82578332 diversification

7/30/2019 82578332 Diversification

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Diversification Strategy

From Contemporary Strategic Analysis by Robert Grant


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Before going into thatFOUR different types (not mutually exclusive, though) of Strategies to manage and sustain profitability! Diversification Strategy ! Integration Strategy ! Intensive Strategy ! Defensve Strategy


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Before going into thatFOUR different types (not mutually exclusive, though) of Strategies to manage and sustain profitability! Diversification Strategy ! Integration Strategy --- backward, forward, horizontal ! Intensive Strategy ! Defensive Strategy


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Before going into thatFOUR different types (not mutually exclusive, though) of Strategies to manage and sustain profitability! Diversification Strategy ! Integration Strategy ! Intensive Strategy --- Market penetration, market

development, product development! Defensive Strategy


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Before going into thatFOUR different types (not mutually exclusive, though) of Strategies to manage and sustain profitability! Diversification Strategy ! Integration Strategy ! Intensive Strategy ! Defensve Strategy --- divestiture, retrenchment, liquidation


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Diversification Strategies Concentric diversification Conglomerate diversification Horizontal diversifica


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Diversification StrategiesConcentric Diversification Adding new, but related, products or services


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Diversification StrategiesGuidelines for Concentric Diversification

Competes in no-growth or slow-growth industry Adding new & related products increases sales of current products New & related products offered at competitive prices Current products are in decline stage of the product life cycle Strong management team


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Diversification StrategiesConglomerate Diversification Adding new, unrelated products or services


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Diversification StrategiesGuidelines for Conglomerate Diversification

Declining annual sales and profits Capital and managerial talent to compete successfully in a new industry Financial synergy between the acquired and acquiringfirms Existing markets for present products are saturated


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Diversification StrategiesHorizontal Diversification Adding new, unrelated products or services for present customers


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Diversification StrategiesGuidelines for Horizontal Diversification

Revenues from current products/services would increase significantly by adding the new unrelated products Highly competitive and/or no-growth industry w/ low margins and returns Present distribution channels can be used to market new products to current customers New products have counter cyclical sales patterns compared to existing products


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Diversification StrategyOUTLINE! Introduction: The Basic Issues ! The Trend over Time ! Motives for Diversification

- Growth and Risk Reduction - Shareholder Value: Porters Essential Tests.! Competitive Advantage from Diversification ! Diversification and Performance:Empirical Evidence ! Relatedness in Diversification


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Basic Issues in Diversification DecisionsSuperior profit derives from two sources:INDUSTRY ATTRACTIVENESS NET OPERATING PROFIT > COST OF CAPITAL

COMPETITIVE ADVANTAGE

Diversification decisions involve these same two issues: How attractive is the sector to be entered? Can the firm achieve a competitive advantage?


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Diversification among the US Fortune 500, 1949-7470.2 29.8 63.5 36.5 53.7 46.3 53.9 46.1 39.9 60.1 37.0 63.0

1949

1954

1959

1964

1969

1974

Note:

During the 1980s and 1990s the trend reversed as large companies refocused upontheir core businesses


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Diversification among Large UK Corporations, 1950-93

70 60 50 40 30 20 10 0 1950 1960 1970 1983 1993 Single business Dominant business Related business Unrelated business


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Diversification: The Evolution of Management Thinking and Management Practice

MANAGEMENT GOALS

Quest for Growth

Financial problems of conglomerates

Refocusing on shareholder value

Competitive advantage through flexibility, and capability

COMPANY DEVELOPMENTS

Rise of conglomerates Emphasis onrelated Refocusing on Related diversification core businesses & concentric by industrial firms Divestment diversification

Joint ventures, Alliance, corporate venturing

Financial Analysis Diffusion of M form structures

STRATEGY TOOLS & CONCEPTS

Analysis of economies of scope & synergy

Portfolio planning models

Value based Transaction management cost analysis Core competences Dominant logicDynamic capability

Capital asset pricing model Development of corporate planning systems

1950

1960

1970

1980

1990


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Motives for DiversificationGROWTH! The desire to escape stagnant or declining industries

a powerful motives for diversification (e.g. tobacco, newspapers).

