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Module 7
Corporate Diversification
Strategies
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Module Outline
From Single-Business to Diversification
Building Shareholder Value Diversification Strategies
Related Diversification Strategies
Unrelated Diversification Strategies
Divestiture and Liquidation Strategies
Corporate Turnaround, Retrenchment, andPortfolio Restructuring Strategies
Multinational Diversification Strategies
Combination Diversification Strategies
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Corporate Diversification and Corporate
Strategy A diversified firm is an collection of
individual businesses Diversification makes corporate strategy-
making a bigger picture exercise than
crafting strategy for a single business
In a diversified firm, corporate managers
must craft a multi-business, multi-industrystrategic action plan for a
Number of different businesses competing in
diverse industry environments
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Main Tasks in Crafting Corporate
Strategy Decide on moves to position firm in
industries chosen for diversification Devise actions to improve long-termperformance of corporations portfolio of
businesses Capture strategic fit benefits existing within
business units, turning them into competitive
advantage Evaluate profit prospects of each business
unit and steer corporate resources into most
attractive strategic opportunities
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From Single-Business To
Diversification
As growth slows, strategic options
include:
Take market share from rivals
Focus on diversification
Stage 4:
Vertical integrationStage 3:
Geographical expansionStage 2:
Most firm begin as small single-
business enterprises serving a localor regional market
Stage 1:
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The Growth Matrix
Market
Penetration
(Concentration)
Product
Development
Market
DevelopmentDiversification
Present New
Present
New
Product
Market
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Major Growth Strategies
(The Growth Matrix) Growth via Market Penetration
(Concentration) Growth via Market Development
Growth via Product Development
Growth via Diversification
Related (Concentric) Diversification
Unrelated (Conglomerate) Diversification
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Market Penetration
(Same Products, Same Markets) When current market are not saturated with your
particular products / services
When the usage rate of present customers could
be significantly increased
When the market shares of some majorcompetitors have been declining while total industry
demand has been rising
When the correlation between sales and marketingexpenditures has historically been high
When increased economies of scale provide major
competitive advantages
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Market Development
(Same Product, New Market) When new channels of distribution are available
that are reliable, inexpensive, and of good quality
When an organization is very successful at what it
does
When new untapped or unsaturated markets exist When the firm has the needed capital and human
resources to manage expanded operations
When an organization has excess productioncapacity
When an organizations basic industry is rapidly
becoming global in scope
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Product Development
(New Products, Same Markets) When the firm has successful products that are in
the maturity stage of the product life cycle (i.e.,
attract satisfied customers to try new, improved
products as a result of their prior experiences)
When an organization competes in an industry that
is characterized by rapid technological change
When major competitors offer better quality
products at comparable prices
When the firm competes in a high-growth industry
When an organization has especially strong
research and development capabilities
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Strategic Management Principle
Diversification doesnt need to become a
strategic priority until a company begins torun out of growth opportunities in its core
business!
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Competitive Strengths of a Single
Business Strategy Less ambiguity about who we are
Energies of firm directed down one path Entrepreneurial efforts focused on keeping
strategy responsive to industry change
Less chance limited resources will be thinly
stretched
Managers maintain hand-on contact withcore businesses
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Competitive Strengths of a Single
Business Strategy Dependence on one business provides
incentive to capture stronger long-termcompetitive position
Full force of firms resources used to become
better at what firm does Important competencies more likely to
emerge
Higher profitability innovative ideas will
emerge
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Risk of a Single Business Strategy
Putting all firms egg in one industry basket
If industry stagnates, then Firms growth rate tougher to sustain
Profits harder to achieve
Changing customer needs, technologicalinnovation, or new substitutes can
Undermine a single-business firm
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When Does Diversification Start to
Make Sense? When to diversify depends on
Firms competitive position and Remaining opportunities in home-base industry
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When Does Diversification Start to
Make Sense?
