Strategy

1
Strategy Competitive Advantage in Diversified
Companies
2
Pros Cons of Single Diversified Businesses

• Single Business focus
• clear identity
• - risk
• Diversified Business spreading risk
• increased opportunity
• - complexity / mgt

3
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.

4
When to diversify?

• Diminishing growth prospects in present business
• Competencies capabilities readily transferable
• Resources managerial depth to expand
• Increases shareholder value 225
• What kind how much?
• Related / unrelated diversification / combo
• Small extent (lt10 tot.rev) or large extent
• Small no. of large businesses / large number of
  small businesses

5
3 Tests for Judging a Diversification Move

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

6
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.

7
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

8
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

9
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 lt/ sum
• - difficult to coordinate cyclical nature of ind.

10
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.

11
Diversification Strategies

• C. Strategies for entering new business
• (i) Acquisition quicker
• hurdles entry barriers
• - difficult to find right company
• Apply cost-of-entry test

12
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.

13
Diversification Strategies

• (iii) Joint Ventures
• Useful when
• Independent action uneconomical / risky
• Pooling resources results in synergy
• Only or best source of access

14
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.

15
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

16
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

17
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