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  • 1. STRATEGY AND COMPETITIVE ADVANTAGE IN DIVERSIFIED COMPANIES CHAPTER 7 Screen graphics created by: Jana F. Kuzmicki, PhD, Indiana University Southeast
  • 2. 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
  • 3. 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
  • 4. 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?
  • 5. 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
  • 6. 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
  • 7. 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!
  • 8. 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
  • 9. Diversification Strategies
    • Entering new industries
    • Related diversification
    • Unrelated diversification
    • Divestiture and liquidation
    • Corporate turnaround, retrenchment, and restructuring
    • Multinational diversification
  • 10. Strategies for Entering New Businesses Acquire existing company Start-up new business internally Joint venture with another company
  • 11. 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
  • 12. 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
  • 13. Types of Strategic Fit Technology Fits Distribution & Customer-Related Fits Operating Fits Managerial Fits
  • 14.
    • 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?
  • 15. 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!
  • 16. 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?
  • 17. 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
  • 18. 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
  • 19. 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
  • 20. 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?
  • 21. Diversification and Shareholder Value
      • A strategy-driven approach to creating shareholder value
      • A finance-driven approach to creating shareholder value
  • 22. Post-Diversification Strategies
    • Divestiture and liquidation
    • Corporate turnaround
    • Corporate retrenchment
    • Portfolio restructuring
    • Multinational diversification
  • 23. 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