Strong competitive
position, rapid marketgrowth
Not a good time to
diversify
Weak competitive
position, rapid marketgrowth
Not a good time to
diversify
Strong competitive
position, slow marketgrowth
Diversification is top
priority consideration
Weak competitive
position, slow marketgrowth
Diversification merits
consideration
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Why Diversify?
To build shareholder value
A diversification move is capable ofincreasing shareholder value if it passes 3
tests:
1. Attractiveness Test
2. Cost of Entry Test
3. Better-Off Test
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Strategic Management Principle
To create shareholder value, a diversifying
firm must get into businesses that canperform better under common management
than they could perform operating as
independent enterprises!
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Diversification Strategies
Entering new industries
Related diversification Unrelated diversification
Divestiture and liquidation
Corporate turnaround, retrenchment, and
restructuring
Multinational diversification
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Strategies for Entering New Businesses
1. Acquire existing firm in target industry
2. Start new company internally3. Form joint venture
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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
and costs Getting adequate distribution access
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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 needed skills
Additional capacity will not adversely impact
supply-demand balance in industry
New start-up does not have to go head-to-head
against powerful rivals
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Diversification via Joint Ventures
Good way to diversify when:
Uneconomical or risky o 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
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Drawbacks of Joint Ventures
Raises questions about
Which partner will do what, and Who has effective control
Potential conflicts
Sourcing of components
Exporting
Whether operations should conform to foreign
firms standards or to local preferences
Control over cash flows and profits
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What is Related Diversification?
Definition
Diversification is related when a firm hasseveral lines of business that, although
distinct, possess some kind ofstrategic fit
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What is Related Diversification?
Principle
What makes related diversification attractiveis the opportunity to turn strategic fit into
competitive advantage!
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Related Diversification and Strategic Fit
Strategic Fit can be based on
Shared technology Common labor skills
Common distribution channels
Common suppliers and raw materials sources Similar kinds of managerial know-how
Ability to share common scales force
Customer overlap
Any area where meaningful sharing opportunities
exist in businesses value chains
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Common Approaches to Related
Diversification Entering businesses where sales force, advertising,
and distribution activities can be shared
Exploiting closely related technologies
Sharing manufacturing facilities
Transferring know-how and expertise from onebusiness to another
Transferring firms brand name and reputation with
customers to a new product / service Acquiring new businesses to uniquely help firms
position in existing businesses
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Appeal of Related Diversification
Allows firm to maintain unity in business
activities and gain benefits of skills transferor cost sharing while
Spreading risks over broader base
Exploits what firm does best and allowstransfer of core competencies from one
business to another
Helps achieve economies of scope
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Appeal of Related Diversification
Strategic fits among related businesses offer
competitive advantage potential of Lower costs via sharing common resources andcombining related activities
Efficient transfer of Key skills or core competencies
Technological expertise or
Managerial know-how Common use of same brand name
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Concepts: Economies of Scope
Arise from ability to eliminate costs by
operating two or more businesses undersame corporate umbrella
Exist whenever it is less costly for two or
more businesses to operate undercentralized management than to function
independently
Cost savings opportunities can stem from
interrelationships anywhere along
businesses value chain
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Concept: Strategic Fit
Exist when different businesses havesufficiently related value chains that permits
Transferring skills and expertise from onebusiness to another
Combining performance of related activities so
as to reduce costs Presence of strategic fit in a diversified firms
portfolio, along with corporate managements
skill in capturing benefits of theinterrelationships Makes related diversification capable of being a
2 + 2 = 5 phenomenon
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Types of Strategic Fit
Market-Related Fits
Operating Fit
Management Fit
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Market-Related Fits
Arise when value chains of different
businesses overlap so products can be Used by same customers
Marketed and promoted in similar ways
Distributed through common dealers andretailers
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Types of Market-Related Fits
Common sales force to call on customers
Advertising related products together Use of same brand names
Joint delivery and shipping
Joint after-sale service and repair work
Joint order processing and billing
Joint promotional tie-ins Cents-off couponing, trial offers, specials
Joint dealer networks
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Operating Fits
Arise when different businesses present
opportunities for cost-sharing or skillstransfer
Procurement of purchased inputs
R&D / technology Manufacturer and assembly
Administrative support functions
Marketing and distribution
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Potential Benefits of Operating Fits
Cost savings
Tapping into more scale economies and / oreconomies of scope
Increased operating efficiency through
sharing of related activities
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Management Fits
Emerge when different business units have
comparable types of
Entrepreneurial,
administrative, or
Operating problems Allow accumulated managerial know-how in
one business to be useful in managing
another business
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Capturing Benefits of Strategic Fit
Management must take actions to capturebenefits
Benefits dont just happen!
