chapter 5 - div a

8/13/2019 Chapter 5 - Div A

1/4

STRATEGY

Chapter 5 Expansion and diversification

Most organization start with the limited resources, which mean they are constrained in the number of

Different type of customer they can look after The range of product and services they can develop.

This forces them to focus their effort so that different elements of a firms value chain are setup to cater the needs of a

particular segment. Once force is the fear of being dependent upon small set of customers or technologies, probably

more important is the fact that good entrepreneurs will develop the value chain to serve the customers once they have

found them and spot other ways to use their resources to generate profit. They may find that their customers have

other unfulfilled needs which their organization is in the position to meet or they may encounter new customers who

require a modified version of products or service. Meeting this need may lead the firm into completely different

industries from those in which they were started. As a result over tine ambitious companies like Sony expand so that

they have many different divisions with their own value chains.

It is surprisingly easy for a firm to be lured into pursuing opportunities that appear attractive but infact are unprofitablebecause the firm does not have the resources to manage them efficiently or effectively on the other hand being too

focused may also has disadvantages. A firm which has too limited range can lose out to firms with products that meet

range of customer needs more closely.

Why Firms Diversify?

To grow To more fully utilize existing resources and capabilities To escape from undesirable and unattractive Industry environment To make use of surplus cash flows

Diversity and diversification at Business Level:

Existing Core Business

Business Level Diversification

Variations In offerings New Customer Types New Geographic Market

Corporate level Diversification

New Technologies

New Suppliers

New Competitors

Different Success Factors

Fig 1

There are number of ways in which a firm can increase its diversity, the simplest is by developing slightly differen

offering perhaps to target slightly different markets from those it serves at the moment or to meet more precisely the

needs of a sub segment of existing customers. Example Includes:


2/4

Mc Donalds introduction of Bigger Big Mac, Targeted existing customers with above average appetites in order toincrease their spend at Mc Donalds.

H&M development of line of clothing for pregnant women Sonys Introduction of range of LCD Tvs and recently LED along with 3DThe extension to a firms offering typically does not involve any radical changes to the way the firm does business.

However, taken to extremes they can make firm difficult to manage. Unilever , Anglo Dutch consumer goods

conglomerate found itself in 1999 with 1600 brands of which just 400 power brands accounted for 90 % of sales. It

decided that by disposing some of these and focusing its marketing research and personal it could raise its profit margin

closer to that of leading competitors

Business Level Vs Corporate level Diversification: Corporate level diversification comes about when a firm find itself

involved in two or more separate Industry with different success factors. Eg, Sony cierge (real life application) which is a

technology based service has a different success factors and different competitors from those its parents.

Consideration in expansion and diversification/ Market and Competitive arguments for and Against Diversity:

1) Market and competitive factors

Growth potential : Extent of market opportunity for business offering Control: Extent to which an organization need a presence in a sector to control its operating environment. Competition : Impact of competitors Legitimation : Extent to which the increased scope , scale or diversity gives the organization gives the greater

legitimacy thus easier access to cheap resources

Differentiation : Extent to which firm can respond to new changing customer needs Dependency and risk : Extent to which firm is dependent for its success on a particular product , technology ,

customer or market

2) Attention and knowledge factors Management Attention : Extent to which Senior managers give proper attention to a particular market , offering

or Industry and understand success factors , Challenges

Exploration : Learning how to do New things , Inventing new product and process along with innovative ways Experience / Exploitation : Learning how to refine particular process all the time to make it more efficient and

effective

3) Efficiency factors Overhead cost: Cost associated with administering and coordinating organization activities. Economies of Scale : Benefits from overall size of organization & producing particular output in large quantities Economies of Scope and Synergies : Benefit from being able to share resources or link activities between

different offerings, businesses and markets

Potential Sources of relatedness between businesses in a portfolio: There are five sets of factors that may form thebasis of competitive advantage in an industry and so be the source of inter-SBU relatedness : Customer factors , channel

factors , Input Factors , Process factors, Market Knowledge factors. A firm may be able to use assets such as knowledge

or reputation that have contributed to success in one business to build advantage in another- if they are relevant

although such advantages may be short lived as competitors learn to replicate them. More , Importantly however , the

competencies needed to build the success factors can also be transferred from one business to another where the basis

of success is similar. These are likely to be less easy to copy and are potential sources of longer term advantage. See

table below :


3/4

Category of success factors & eg. Assets giving short term Adv. If scarce Competencies offering Possible

longer term advantage

Customer Factors

Brand Recognition , Customer Loyalty ,

Large Installed base of Products

Brands And reputation Brand Building : CRM

Channel Factors

Established access to distribution

channel : Distributor loyalty

Reputation with dealers : logistics

assets

Dealer recruitment : negotiation

with dealers and retailers

Input factors :Supplier loyalty : or preferential access

to scarce skill and raw material

Knowledge of where to find Inputs at

the right price or quality : reputation :

finance for purchase

Supplier negotiation and

management

Process factors :

Proprietary technology : product or

market specific , experience

organizational system

Patents and proprietary systems. Technological and innovation

competencies

Market knowledge factors:

Understanding of the Industry and the

market

Accumulated information on : the

goals and behaviors of competitors or

customers , the price sensitivity of

products

Data gathering : customer

psychology

Accessing business level scope Decisions:

M

A

R

K

E

T

S

M

A

N

Y

/

B

R

OA

D

Best for :

Economies of Scale

Experience/Exploitation

Best for :

Economies of Scope

Exploration

Avoiding Dependency

Pre-empting competition

Some potential benefits

Avoiding Dependency

ExplorationEconomies of Scope


Some Potential Benefits

Economy of Scale

Responsiveness

Main Risk

Responsiveness

Main Risk

Experience/ Exploitation

Overhead Cost

F

E

W

/

NA

R

R

O

W

Best for :

Low overheads

Responsiveness

Best for :

Responsiveness

Some Benefits

Experience

Some Benefits

Learning economies of ScopeAvoiding dependency


Main Risk

Dependency

Pre-emption by Competition

Lack of exploration opportunities

No economies of scale or scope

Main Risk

Few economies of scale or

experience benefits

FEW MANY

PRODUCTS


4/4

Fig 2 (Benefits and Risks of Different degrees of diversity)

Accessing Corporate level diversification Decisions: Corporate level diversity in some ways is easier to access than

business level diversity , since there are clear criteria that can be used to discriminate between effective and ineffective

portfolioeven if applying these criteria is far from simple in practice. According to porter to create shareholder value it

must meet three tests :

1) The Attractiveness Test : Diversification must be directed towards actual or potentially attractive industries2) The Cost of Entry Test : The cost of entry must not capitalize future profits3) The Better-Off- test : either the new unit must gain competitive advantage from its link with the corporation or

vice0versa ( I.e. Synergy must be present )

chapter 5 - div a

Documents