Diversification why should firm diversify Diversified Company Strategies for entering new business. types of diversificaton exit strategies

1. Business
Strategy
Presentation

2. TOPIC:
CREATING VALUE THROUGH
DIVERSIFICATION

3. “To acquire or not to
acquire: that is the
question.”
Robert J. Terry

4. Diversification and
Corporate Strategy
 A company is diversified when it is in two or
more lines of business that operate in diverse
market environments
 Strategy-making in a diversified company is a
bigger picture exercise than crafting a strategy for
a single line-of-business

5.  Growth prospects in present business
 It can transfer existing competencies and
capabilities
 It can reduce costs by diversifying into related
businesses
 It has a powerful brand name so it can increase
sales and profits of other
businesses
When Should a Firm
Diversify?

6. Why Diversify?
 To build shareholder value!
 To grow
 To more fully utilize existing resources and
capabilities.
 To escape from undesirable or unattractive
industry environments
 To make use of surplus cash flows.

7. Diversification
 The Process of entering in to one or more industries that are
distinct or Different from a company’s core or original industry to
find ways to use the company’s distinctive competencies to
increase the value to customers of the products it offers in those
industries
 A company that operates in two or more industries to find ways
to increase long run profitability.
Diversified Company

8. Creating Value Through
diversification
 Most companies first consider diversification when they are
generating financial resources in excess of those necessary to
maintain a competitive advantage in their original business or
Industry.
 Diversification can help a company create greater value in three
main ways:
1. By permitting superior internal Governance
2. By transferring competencies among businesses and,
3. By Realizing economies of scope

9. 1. Superior Internal
Governance
 The term internal governance refers to manner in which the
top executives of a company manage (or ‘’govern’’) its
business units, divisions and functions.
 Diversification creates value when top managers operate
the company’s different business units so effectively that
they perform better than they would if they were separate
and independent Companies

10. How managers create value
through internal governance?
 First , they organize the different business units of the
company , each of which operates separately.
 Second, these divisions tend to be managed by corporate
executives in a highly decentralized fashion.
 Third, corporate managers are careful to link their monitoring
control to incentive pay system, to reward for attaining
performance goals.

11. 2. Transferring of
Competencies
 A Second Way for company to create value from diversification is to
transfer its existing distinctive competencies in one or more value
creation functions to other industries.
 Top managers seek out companies in new industries to apply these
competencies to create value and increase profitability
 Corporate managers decide to acquire company to improve
efficiency of their existing value creation activities
 Such competency lower costs of value creation in company’s
diversified businesses

12. 3. Economies of
Scope
 The phrase ‘’two can live cheaper than one ‘’ expresses idea
behind economies of scope. When two or more business units
can share resources or capabilities such as manufacturing
facilities, distribution channels, advertising campaigns, and R &
D costs, total operating costs fall because of economies of
scope
 These Businesses share costs of procuring certain raw
materials and developing technology for new products and
processes.
 A joint sale force sells both products to super markets and
both products are shipped via same distribution system.

13. Strategies for Entering
New Businesses
Acquire existing company
Internal start-up
Joint ventures

14.  ACQUISITION AND RESTRUCTURING
STRATEGY
It involves, WHEN corporate managers mangers acquiring inefficient
and poorly managed enterprises and then creating value by
installing their superior internal governance in these acquired
companies and restructuring their operation systems to improve
their performance
 INTERNAL STARTUP
When Parent firm already has most of needed resources to build a
new business AND Ample time exists to launch a new business
AND Internal entry has lower costs than entry via acquisition.
 JOINT VENTURE
Good way to diversify when
- Uneconomical or risky to go it alone
- Pooling competencies of two partners provides more competitive
strength
- Only way to gain entry into a desirable foreign market

15. Related Diversification
The strategy of operating
business unit in a new
industry that is related to
company’s existing business
units through some
commonality in their value
chains
Unrelated Diversification
 The strategy of operating
business unit in new
industry that has no value
chain connection with
company’s existing
business units. unrelated
diversification is called
‘’Conglomerate’’ implies the
company is made up of number
of diverse businesses
Related vs. Unrelated Diversification

16. Exit Strategies

17.  Companies can choose from three main strategies for existing
business areas:
1. Divestment:
Divestment involves selling a business unit to the highest bidder.
Three types of buyers are independent investors, other
companies, and the management of the unit to be divested
 Spinoff:
The sale of business unit to another company or to independent
investors.

18. 2. Harvest Strategy
The halting/stop of investment in a business unit to maximize
short to medium term cash flow from that unit.
Harvest strategy, is any plan for getting the value out of a
company, product line, or business entity.
3. Liquidation Strategy:
The shutting down of operations of a business unit and the sale
of its assets. A pure liquidation strategy is least attractive of all
to pursue, because it requires that the company write off its
investment in a business unit, often at considerable cost.

19. Thank
You !