Businesses with sharing potential must bereorganized so activities to be shared aremerged and coordinated
Where skills transfer is cornerstone of strategicfit, a means must be found to make transfer
effective Management must access that some
centralized strategic control is great enough
to justify sacrificing business-unit autonomy
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What is Unrelated Diversification?
Unrelated diversification involves no
Common linkage of strategic fit among adiversified firms line of business
Meaningful value chain interrelationships
Corporate strategy approach Venture into any industry and any business in
which we think we can make a profit
Firms pursuing unrelated diversification arereferred to as Conglomerates
No unifying strategic theme
cquisition Criteria: Pursuing Unrelated
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cquisition Criteria: Pursuing Unrelated
Diversification Can business meet corporate targets for
profitability and ROI?
Will business require substantial infusions ofcapital?
Is business big enough to contribute toparent firms 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?
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Attractive Acquisition Targets
Companies with undervalued assets
Capital gains may be realized Companies that are financially distressed
May be purchased at bargain prices
Companies with bright prospects, but limitedcapital
Dominant Philosophy of Unrelated
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Dominant Philosophy of Unrelated
DiversificationAny company that can be acquired on good
financial terms and offers good prospects for
profitability is a good business to diversify
into!
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Appeal of Unrelated Diversification
Business risk scattered over differentindustries
Capital resources invested in thoseindustries offering best profit prospects
Stability of profits Hard times in oneindustry may be offset by good times inanother industry
If management is exceptionally astute atspotting bargain-priced firms with big profitpotential, then
Shareholder wealth can be enhanced
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Drawbacks of Unrelated Diversification
Places big demand on corporate management
More diverse the business, harder it is to
Oversee each subsidiary and spot problems
Judge caliber of strategic plans of subsidiaries
Consolidated performance of unrelated portfolio
tends to be no better than sum of individual business on their own,
and
It may be worse
Promises greater sales-profit stability over business
cycles, but is seldom realized
How Broadly Should a Company
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How Broadly Should a Company
Diversify? With unrelated diversification, corporate
managers have to be shrewd enough to
Discern good acquisition from bad ones
Select capable managers to run many different
businesses Judge soundness of strategic proposals of
business-unit managers
Know what to do if a subsidiary stumbles
How Broadly Should a Company
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How Broadly Should a Company
Diversify? Two questions should guide a firms
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 bemanaged, given its added complexity?
Di ifi ti d Sh h ld V l
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Diversification and Shareholder Value
Related Diversification
Strategy-Driven approach to create shareholder
value
Unrelated Diversification Finance-Driven approach to create shareholder
value
Di tit d Li id ti St t i
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Divestiture and 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
Sub-par performance of some subsidiaries isbound to occur
Diversification appearing sensible based on
strategic fit lacks compatibility of values essentialto cultural fit
St t i M t P i i l
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Strategic Management Principle
A business needs to be considered when it
ceases to be an attractive investment or
business the company should be in!
