CORPORATE DIVERSIFICATION STRATEGIES

Strategic Mgt. In Diversified Companies

The tribal wisdom of the Lakota Indians passed on from one generation to the next, says that when you discover that you are riding a dead horse, the best strategy is to dismount. However, members of modern, corporate management teams have developed new techniques.

a. Buying a stronger whip. b. Changing riders.. c. Threatening the horse with termination... d. Appointing a committee to study the horse.... e. Arranging to visit other sites to see how they ride dead horses... f. Lowering the standards so that dead horses can be included..... g. Reclassifying the dead horse as living impaired..... h. Hiring outside contractors to ride the dead horse.....

i . Harnessing several dead horses together to increase speed..... j. Providing additional funding to increase the dead horse's performance. k. Doing a productivity study to see if lighter riders would improve the dead horse's performance. l. Declaring that the dead horse carriers lower overhead and therefore performs better than some other horses.... m. Rewriting the expected performance requirements for all horses. n. Promoting the dead horse to a supervisory position

Overview
What is Diversification What is senior Mgts responsibility in Diversified Companies? Why and When does a company diversify? How does a company accomplish it Related and Unrelated Diversification When to stop.

What is Diversification?
A collection of businesses under one corporate umbrella

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

Diversification and Corporate Strategy

In addition to a business strategy which identifies and maintains a sustainable competitive advantage in each of the business units, a coherent corporate strategy is needed which creates value and is internally consistent.

Diversification and Corporate Strategy

A coherent corporate strategy can best be thought of as how, in pursuit of a vision, the corporation aligns its goals and objectives, organizational structure, systems and processes, and choice of industries and strategies to build and leverage the unique resources to give it a corporate advantage. It is through these actions that the corporation will create value and so justify its existence as a multi-business entity

Five Components of Corporate Strategy

Vision- For the corporation as a whole Goals and Objectives Structure, systems and procedures
Deploy corporate resources into the businesses Establish the context for decentralized decision making Routine public company functions Contain multiple elements e.g. structure, budgeting,strategic planning, management style etc.

Five Components of Corporate Strategy-Resources

Set of tangible and intangible assets, established over time, which cant be readily imitated, acquired or duplicated. Make the corporation unique When they are competitively superior and they contribute to sustainable competitive advantage in the SBUs, they become a corporate advantage. Resources, effectively used, create value One time=restructuring Ongoing=use of corporate brand

Five Components of Corporate Strategy-Businesses and Industries

Industries in which the corporation chooses to compete Competitive strategies adopted by the business units in those industries. How the units are related to each other.

Tasks of Senior Management

Create an appropriate vision Establish goals and objectives Finding and moving into compatible businesses and industries Leverage Resources
Boost combined performances Find synergies among related businesses that result in competitive advantage

Move resources into businesses

Because you are dealing with multiple industries, businesses and locations,
Diversified businesses are harder to manage

Why and When does a company diversify?

FROM SINGLE-BUSINESS TO DIVERSIFICATION

STAGE 1: Most firms begin as small singlebusiness enterprises serving a local or regional market STAGE 2: Geographical expansion

STAGE 3: Vertical integration

STAGE 4: As growth slows, strategic options include:
Take market share from rivals Focus on diversification

When do we diversify?
When a company runs out of growth opportunities in the core business and not before! When diversification results in creation of value

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

When you can increase value based on three tests

Attractiveness Test-The industry must be attractive Cost of Entry Test - Cost has to be reasonable ( Catch 22) Better off Test - Diversification results in a competitive advantage and creation of value.

How to Diversify
Find ways to enter new industries Decide whether the businesses related to each other or not? Strengthen the performance of the businesses youve got
Get rid of the bad ones that cant be fixed Fix the bad ones that can be fixed

STRATEGIES FOR ENTERING NEW BUSINESSES

1. Acquire existing firm in target

industry 2. Start new company internally 3. Form joint venture

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 & costs Getting adequate distribution access

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 of needed skills Additional capacity will not adversely impact supplydemand balance in industry New start-up does not have to go head-to-head against powerful rivals

DIVERSIFICATION VIA JOINT VENTURES

Good way to diversify WHEN:

Uneconomical or risky to 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

DRAWBACKS OF JOINT VENTURES

Raises questions about Which partner will do what & Who has effective control

Requires precise agreements

Related Diversification
Are the businesses that we are divesting into related to one another and if so, how?

