diversification and corporate strategy
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Corporate Strategy and Diversification
Corporate Level Strategy is thestrategy for a company and all of itsbusiness units as a whole.
Diversification is the primary approachto corporate level strategy.
Diversified firms vary according to the: Level of diversification. Degree of relatedness.
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Why do Firms Diversify?
When they have excess resources,capabilities, and core competencies thatmay be put to multiple uses.Diminishing growth prospects in thepresent industry.There are cost saving opportunities.There are opportunities to captureStrategic Fits advantages.There are opportunities to captureFinancial Economies.Spreading business risk.
Leverage of brand name.
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Making the DiversificationDecision
Decision to diversify depends on thefollowing two parameters:
Level and Degree of Diversification Number and Relatedness
Mode of Diversification Merger and Acquisition Strategies,
Internal Development, Joint Venture
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Diversification-CorporateStrategies
ConcentrationVertical IntegrationDiversification:
a. UnrelatedDiversification
b. Related Diversification
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Advantages of Concentration
Allows a firm to master one business: In-depth knowledge. Easier to achieve competitive advantage.
Organizational resources under lessstrain.Prevents proliferation of Managementlevels and staff functions.Sometimes found more profitable thanother strategies (dependent on thenature of the industry).
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Disadvantages ofConcentration
Risky
in unstableenvironments.
Product obsolescence andindustry maturity.
Cash flow problems.
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The Vertical Integration Supply Chain
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RawMaterialsExtraction
PrimaryManufac-turing
Final
ProductManufac-turing
Whole-saling Retailing
Vertical Integration : The extent to whichan organization is involved in multiplestages of the industry supply chain.
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When to Vertically Integrate?
Common reasons for VerticalIntegrationIncreased control over quality of
supplies or the way the product ismarketed.Better information about supplies or
markets.Greater opportunities for differentiationthrough coordinated efforts.
Opportunity to make greater profits by
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Unrelated Diversification
Large, highly diversified firms arecalled CONGLOMERATES.
Not a high performing strategy formost firms but with a few notableexceptions.
Difficult for the top Manager tounderstand and appreciate the coretechnologies, key success factors, andspecial requirements of each
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Related Diversification
Based on tangible and intangiblerelatedness.
At conceptual level can lead to synergy,
which is often illusive .
Often a higher performing strategy thanthe unrelated diversification (lower risk
and higher profitability).
Can lead to corporate-level distinctivecompetencies giving an edge overcontemporaries.
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Combination of Related-Unrelated Diversification
StrategiesDominant-Business Firms One major/core business accounting for 50 - 80
percent of revenues, with several small related orunrelated businesses accounting for remainingrevenues.
Narrowly Diversified Firms Diversification includes a few (2 - 5) related or
unrelated businesses.
Broadly Diversified Firms Diversification includes a wide collection of eitherrelated or unrelated businesses or a mixture ofbusinesses.
Multi-Business Firms
Diversification portfolio includes several unrelatedgroups of related businesses
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STRATEGIES FOR ENTERINGINTO NEW BUSINESSES
Acquisition Internal newventure (start-up)
Joint ventureMerger
Diversifying intoNew Businesses
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Strategy of a DiversifiedCompany Evaluation
ParametersStep1 : Assess attractiveness/worth of eachindustry firm competing with each other.
Step 2 : Assess competitive strength of firms business units.
Step3 : Check competitive advantage potential ofcross-business strategic fits amongbusiness units.
Step4 : Check whether firms resources fit
requirements of present businesses.Step 5 : Rank performance prospects of businessesand assign a priority for resourceallocations
Step 6 : Craft new strategic moves to improve
overall performance of the company.
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Strategy Options for a AlreadyDiversified Firm
Stick withthe ExistingBusinessLineup
Broaden theDiversificationBase with NewAcquisitions
Divest andRetrench toa Narrower downtheDiversificationBase
Restructurethrough
DivestituresandAcquisitions
Strategy Options for aAlready Diversified Firm
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Why Firms Expand Globally?
Gain access to new customers and markets. Achieve lower costs and enhancecompetitiveness.
Capitalize on the corecompetencies/expertise of the Firm.Spread business risk across wider market
base. Access to raw materials, machinery,manpower etc. at low price/cost.
Minimize exchange rate fluctuations.
