Diversification

Is a process that:

● Improves the core business execution

● Enhances the unit’s structural position

● Increases the competitive advantage

● Creates value for the shareholder’s

Forms of Diversification
Vertical Integration

Is one where a corporation performs more than

one step of the process involved in
converting raw materials into a product
delivered and ready for consumption and the
integration is so efficient that
one business feeds the other.
Benefits of Vertical Integration

● Elimination or reduction of transaction costs

● Improved coordination

● Keeps inside counterparts honest and on their

toes
Limits to Vertical Integration

● May upset the minimum efficient scale of the

firm

● Reduces flexibility and makes products outdated

and non-competitive

● Makes firm susceptible to strikes

● Difficulties integrating different specializations

When to Integrate Vertically?

● Are our existing suppliers or customers meeting

the final consumer’s needs?

● How volatile is the competitive situation?

● Is it possible to “own” a business without actually

buying it?

● Will vertical integration enhance the structural

position of the business?
 Horizontal Diversification

Entails moving into more than one industry

For Example:
Retailing of FMCG Products and
Petroleum Products by Reliance
Why Horizontal Diversification?

● Better financial strength

● Expertise to run diverse business

● Economies of Scale

● Higher profitability
Case against Conglomerates?
● Conglomerate Discounts – stock sells less for
than the total of the individual stocks would sell
for

● Discount determined using P/E ratio – higher the

ratio more the value of stock

● Gave rise to the concept of Corporate Raiders –

Acquiring a conglomerate and then selling
individual parts to earn huge gains without
actually running the business even for a day
Takeover Premiums

● Takeover Premiums
Difference in the normal trading price of the
takeover’s target’s stock and the price required
to entice shareholder's to sell enough shares to
acquire controlling interest

● Risky as the corporate stock may become

worthless subsequently and lead to
conglomerate discount
Global Diversification

● Acquiring a global company or entering into

strategic alliance with a global partner

● Facilitates operations at a global level

● Helps launch in the global arena with ease

Means of Diversification

Acquisitions

Refers to purchase of a company that is

already in operation

● Facilitates quick diversification and

improvement in the value of stockholder’s
investment
Pre-acquisition Management
● Analyze the deal itself:
* Cost of Acquisition
* Benefits from the deal
* Financing of the deal
* Returns from the deal

● Analyzing the human, organizational and

cultural aspects of acquisition
Post-acquisition Management
• Determine potential ability of the firm to
increase competitiveness

• Actions needed include

* Setting stretching targets
* Define key top positions
* Pick the best people
* Commit adequate resources
* Anticipate and prioritize senior
management agenda
* Listen and transmit
Strategic Alliance

● Refers to arrangements in which corporations

join forces to form cooperative partnership
● Neither company owns the other – third entity
created
● Strengths of one offset the weakness of the other
● Coordination difficult due to differences in goals,
strategies, procedures and cultures
Avoiding conflict in Joint
Ventures
● Discuss the following:
* Mission of the new business
* Market’s it will serve
* Products it will offer
* Obligations of each partner
* Procedure for dissolving the venture
● Do not depend on the contract to make joint
venture successful
● Do not try to short change your partner
Internal Development
● Refers to building new businesses more or less
from ground up – Corporate
Entrepreneurship

● Four Strategies adopted:

* Act as Venture Capitalists
* New Venture Incubator
* Idea generation and transfer program
* Intrapreneurialship
Benefits of Diversifications

• Capitalizing on Core Competencies

• Increasing market power
• Sharing Infrastructures
• Balancing financial resources
• Maintaining Growth
• Reducing Risk
The Growth Share Matrix

● Analysis projects two factors that predict

success
* The growth rate of the market within
which the business competes
* Its share of that market

● Entities in fast growing markets need more cash

than they have and vice versa
The Growth Share Matrix
Market Growth
High Low

High
Star Cash
Cow
Market Share

Low Problem
Dog
Child

Source: BCG
Analysis of Matrix

● Cash Cows

* Expected to produce more cash than can be

usefully employed in the house

* Businesses often “milked” to finance other

businesses that influence the success of
the Corporation
● Dogs
* Are businesses holding small shares of
slow growing or declining markets
* Unlikely to ever become important sources of
cash generation
* Are great users of cash for which there is little
return
* Adopt “Harvest” strategy – Do not invest ; shift
cash flows to more promising business
● Problem Child
* Low market shares of rapidly growing markets
* Represent a potential opportunity
* Increase in their market share can make them
cash cows but failure can make them dogs
* Strategy – investing and exploiting
opportunity or not investing and missing
opportunity
● Stars
* Hope of the future
* Hold large market share currently
* Cash flows minimal or even negative
* Strategy to nurture them, maintain their
health and wait for the market to slow to
increase cash flows
* Cash hungry start get transformed into cash
cows that can be milked to nurture another
generation of businesses
Competitive Strength Matrix:

● BCG fails to consider other issues affecting cash

flow other than market growth and market
share

● CSM depicts various strategic issues beyond

simply growth

● Provides a useful bridge between strategy

formulation at business and corporate level
 Stage of Market Life Cycle
Introduction Growth Maturity Decline

vely
H ssi
Competitive Strength

High S e
PU ggr
s tA
ve N ely
In O
I tiv
Moderate
U T ec
e l
CA st S
nve ER
I G st
Low AN ve
D a r
H
Industry Attractiveness – Business
Position Matrix
● Considers the matters discussed in other frameworks
and incorporates other considerations
● Facilitates subjective evaluation of overall industry
attractiveness and business position
● Industry Attractiveness is the subjective assessment
based on broadest possible range of external
opportunities and threats beyond the strict control of
management
● Business Position is assessment of how strong a
competitive advantage is created by the firm’s internal
strengths and weaknesses
 Industry Attractiveness
High Medium Low

High Invest Selective Up or

Growth Out
Business Position

Selective Up or
Moderate Growth Harvest
Out

Low Up or
Out Harvest Divest
Factors Considered
Industry Attractiveness: (d) Economic Factors:
(a) Bargaining Powers of Suppliers: Scale Volatility
Relative Size of players Cyclicality of Demand
Numbers of each Market Growth
Importance of purchases from or sales to Capital Intensity
Ability to integrate vertically
(e) Financial Norms:
(b) Threat of Substitute Products/ New Average profitability
Entrants: Typical Leverage
Technological Maturity Credit Practices
Diversity of the Market
Barriers to Entry (f) Socio Political Considerations:
Flexibility of Distribution System Government Regulation
Community Support
(c) Nature of Competitive Rivalry: Ethical Standards
Number of Competitors
Size of Competitors
Price Wars
Competition on Multiple dimensions
Factors Considered
(d) Financial Strength:
Industry Attractiveness: Solvency
Liquidity
(a) Level of Differentiation: BEP
Advertising Effectiveness
Cash Flows
Product Quality
Company Image Profitability
Patented Products Growth in Revenues
Brand Awareness
(e) Human Assets:
(b) Cost Position: Turnover
Economies of Scale Skill Level
Manufacturing Costs Relative Wage
Overheads Morale
Scrap / Waste / Rework Managerial Commitment
Labour Rates Unionization
Patented Processes

(c) Response Time: (f) Public Approval:

Manufacturing Flexibility Goodwill
Time needed to introduce new products Reputation
Delivery Time Image