diversification strategy
Post on 31-Dec-2015
53 Views
Preview:
DESCRIPTION
TRANSCRIPT
Diversification StrategyDiversification Strategy
• Introduction: The Basic Issues• The Trend over Time• Motives for Diversification
- Growth and Risk Reduction - Shareholder Value: Porter’s Essential Tests.
• Competitive Advantage from Diversification• Diversification and Performance: Empirical Evidence• Relatedness in Diversification
OUTLINE
RATE OF PROFIT
> COST OF CAPITAL
INDUSTRY
ATTRACTIVENESS
COMPETITIVE
ADVANTAGE
The Basic Issues in Diversification DecisionsThe Basic Issues in Diversification Decisions
Superior profit derives from two sources:
Diversification decisions involve these same two issues:• How attractive is the sector to be entered?•Can the firm achieve a competitive advantage?
Diversification among the US Fortune 500, 1949-74Diversification among the US Fortune 500, 1949-74
Percentage of Specialized Companies (single-business, vertically-integrated and dominant-business)
Percentage of Diversified Companies (related-business and unrelated business)
Note: During the 1980s and 1990s the trend reversed as large
companies refocused upon their core businesses
1949 1954 1959 1964 1969 1974
70.2 63.5 53.7 53.9 39.9 37.029.8 36.5 46.3 46.1 60.1 63.0
0
10
20
30
40
50
60
70
1950 1960 1970 1983 1993
Single business
DominantbusinessRelated business
Unrelatedbusiness
Diversification among Large UK Corporations, 1950-93
Diversification among Large UK Corporations, 1950-93
COMPANY DEVELOPMENTS
MANAGEMENT
GOALS
STRATEGY TOOLS & CONCEPTS
1950 1960 1970 1980 1990
Financial problems of
conglomerates
Refocusing on shareholder
value
Rise of conglomeratesRelated diversification
by industrial firms
Emphasis on“related’ & “concentric” diversification
Refocusing on core businesses
Divestment
Diffusion of M form structures
Analysis of economies of
scope & “synergy”
Value based management
Capital asset pricing model
Portfolio planning models
Core competences
Transaction cost analysis
Development of corporate planning systems
Diversification: The Evolution of Management Thinking and Management Practice
Diversification: The Evolution of Management Thinking and Management Practice
Joint ventures, Alliance, corporate
venturing
Competitive advantage throughSpeed, flexibility,
and capability
Dynamiccapability
Quest for Growth
Financial Analysis
Dominant logic
Motives for DiversificationMotives for Diversification
GROWTH --The desire to escape stagnant or declining industries a powerful motives for diversification (e.g. tobacco,
oil, newspapers). --But, growth satisfies managers not shareholders.
--Growth strategies (esp. by acquisition), tend to destroy shareholder value
RISK --Diversification reduces variance of profit flowsSPREADING --But, doesn’t create value for shareholders—they can
hold diversified portfolios of securities.--Capital Asset Pricing Model shows that diversification lowers unsystematic risk not systematic risk.
PROFIT --For diversification to create shareholder value, then bringing together of different businesses under common ownership & must somehow increase their profitability.
Diversification and Shareholder Value: Porter’s Three Essential Tests
Diversification and Shareholder Value: Porter’s Three Essential Tests
If 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)
Additional source of value from diversification: Option value
Competitive Advantage from DiversificationCompetitive Advantage from Diversification
• Predatory pricing/tie-in sales Evidence• Reciprocal buying of these• Mutual forbearance is sparse
MARKETPOWER
• Sharing tangible resources (research labs, distribution systems) across multiple businesses• Sharing intangible resources (brands, technology) across multiple businesses• Transferring functional capabilities (marketing, product development) across businesses• Applying general management capabilities to multiple businesses
• Economies of scope not a sufficient basis for diversification ----must 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
ECONOMIES OF
SCOPE
ECONOMIESFROM
INTERNALIZINGTRANSACTIONS
Competitive Advantage from DiversificationCompetitive Advantage from Diversification
• Predatory pricing Evidence• Reciprocal buying of these• Mutual forbearance is sparse
MARKETPOWER
• Sharing tangible resources (research labs, distribution systems) across multiple businesses• Sharing intangible resources (brands, technology) across multiple businesses• Transferring functional capabilities (marketing, product development) across businesses• Applying general management capabilities to multiple businesses
• Economies of scope not a sufficient basis for diversification—must 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
ECONOMIES OF
SCOPE
ECONOMIESFROM
INTERNALIZINGTRANSACTIONS
Relatedness in DiversificationRelatedness in Diversification
Economies 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.
Problem of operational relatedness:- the benefits in terms of economies of scope may be dwarfed by the administrative costs involved in their exploitation.
Branson & the Virgin Companies: Making strategic sense of apparent entrepreneurial chaos
Branson & the Virgin Companies: Making strategic sense of apparent entrepreneurial chaos
KEY RESOURCES•Virgin brand•Branson -charisma/image --PR skills -networking skills -entrepreneurial flair
DOMINANT LOGIC•Seek competitive advantage by start-up cos. pursuing innovative differentiation in underserved market with sleepy incumbents
CHARACTERISTICS OFMARKETSTHAT CONFORM TO THIS LOGIC•consumer•dominant incumbent •scope for new approaches to customer service•high entry barriers to other start-ups•Branson/Virgin image appeals to customers
DESIGNING A CORPORATE STRATEGY& STRUCTURE• What’s 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 there a need for greater formalization?
top related