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Going Global - Cross Country DifferencesPoints to Ponder
Cultures and lifestylesMarket demographicsMarket conditions - Growth rate Distribution systems/channels Need for responsiveness/CSR Union
Carbide (Bhopal)Location/home ground advantage/home
sicknessFluctuating currency exchange ratesHost government restrictions/SOPs andreservations backward/hilly/tribal/border
and educationally backward minority
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Diversification Methods
Internal VenturesMergers and
AcquisitionsJoint Ventures
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Internal Ventures
Internal ventures make use of the research anddevelopment programs of the organization as it-
Provides high level of control over theventureProprietary information is not shared withother firms
All profits are retained by the venturingcompany
Disadvantages of internal ventures :
Risk of failure is highTakes a lot of time
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Mergers and Acquisitions
Mergers and acquisitions aresometimes seen as a way to buy innovations rather than producing in-house . Acquisition and mergersneed knowledge and skills.
M & A Strategies are:Fastest way to enter new markets,
Acquire new products or services,Learn new technologies,Facilitates vertical integration,Broaden the markets geographically penetration and/ormarket mix with more/high profitmotives, andSuits to the corporate image and itsoverall branding.
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Mergers and Acquisitions
Most research indicates that mergersand acquisitions perform poorly :
High premiums
Increasedinterest costson outstanding
loans or debts High advisory orconsultancyfees
Poison pills
High turnover
Managerialdistraction
Less innovation
Lack of strategic fit Increased risk offailure
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Mergers that Dont Work
Large or extraordinary debt/loan
Overconfident or incompetent
ManagementEthical concerns
Changes in Top Management Team
and/or Organizational Leadership
Inadequate analysis (due diligence) Diversification away from the firms core
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Mergers that WorkStrong relatedness of the firmsFriendly negotiations across the table withouta third party interventionLow-to-moderate debt
Continued focus on core strengths of firmCareful selection and negotiations only withthe target firmsStrong cash positionFirm cultures and management styles aresimilarSharing resources across companies
optimal utilization/judicious use
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STRATEGIC MANAGEMNT
GLOBALIZATION Why Going Global The Basic
Reasons
1. Homogeneity of Demands.2. Spread Research and
Development Costs.3. Increased Market Size.4. Rising Economies of Scale
cutting costs.5. Favorable Government Policies.6. Exploit Local Advantages.
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o ng o a s s nvo ve Failure to understand Foreign
Customers Preferences.Failure to Appreciate the Level,
Intensity and Complexities ofCompetitions in GlobalMarkets.
Failure to Understand HostCountrys Rules of the Game.Failure to Understand the
Political Risks and
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o ng o a za on re-requisites
Learn new or other languages with proper ascent.
Understand host countrys laws, rules, regulations,systems and procedures restrictions on foreigninvestments etc.
Any specific benefit offered by the host country lowtax rates, tax holiday, rent free land, low-interest or no-interest loans, subsidized energy and transportationcost and well developed infrastructure.
Ability to deal with volatile currencies. Ability to face political risks and/or uncertainties.Redesign products to suit the needs of differentsegments of customers and the expectations of theirtraditions, rituals and cultural environment.Cost effective place.
Availability of large market for goods and services.
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GLOBAL EXPENSION
STRATEGIES Standardize ProductsLocate Plant to maximize System-wide
Advantages.Leverage Technology across Multiple
Markets.Undertake World-wide Marketing Efforts.Compete with Rivals through Cross-subsidization.
Product Adaptation.Do value-addition locally.Use local Distribution Channels.Strongly Global Image.
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ACQUIRING/BUILDING
COMPETITIVE ADVANTAGE HOW?
Strategic route for acquiring/buildingcompetitive advantages are -
Must innovate and continue to innovate,and master the art of change. Maintainflexibility, continuously improve quality,and beat competition through innovative
products and services.
Integrate horizontally and vertically togarner optimal benefits.
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Be open for alliances, mergers andacquisitions to climb up the value chainand survive in the market.
Focus on research and development forproducing unique ideas and methodsleading to new and improved productsand services.
Create entry barriers in terms of largesize, low investment, substantial costadvantage, formidable distributionnetwork, powerful brand (Bajaj Auto,Maruti Udyog, Asian Paints, TELCO,Thermax etc.)
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CORE COMPETENCY
Certain long lasting and uniquecompetitive advantages that can notbe easily imitated by the competitors.
Such core competencies put the firmahead of others as a winner on mostoccasions.
Acquire core competence throughheavy investments in technology,
research and development followed by
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Core Competency - ExamplesHonda Engine design and technology
3M Research and development especially insubstrates, coatings and adhesives.
Dupont Chemical Technology
Sony Miniaturization, micro-processordesigns
Xerox Research strength in material science, `mechanics and optics
NEC (Japan) Computing, communications andcomponents.
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Core Competency - Attributes
Provides access to the Firm to theimportant markets areas and/orsegments/pockets.
Contributes significantly to customers
satisfaction, and the benefits in theend products.
Proves difficult for competitors toi i