></ul><ul><ul><li>Attractiveness of opportunities to transfer existing competencies to new businesses </li></ul></ul><ul><ul><li>Potential cost-saving opportunities to be realized by entering related businesses </li></ul></ul><ul><ul><li>Availability of adequate financial and organizational resources </li></ul></ul><ul><ul><li>Managerial expertise to cope with complexity of operating a multi-business enterprise </li></ul></ul>
  6. 6. When Does Diversification Start to Make Sense? <ul><li>Strong competitive position, rapid market growth -- Not a good time to diversify </li></ul><ul><li>Strong competitive position, slow market growth -- Diversification is top priority consideration </li></ul><ul><li>Weak competitive position, rapid market growth -- Not a good time to diversify </li></ul><ul><li>Weak competitive position, slow market growth -- Diversification merits consideration </li></ul>
  7. 7. Strategic Management Principle <ul><li>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! </li></ul>
  8. 8. Corporate Strategy Alternatives Vertical Integration Single Business Concentration Diversify into Related Businesses Diversify into Unrelated Businesses Diversify into Related & Unrelated Businesses <ul><li>Make new acquisitions </li></ul><ul><li>Divest weak units </li></ul><ul><li>Restructure portfolio </li></ul><ul><li>Retrench </li></ul><ul><li>Become a DMNC </li></ul><ul><li>Liquidate </li></ul>Post-Diversification Strategic Alternatives
  9. 9. Diversification Strategies <ul><li>Entering new industries </li></ul><ul><li>Related diversification </li></ul><ul><li>Unrelated diversification </li></ul><ul><li>Divestiture and liquidation </li></ul><ul><li>Corporate turnaround, retrenchment, and restructuring </li></ul><ul><li>Multinational diversification </li></ul>
  10. 10. Strategies for Entering New Businesses Acquire existing company Start-up new business internally Joint venture with another company
  11. 11. Concept: Economies of Scope <ul><li>Arise from ability to eliminate costs by operating two or more businesses under same corporate umbrella </li></ul><ul><li>Exist when it is less costly for two or more businesses to operate under centralized management than to function independently </li></ul><ul><li>Cost saving opportunities can stem from interrelationships anywhere along businesses’ value chains </li></ul>
  12. 12. Concept: Strategic Fit <ul><li>Exists among different businesses when their value chains are sufficiently similar to offer opportunities </li></ul><ul><li>Offers competitive advantage potential of </li></ul><ul><ul><li>Lower costs </li></ul></ul><ul><ul><li>Efficient transfer of </li></ul></ul><ul><ul><ul><li>Key skills </li></ul></ul></ul><ul><ul><ul><li>Technological expertise </li></ul></ul></ul><ul><ul><ul><li>Managerial know-how </li></ul></ul></ul><ul><ul><li>Use of a common brand name </li></ul></ul>
  13. 13. Types of Strategic Fit Technology Fits Distribution & Customer-Related Fits Operating Fits Managerial Fits
  14. 14. <ul><li>Involves diversifying into businesses with </li></ul><ul><ul><li>No strategic fit </li></ul></ul><ul><ul><li>No meaningful value chain relationships </li></ul></ul><ul><ul><li>No unifying strategic theme </li></ul></ul><ul><li>Approach is to venture into “any business in which we think we can make a profit” </li></ul><ul><li>Firms pursuing unrelated diversification are often referred to as conglomerates </li></ul>What Is Unrelated Diversification?
  15. 15. Basic Premise of Unrelated Diversification <ul><li>Any company that can be acquired on good financial terms and offers good prospects for profitability is a good business to diversify into! </li></ul>
  16. 16. Acquisition Criteria For Unrelated Diversification Strategies <ul><li>Can business meet corporate targets for profitability and ROI? </li></ul><ul><li>Will business require substantial infusions of capital? </li></ul><ul><li>Is business in an industry with growth potential? </li></ul><ul><li>Is business big enough to contribute to the parent firm’s bottom line? </li></ul><ul><li>Is there potential for union difficulties or adverse government regulations? </li></ul><ul><li>Is industry vulnerable to recession, inflation, high interest rates, or shifts in government policy? </li></ul>
  17. 17. Attractive Acquisition Targets <ul><li>Companies with undervalued assets </li></ul><ul><ul><li>Capital gains may be realized </li></ul></ul><ul><li>Companies in financial distress </li></ul><ul><ul><li>May be purchased at bargain prices and turned around </li></ul></ul><ul><li>Companies with bright prospects but limited capital </li></ul>
  18. 18. Appeal of Unrelated Diversification <ul><li>Business risk scattered over different industries </li></ul><ul><li>Capital resources can be directed to those industries offering best profit prospects </li></ul><ul><li>Stability of profits -- Hard times in one industry may be offset by good times in another industry </li></ul><ul><li>If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced </li></ul>
  19. 19. Drawbacks of Unrelated Diversification <ul><li>Difficulties of competently managing many diverse businesses </li></ul><ul><li>There are no strategic fits which can be leveraged into competitive advantage </li></ul><ul><ul><li>Consolidated performance of unrelated businesses tends to be no better than sum of individual businesses on their own (and it may be worse) </li></ul></ul><ul><ul><li>Promise of greater sales-profit stability over business cycles seldom realized </li></ul></ul>
  20. 20. How Broadly Should a Company Diversify? <ul><li>Two questions should guide unrelated diversification efforts: </li></ul><ul><ul><li>1. What is the least diversification it will take to achieve acceptable growth and profitability? </li></ul></ul><ul><ul><li>2. What is the most diversification that can be managed, given its added complexity? </li></ul></ul>
  21. 21. Diversification and Shareholder Value <ul><li>RELATED DIVERSIFICATION </li></ul><ul><ul><li>A strategy-driven approach to creating shareholder value </li></ul></ul><ul><li>UNRELATED DIVERSIFICATION </li></ul><ul><ul><li>A finance-driven approach to creating shareholder value </li></ul></ul>
  22. 22. Post-Diversification Strategies <ul><li>Divestiture and liquidation </li></ul><ul><li>Corporate turnaround </li></ul><ul><li>Corporate retrenchment </li></ul><ul><li>Portfolio restructuring </li></ul><ul><li>Multinational diversification </li></ul>
  23. 23. Multinational Diversification Strategies <ul><li>Distinguishing characteristic </li></ul><ul><ul><li>Diversity of businesses and diversity of national markets </li></ul></ul><ul><li>Presents a big strategy-making challenge </li></ul><ul><ul><li>Strategies must be conceived and executed for each industry, with as many multinational variations as is appropriate </li></ul></ul>
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