Professional Documents
Culture Documents
Diversification
Diversification
Market Development
Goal: find new markets Marketing expertise Mature products/services
Diversification
Goal: develop & introduce products/services to new or emerging markets (Most likely Unrelated Diversification)
Single business strategies have a number of advantages but also a number of risks -- all ones eggs in one basket The logic: to spread corporate risk across multiple industries to enhance shareholder value: SYNERGY (i.e., 2 + 2 = 5)
Diversification -- Motives
The risks of single business strategies are more severe for management than for shareholders of publicly traded firms. Diversification may be motivated by managements desire to reduce risk. Diversification only makes sense when it enhances shareholder value!
Attractiveness Test
Is the target industry attractive? (Use 5forces model to assess industry attractiveness) Does the diversification move fit with the grand strategy of the firm?
Better-off test
Does the diversification move produce opportunities for synergies? Will the company be better off after the diversification than it was before? How and why?
Acquisition
Most popular approach to diversification Quick market entry Avoids entry barriers: Technology Access to suppliers Efficiency / economies of scale Promotion Distribution channels
or
Acquire a struggling company at a bargain price
StartStart-Up
Appropriate when: You have time to launch Market moves slowly Internal entry costs lower than acquisition costs You already possess necessary skills Target industry is fragmented
Joint Ventures
Pooling resources to spread risk Achieving synergy from respective capabilities Leveraging one anothers experience Complicated; potential for conflicts if responsibilities, liabilities, & rewards not clearly delineated
Related Diversification
Businesses are distinct but their value chains possess strategic fit in operations, marketing, management, R&D. distribution, labor, etc. Therefore, they tend to exploit economies of scope Tend to (historically) outperform unrelated diversifications
Unrelated Diversification
No common linkage or element of strategic fit among SBUs -- i.e., no meaningful value chain interrelationships Strategic approach: venture opportunistically into attractive industries that have solid potential for financial returns Conglomerates Dominant logic: spreads businesses risk over multiple industries, stabilizing corporate profitability (in theory)
The essence of strategic management is to allocate resources to those areas that possess the greatest potential for future success
(1) How attractive are our current businesses? (2) With these businesses, what is our performance outlook for X years in the future? (3) If answers to (1) & (2) above arent satisfactory, what should we do to get out of some businesses, strengthen those remaining, & get into new businesses to boost our prospects for better performance?
BCG Growth-Share Matrix GrowthDimensions: Industry growth rate Relative market share position of the businesses
SBUs plotted as circles with area proportional to their contribution to overall corporate sales
Low
Question Marks
Cash Cows
Dogs
Explains why priorities for corporate resource allocation differ from SBU to SBU
G.E. 9-Cell Matrix 9Dimensions: Long-term industry attractiveness Business strength/Competitive position
SBUs plotted as circles with area proportional to the size of the industry, & a sector within each circle representing the SBUs market share in its industry
Strong
Average
Weak
H
Long-Term Industry Attractiveness
SBUs in 3 upper left cells get top investment priority SBUs in 3 middle diagonal cells merit steady investment to maintain & protect their industry positions SBUs in 3 lower right cells are candidates for harvesting or divestiture
Allows for intermediate rankings between high & low and between strong & weak Incorporates a wider variety of strategically relevant variables than the BCG matrix Stresses the channeling of corporate resources to SBUs with the greatest potential for competitive advantage & superior performance
Provides no guidance on specifics of SBU strategy Only suggests general strategic posture -- aggressive expansion, fortify-&-defend, or harvest/divest Doesnt address the issue of strategic coordination across related SBUs Tends to obscure SBUs about to take off or crash & burn -static, not dynamic
Area of each SBU circle is proportional to size of the industry; sectors denote SBUs market share in its industry
This matrix displays the distribution of the firms businesses across the various stages of industry evolution
Effectiveness
Doing the right thing; goal attainment Determine by the market Establishes what price you can command Measures: sales, market share, etc.
Efficiency
Doing the thing right Ratio of output to input Determines price you must charge Measures: operating profit, unit cost structure, etc.
Market Criteria
Future projection Reflects anticipated results Indicates investor confidence Measures: trend in stock price or cash value
Operational Criteria
Past & present Reflects actual results Indicates managerial competence Measures: ROE, ROI, ROA, market share, revenue, operating margin (profit), time-tomarket, inventory turns, quality, etc.