Divestiture and Liquidation Strategy
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q gy
Options Two types of divestiture options
Divest business by spinning it off as independent
company
Divest business by selling it
Liquidation Most painful option
Involves terminating firms existence
Turnaround, Retrenchment, and
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, ,
Portfolio Restructuring Strategic Options for diversified firm with
ailing subsidiaries
Conditions causing poor performance
Large losses in one or more subsidiaries
Disproportionate number of businesses inunattractive industries
Bad economic conditions
Excessive debt load
Acquisitions that perform worse than expected
Corporate Turnaround Strategies
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Corporate Turnaround Strategies
Focus
Restore money-losing businesses toprofitability rather than divest them
Objective
Get whole firm back in the black by curing
problems of those businesses in portfolioresponsible for pulling down overall
performance
Corporate Turnaround Strategies
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Corporate Turnaround Strategies
Most appropriate where
Reasons for poor performance are short-term
Ailing businesses are in attractive industries
Divesting money-losers doesnt make long-term
strategic sense
Corporate Retrenchment Strategies
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Corporate Retrenchment Strategies
Focus
Reduce scope of diversification to a smallernumber of businesses
When to Consider
1. Certain businesses can be made profitable
2. Diversification efforts have become too
broad and building strong positions in fewerbusinesses is key to improving long-term
performance
Corporate Retrenchment Strategies
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Corporate Retrenchment Strategies
Options
Divest business Too small to make sizable contribution to
earnings
Having little or no strategic fit with firms corebusinesses
Portfolio Restructuring Strategy
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Portfolio Restructuring Strategy
Focus
Making radical changes in mix andpercentage makeup of types of businesses in
portfolio via both
Divestitures, and New acquisitions
Portfolio Restructuring Strategy
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Portfolio Restructuring Strategy
When to use
Long-term performance prospects are unattractive
Core business unit falls upon hard times
Wave of the future technologies or products
emerge and major shakeup is needed to build
position in potentially big new industry
Unique opportunity emerges and some existing
businesses must be sold to finance new acquisition
Major businesses in portfolio become unattractive
Comment: Trend in Diversification
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Comment: Trend in Diversification
The present tend toward narrower
diversification has been driven by a growing
preference to gear diversification around
creating strong competitive positions in a
few, well-selected industries as opposed toscattering corporate investments across
many industries!
Strategy of Multinational Diversification
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Strategy of Multinational Diversification
Distinguishing Characteristic
Diversity ofBusiness and Diversity ofNational Markets
Presents a big strategy-making challenge
Management must conceive and executesubstantial number of strategies
At least one for each industry, with as manymultinational variations as is appropriate
Multinational Diversification:
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The 1960s MNCs operated autonomous subsidiaries in each
host country
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 countryefficiently and cheaply
MNCs market position in a country negotiated withhost government, not due to pressures ofinternational competition
Multinational Diversification:
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The 1970s Multi-country strategies based on national
responsiveness began to lose effectiveness
International competition in more industries
Relevant market arena in many industriesshifted from national to global
Traditional MNCs driven to integrateoperations across national borders
Manufacturing a complete product range ineach country became less prevalent
Instead, plants specialized in making fewer
models
Multinational diversification:
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The 1970s 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
MNCs acted to take advantage of country-to-country differences
Interest and exchange rates
Favorable credit terms
Government subsidies
Export guarantees
Multinational Diversification:
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The 1980s Another source of competitive advantage emerged
Using strategic it 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
Related diversification produces extra competitiveadvantage for an MNC where
Expertise in a core technology was applied in different
industries Important brand name advantages existed
Competitive Strength of a DMNC in
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Global Markets Competitive advantages hinge upon
Employing a related diversification strategy
based on exploiting a core competence
Managing related businesses to capture
strategic fit benefits
Using cross-subsidization to win solid footholds
in attractive country markets
Competitive Strength of a DMNC in
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Global Markets A DMNC has a strategic arsenal capable of
defeating both
A single-business MNC, and
A single-business domestic firm in a long-term
competitive struggle
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End of Module 7