Professional Documents
Culture Documents
IN DIVERSIFIED COMPANIES
8
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Review Questions
1. What do you mean by a diversified company? Make a list of ten
diversified companies in Bangladesh.
2. What are the situations that justify diversification of a company’s
business?
3. What are the approaches to diversification? Explain briefly.
4. Distinguish between related diversification and unrelated
diversification.
5. What do you mean by related diversification? What are the reasons
for some companies’ preferring related diversification to unrelated
diversification?
6. Discuss the grounds for choosing related diversification strategy by a
company.
7. When should a company concentrate on related diversification?
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Review Questions
1. What is meant by unrelated diversification?
2. What are the benefits that a company may enjoy if it follows
unrelated diversification strategy?
3. Distinguish between related and unrelated diversification strategies.
4. Discuss the situations when unrelated diversification strategy work
well.
5. Discuss the merits and demerits of unrelated diversification
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Review Questions
1. Make a list of the strategies that a company can follow for
diversifying its business.
2. What is internal start-up strategy?
3. What are the circumstances that warrant internal start-up for
expansion of business by a company?
4. What is acquisition strategy? Explain with examples.
5. When does an acquisition strategy work well?
6. Explain the concept of joint venture strategy. Can a joint venture be
international?
7. Discuss the advantages of joint venture.
8. What are the pitfalls of joint venture as a strategy for entering into
new business?
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Review Questions
1. Why do companies go for strategic alliance? Are there any demerits
of strategic alliance? Discuss.
2. How does a company gain outside the national boundary when it
enters into strategic alliance with other companies?
3. What are the major reasons for the failure of strategic alliance?
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If a business unit is
It was found that some companies had difficulties in managing a large
sold off to its own number of business units. They have divested certain business units to
management that is focus their resources on the core business. Divestiture strategy enables a
known as company to narrow down its diversification base through divesting some
“management business units that have no (or little) strategic fit with its main businesses
buyout”
or that have no ability to make substantial combination to the earnings of
the company.
2. Harvest Strategy
Also known as ‘asset reduction strategy’, harvest strategy entails
Harvest Strategy is decreasing the investment in a business unit and extracting the
known as ‘asset
reduction strategy.
investment as much as it can. The company tries to harvest all the returns
it can. It reduces the assets to a minimum. When a company adopts
harvest strategy, it halts investment in a business unit to maximize short
term cash flow from the unit. Subsequently, the unit is liquidated.
3. Liquidation Strategy
Liquidation strategy is
Liquidation strategy is the strategy of writing off a business unit’s
usually adopted when investment. This strategy is usually adopted when it becomes difficult to
it becomes difficult to find a buyer for a losing unit. Generally, the business units that are weak
find a buyer for a (financially or in terms of managerial performance) follow liquidation
losing unit. strategy. If turnaround is not possible, liquidation (or divestiture) strategy
is the last resort.
4. Turnaround Strategy
A company is a weak competitive position may apply turnaround
Turnaround strategy strategy. Turnaround strategy is the strategy of reverting a weak business
is the strategy of unit back to profitability. This strategy aims at restoring a losing business
reverting a weak unit to profitability. In order to make a poor company profitable,
business unit back to
profitability. management may redeploy additional resources, instead of divestment or
liquidation. However, the company must have enough resources and
capable managers to turn the business unit around. Lee Iacocca applied
turnaround strategy to regain the position of Chrysler Corporation (one
of the giant American car manufacturers) in 1990s and was tremendously
successful. This strategy works best when ‘the reasons for poor
performance are short term, the ailing businesses are in attractive
industries, and divesting the money-losers does not make long-term
strategic sense.’ Turnaround strategy may include the following actions:
a. Selling or closing down a losing unit having a poor prospect.
b. Changing the present strategy and adopting a different business-
level strategy.
c. Creating a new venture to earn greater returns.
d. Undertaking measures for cost reduction.
It may be noted that turnaround strategy can be applied for both a single-
business company and a diversified company.
