Strategy & Competitive Advantage in Diversified Companies

Pros & Cons of Single & Diversified Businesses

Single Business: + focus + clear identity - risk

Diversified Business: + spreading risk + increased opportunity - complexity / mgt

Strategy & Competitive Advantage in Diversified Companies

Challenge is to craft a multi-business, multi-industry strategy. When to diversify? What businesses to enter? How to enter them? Actions to boost the combined performance / competitive advantage of businesses? Prioritising & steering corporate resources in right directions.

When to diversify?
Diminishing growth prospects in present business Competencies & capabilities readily transferable Resources & managerial depth to expand Increases shareholder value 2+2=5 What kind & how much? Related / unrelated diversification / combo Small extent (<10% tot.rev) or large extent Small no. of large businesses / large number of small businesses

3 Tests for Judging a Diversification Move

The industry attractiveness test The cost-of-entry test The better-off test

Diversification Strategies
A. Related Diversification Strategies

Common approaches: Entering business where salesforce, advertising, distribution facilities may be shared. Closely related technologies / expertise Transferring know-how from one business to another or brandname & reputation to new product / service Acquiring new business that will uniquely help firms position in existing business. The greater the relatedness the bigger the window for creating competitive advantage.

Diversification Strategies
Advantages of Related Diversification...
+ Degree of unity in business activities + Strategic fits - technology, operating, distribution / customer related, management +Economies of scope
IMPORTANCE OF SKILL AT EXPLOITING LINKAGES

Diversification Strategies
B. Unrelated Diversification Strategies Diversifying into any business with a good profit potential (usually through acquisition) Screening nb: targets for profit & ROI degree of investment required industry growth potential impact on bottom line of parent co.

Often taking advantage of undervalued co.s / lack capital

Unrelated Diversification Strategies

Advantages & Disadvantages + diverse spread of risk + optimal ST use of financial resources + more stable corporate profits + increased shareholder wealth - complexity / managerial expertise - without c.ad. of fits whole may be </= sum - difficult to coordinate cyclical nature of ind.

Unrelated Diversification Strategies

Unrelated diversification is a financial approach to creating shareholder value; related diversification is a strategic approach.
To succeed - achieve consistently high ROI - negotiate gd. acquisition prices - sell at right time - shift resources at right time - manage better than if indep.

Diversification Strategies
C. Strategies for entering new business

(i) Acquisition: + quicker + hurdles entry barriers - difficult to find right company
Apply cost-of-entry test

Diversification Strategies
(ii) Internal Start-up: + Good fit & control - Entry barrier - Capital investment - Speed Attractive when ample time, aggressive response unlikely, cost of entry lower than acquisition, skills exist in-house, new capacity wont over-supply, industry fragmented.

Diversification Strategies
(iii) Joint Ventures

Useful when Independent action uneconomical / risky Pooling resources results in synergy Only or best source of access

Diversification Strategies
D. Divestiture & Liquidation Strategies
due to change or misfit If we werent in this business today would we want to get into it now? When is a turnaround possible or not? Sell - partial / outright Early liquidation better than bankruptcy / depletion.

Diversification Strategies
E. Corporate turnaround, retrenchment & portfolio restructuring strategies
Poor performance in one or more business units

Turnaround - problems are ST, ind. is attractive Retrenchment - smaller no. of businesses Restructuring - change the mix of businesses

Diversification Strategies
F. Multinational Diversification (DMNCs)
Diverse businesses & national markets - Complexity of strategising across businesses & countries + opportunity for strategic coordination / sustainable c.ad. not open to companies who operate only domestically

Diversification Strategies
Sources of Advantage for a DMNC Fits / Economies of scope - expertise, technology, worldwide distribution, bargaining power, leveraging brandname.
Cross subsidisation / multiple profit sanctuaries Fit advantages more reliable & sustainable than cross-subsidisation