Chapter IX

DIVERSIFICATION

 

Crafting strategy for diversified companies has four elements:

bullet Picking new industries to enter and deciding on the means of entry
bullet Initiating actions to boost combined performances of existing businesses
bullet Leverage cross business value chain relationships and strategic fits into company advantage
bullet Establishing investment priorities

 

I. When to Diversify

bullet Depends on growth opportunities and opportunities to utilize resources, experience and capabilities in other markets
bullet Risks of concentrating in single business: all eggs are in one basket
bullet Factors that signal when to diversify:
bullet When technology and products complement existing business
bullet Opportunity to add value by including complementary products
bullet Cost saving opportunities
bullet When it has powerful and well known brand names that can be transferred

Note: Justification for diversification is to build shareholder value (1+ 1= 3)

 

II.) Three Tests for Judging a Diversification Move

bullet Attractiveness test: does industry provide a good ROI?
bullet Cost of entry test: are entry barriers high or low?
bullet Better off test: must bring competitive advantage to new business and increase shareholder value (1+ 1 = 3)

 

III.  Strategies for Entering New Businesses

bullet Acquisition of existing business: must find the right business
bullet Internal start-up: must have time and resources to launch the new business, incumbents should be perceived as low in responding, must have low cost relative to acquisition, must have requisite skills, etc.
bullet Joint ventures:  good for high risk projects, when pooled resources are needed, etc.

 

IV. Diversification Strategies

1.) The Case for Related Diversification (See Fig. 9.2, page 243)

bullet Value chains must have strategic fit
bullet Technology fit: can you share R&D, etc.?
bullet Supply chain fit: Greater bargaining power with suppliers?
bullet Manufacturing fit: to obtain economies of scale and scope
bullet Distribution and customer related fit: e.g. single sales force, billing, promo tie ins, etc.
bullet Sales and marketing fit:  can same marketing strategies be used to save costs?
bullet Management fit: can management transfer its expertise?

2.) The Case for Unrelated Diversification

Companies that may hold attractiveness for unrelated acquisition are those with undervalued assets, those that are financially distressed, those that have high growth prospects, but are short on cash, etc.

bullet Pros of unrelated diversification
bullet Risk is spread out
bullet Financial resources can be employed to maximum advantage
bullet Profit may be more stable
bullet Shareholder wealth may be enhanced
bullet Cons of unrelated diversification
bullet Management may not have knowledge of business
bullet Consolidated performance may be no more than if each were on their own
bullet In practice, few businesses have opposite up and down cycles

Note: Unrelated diversification is more of a financial than strategic approach to creating shareholder value since there are no strategic fit opportunities.

 

V. Evaluating The Strategies Of Diversified Companies

I.) Steps (1 through 6)

1.)  Evaluating Industry Attractiveness (3 Tests)

bullet Evaluate all businesses in portfolio
bullet Market size and growth
bullet Intensity of competition
bullet Seasonal and cyclical factors
bullet Emerging opportunities and threats
bullet Resource requirements
bullet Strategic fits/degree of risk, etc.
bullet Evaluate all businesses relative to each other
bullet Determine industry attractiveness measures, weights, and sum (page 333)
bullet Evaluate all industries as a "group"
bullet Substantial amount of revenue must come form businesses in attractive industries
bullet See table 9.1, page 256

 

2.)  Evaluating the Competitive Strength of Each of the Company's  Business Units (See table 9.2, page 259)

bullet Market share (market share/market share of next largest firm)
bullet Ability to compete on cost
bullet Ability to match rivals on quality/service
bullet Ability to exercise bargaining leverage with key suppliers/customers
bullet Ability to match/beat rivals on key product attributes
bullet Caliber of alliances and partnerships with buyers/suppliers
bullet Technological/innovativeness capabilities
bullet How competencies match industry's key success factors
bullet Use the nine cell matrix (Figure 9.5  -- page 261)
bullet See bubble:  (% revenue to total)
bullet Two axes:  x = competitive business position, y = long term industry attractiveness

 

3.) Checking for Competitive Advantage Potential

bullet Value chain match-ups (Fig. 9.6, page 264)
bullet Can company transfer skills/technology?
bullet Can company combine performance of related activities?
bullet Can company use common brand name, etc.?
bullet Can company create valuable new competitive capabilities?

 

4.)  Checking for Resource Fit

bullet Check the financial resource fit:  Analyze cash flows and identify cash hogs and cash cows
bullet Check the competitive and managerial resource fits
bullet Are resource strengths matched to KSF's?
bullet Does management have the necessary expertise?
bullet Can competitive capabilities be transferred?
bullet Does the company need to upgrade its resources/capabilities?

 

5.) Ranking the Business Units on the Basis of Performance and Priority for Resource Allocation

bullet Business units with the brightest profit and growth prospects should head list for support

 

6.) Crafting New Strategic Moves to Improve Overall Corporate Performance

bullet Five categories of actions:
bullet Stick with existing units
bullet Make new acquisitions
bullet Divest certain businesses
bullet Restructure company
bullet Pursue multinational diversification (See fig. 9.7, page 268)

 

 VI.  A Company's Four Main Strategic Alternatives After it Diversifies

bullet  Broaden the base
bullet Divest and retrench
bullet Restructure the lineup
bullet Pursue multinational diversification
bullet By capturing economies of scope and scale
bullet By capitalizing on opportunities to transfer valuable resources form business/business and country/country
bullet By leveraging use of well known brand name
bullet Etc.

Next Steps:  Please review the PowerPoint Overview slides (40-109) for this chapter.  Then proceed to the Discussion Area.

 
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