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5. Restructuring Strategy
Restructuring strategy involves divestment of one or more business units
of a diversified company and acquiring news business units. Thus, the
business makeup of the diversified company takes a new shape. This
In Restructuring
strategy calls for reorganizing the business portfolio of the company. For Strategy ailing
this purpose, ailing business units are sold off and prospective new business units are
business endeavors are undertaken. For example, if a diversified sold off and
company, over a 4 or 5-year period time, sells off 2 units, closes down 3 prospective new
business endeavors
weak units, and adds 4 new lines of business to its business-portfolios,
are undertaken.
these efforts of the company can be called restructuring strategy.
Thompson and Strickland have identified seven conditions that prompt a
diversified company to undertake restructuring strategy:
a. When the long-term performance prospects of the company have
become unattractive.
b. When one or more of the company’s business-units have been
facing hard times.
c. When a newly-appointed CEO decides to restructure the
company.
d. When the diversified company wants to build up a strong
presence in a potentially attractive new industry.
e. When the company needs huge cash for acquiring a very
prospective business and so needs to sell off some units.
f. When environmental changes force the company to shake-up the
existing portfolio to improve corporate performance.
g. When changes in markets and/or technologies compel the
company to split the company into separate pieces rather than
remaining together.
6. Multinational Diversification Strategy
A company may follow a strategy of diversifying it business into foreign
markets. When a company faces hard times in the domestic market or Multinational
finds a high prospect in foreign markets, it may undertake a multinational diversification
diversification strategy. Multinational diversification strategy warrants a strategy warrants a
cross-country collaboration and strategic coordination. This strategy cross-country
collaboration and
becomes effective when it results in competitive advantage and increased strategic
profitability. coordination.
Multinational diversification offers several ways to build competitive
advantage:8
1. Full capture of economies of scale and experience curve effects.
2. Opportunities to capitalize on cross-business economies of
scope.
3. Opportunities to transfer competitively valuable resources from
one business to another.
4. Ability to leverage use of a well-known and competitively
powerful brand name.
5. Ability to capitalize on opportunities for cross-business and
cross-country collaboration and strategic coordination.
6. Opportunities to use cross-business or cross-country
subsidization to coutcompete the competitors.
Review Questions
1. What are the corporate strategies that a diversified company may
consider for improving its performance? Discuss them in a nutshell.
2. What do you mean by divestiture strategy? When should a company
follow this strategy?
3. Explain the harvest strategy, liquidation strategy and turnaround
strategy.
4. When is the turnaround strategy effective? What are the actions that
the turnaround strategy may include?
5. When does a company consider restructuring strategy? Discuss the
conditions that prompt a diversified company to undertake
restructuring strategy?
6. What is a multinational diversification strategy? What are the ways
that multinational diversification strategy offers for building
competitive advantage?
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(8)
Formulating
corporate strategy
(1)
Identification of
present
(7) corporate
Determining priority of strategy
resource allocation
(2)
Evaluating
(6) industry
Ranking DIVERSIFIED attractiveness
business-units COMPANY
(5) (3)
Resource-fit analysis Evaluating
unit strengths
(4)
Strategic-fit
analysis
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Review Questions
1. Make a list of the techniques for evaluating a diversified company.
2. Discuss the various techniques for effective analysis of diversified
companies.
NOTES
1. Strategic fit between two businesses exists whenever one or more
value chain activities of both the businesses are sufficiently
similar. Complete strategic fit occurs when the similar value chain
activities help in the transfer of expertise/technological know-how,
combining related activities of both, exploiting common use of a
brand-name and cross-business collaboration.
2. Hill and Jones, Strategic Management, op.cit. p. 297.
3. M. Lubakin and S. Chatterjee, “Extending modern portfolio theory
into the domain of corporate diversification: Does it apply?”
Academy of Management Journal, 37 (1), 1994, pp. 109-36.
4. Thomson and Strickland, op.cit., pp. 299-300.
5. Hill and Jones, op.cit. p. 327.
6. D.J. Ravenscraft, and F.M. Scherer, mergers, Sell-offs and
economic efficiency (Washington DC: Brookings Institution, 1987
7. Hills and Jones, op.cit. p. 328.
8. Thomson and Strickland, op.cit. pp. 308-309.
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