! But, growth satisfies managers not shareholders. ! Growth strategies (especially by acquisition), tend

to destroy shareholder value


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Motives for DiversificationRISK SPREADING! Diversification reduces variance of profit flows ! But, does not create valuefor shareholders ! Capital Asset Pricing Model shows that

diversification lowers unsystematic risk not systematic risk.


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Motives for Diversification

PROFIT! For diversification to create shareholder value,

then bringing together of different businesses under common ownership & must somehow increase their profitability.


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Diversification and Shareholder Value: Porters Three Essential TestsIf diversification is to create shareholder value, it must meet three tests:


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1. The Attractiveness Test: diversification must be directed towards attractiveindustries (or have the potential to become attractive).


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1. The Attractiveness Test: diversification must be directed towards attractiveindustries (or have the potential to become attractive).

2. The Cost of Entry Test : the cost of entry must not overwhelm all future profits.


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Diversification and Shareholder Value: Porters Three Essential TestsIf diversification is to create shareholder value, it must meet three tests: 1.The Attractiveness Test: diversification must be directed towards attractive industries (or have the potential to become attractive). 2. The Cost of Entry Test: the cost of entry must not capitalize all future profits. 3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa. (i.e. some form of synergy must be present)


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Diversification and Shareholder Value: Porters Three Essential TestsIf diversification is to create shareholder value, it must meet three tests: 1.The Attractiveness Test: diversification must be directed towards attractive industries (or have the potential to become attractive). 2. The Cost of Entry Test: the cost of entry must not overwhelm all future profits. 3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa. (i.e. some form of synergy must be present)Additional source of value from diversification: Option value


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Competitive Advantage from DiversificationMARKET POWER 1. Predatory pricing/tie-in sales 2. Reciprocal buying 3. Mutual forbearance Evidence of all three are sparse


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Competitive Advantage from DiversificationECONOMIES OF SCOPE Sharing tangible resources (research labs, distribution systems) across multiple businesses Sharing intangible resources (brands, technology) across multiple businesses


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Competitive Advantage from DiversificationECONOMIES OF SCOPE (--- continued)

Transferring functional capabilities (marketing, product development) across businesses Applying general management capabilities to multiple businesses


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Competitive Advantage from DiversificationINTERNALIZE TRANSACTION COST Economies of scope not a sufficient basis for diversificationmust be supported by transaction costs Diversification firm can avoid transaction costs by operating internal capital and labor markets Key advantage of diversified firm over external markets--- superior access to information


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Relatedness in DiversificationEconomies of scope in diversification derive from two types of relatedness:! Operational Relatedness-- synergies from sharing

resources across businesses (common distribution facilities, brands, joint R&D)! Strategic Relatedness-- synergies at the corporate level

deriving from the ability to apply common management capabilities to different businesses.


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Relatedness in DiversificationProblem of operational relatedness: the benefits in terms of economies of scopemay be dwarfed by the administrative costs involved in their exploitation.


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Branson & the Virgin Companies: Making strategic sense of apparent entrepreneurial chaosKEY RESOURCES

Virgin brand Branson -charisma/image --PR skills -networking skills -entrepreneuriaflair

DOMINANT LOGIC

Seek competitive advantage by start-up cos. pursuing innovative differentiation inunderserved market with sleepy incumbentsCHARACTERISTICS OF MARKETSTHAT CONFORM TO THIS LOGIC

DESIGNING A CORPORATE STRATEGY & STRUCTURE

Whats the business model? (Does Virgin create value by being an entrepreneurial incubator, a venture capital fund, a diversified corporation, or what?) Which businesses to divest? Criteria for future diversification What type of structure?Is te a need for greater formalization?

consumer dominant incumbent scope for new approaches to customer service high eiers to other start-ups Branson/Virgin image appeals to customers


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82578332 diversification

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