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

Presence of strategic fit in a diversified firms portfolio, along with corporate managements skill in capturing benefits of the interrelationships makes related diversification capable of being a 2 + 2 = 5 phenomenon

Types of Strategic Fit

Technology Fits

Operating Fits

Distribution & CustomerRelated Fits

Managerial Fits

Several lines of business with a strategic fit that becomes a strategic advantage

RELATED DIVERSIFICATION & STRATEGIC FIT

STRATEGIC FIT can be based on
Shared technology Common labor skills Common distribution channels Common suppliers & raw materials sources Similar operating methods Similar kinds of managerial know-how Ability to share common sales force Customer overlap Any area where meaningful sharing opportunities exist in businesses value chains

COMMON APPROACHES TO RELATED DIVERSIFICATION

Entering businesses where sales force, advertising, & distribution activities can be shared Exploiting closely related technologies Sharing manufacturing facilities Transferring know-how & expertise from one business to another Transferring firms brand name & reputation with customers to a new product/service Acquiring new businesses to uniquely help firms position in existing businesses

Value of Related Diversification

Allows a company to enjoy economies of scope

CONCEPT: ECONOMIES OF SCOPE

Utilize strategic fits to gain cost or other competitive advantage. Economies of scale use size to gain advantage Arise from ability to eliminate costs by operating two or more businesses under same corporate umbrella Exist whenever it is less costly for two or more businesses to operate under centralized management than to function independently Cost savings opportunities can stem from interrelationships anywhere along businesses value

chains

Unrelated Diversification
If the businesses we diversify into arent related to each other, whats the point?

Unrelated Diversification
Financially driven rather than Strategically driven Strategic fit, value chain relationships or strategic theme are not important Profitability and size are key. Look for a bargain
undervalued assets, financially distressed, turnarounds, bright future with limited capital

Unrelated diversification
Go into any business where we can make a profit Referred to as conglomerates No unifying strategic theme

APPEAL OF UNRELATED DIVERSIFICATION

Business risk scattered over different industries Capital resources invested in those industries offering best profit prospects Stability of profits -- Hard times in one industry may be offset by good times in another industry
If management is exceptionally astute at spotting bargain-priced firms with big profit potential, then Shareholder wealth can be enhanced

Tasks of Senior Management

When you arent looking for businesses, what do you do? Leverage the Resource base
Boost combined performances

Strengthen the Performances of Companies we own

Fix what can be fixed Get rid of what cannot be fixed If it isnt broken, please dont fix it.

When it cant be fixed

Divest Liquidate

DIVESTITURE & 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 Subpar performance of some subsidiaries is bound to occur Diversification appearing sensible based on strategic fit lacks compatibility of values essential to CULTURAL FIT

Divestiture
Spin off Sale

When it can be fixed

Turnaround
Cure the problems that make the losing business unsuccessful Done when the business is in an attractive industry And when divesting doesnt make strategic sense

COMMENT: TREND IN DIVERSIFICATION

The present trend toward narrower diversification has been driven by a growing preference to gear diversification around creating strong competitive positions in a few, wellselected industries as opposed to scattering corporate investments across many industries!

STRATEGY OF MULTINATIONAL DIVERSIFICATION

Distinguishing Characteristic

DIVERSITY of BUSINESSES & DIVERSITY of NATIONAL MARKETS

Presents a big strategy-making challenge

MULTI-NATIONAL DIVERSIFICATION: THE 1960s

Multi country approach 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 country efficiently & cheaply MNCs market position in a country negotiated with host government, not due to pressures of international competition

MULTI-NATIONAL DIVERSIFICATION: THE 1970s

Traditional MNCs driven to integrate operations across national borders Manufacturing a complete product range in each country became less prevalent 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

MULTI-NATIONAL DIVERSIFICATION: THE 1980s

Another source of competitive advantage emerged
Using strategic fit 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

When to Stop Diversifying

When you achieve acceptable levels of growth and profitability Before complexity outstrips management's ability to manage