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© The McGraw-Hill Companies, Inc., 1998
Irwin/McGraw-Hill
STRATEGY AND STRATEGY AND COMPETITIVE ADVANTAGE COMPETITIVE ADVANTAGE
IN DIVERSIFIED IN DIVERSIFIED COMPANIESCOMPANIES
CHAPTER 7
Screen graphics created by:Jana F. Kuzmicki, PhD, Indiana University Southeast
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© The McGraw-Hill Companies, Inc., 1998
Irwin/McGraw-Hill
Chapter Outline
When to Diversify Building Shareholder Value Entering New Businesses Related Diversification Strategies Unrelated Diversification Strategies Divestiture and Liquidation Strategies Corporate Turnaround, Retrenchment, and
Portfolio Restructuring Strategies Multinational Diversification Strategies Combination Diversification Strategies
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© The McGraw-Hill Companies, Inc., 1998
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Diversification and Corporate Strategy
A company is diversified when it is in two or more lines of business
Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business
A diversified company needs a multi-industry, multi-business strategy
A strategic action plan must be developed for several different businesses competing in diverse industry environments
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Stages in Transitioning from a Single Business to a Diversified Company
STAGE 1STAGE 1: Small single-business serving a regional market
STAGE 2STAGE 2: Geographic expansion
STAGE 3STAGE 3: Vertical integration (optional)
STAGE 4STAGE 4: Diversification--usually initiated when growth opportunities dwindle in the company’s present business
What next?
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When to Diversify?
When it makes sense to diversify depends on Growth potential in present business Attractiveness of opportunities to
transfer existing competencies to new businesses
Potential cost-saving opportunities to be realized by entering related businesses
Availability of adequate financial and organizational resources
Managerial expertise to cope with complexity of operating a multi-business enterprise
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© The McGraw-Hill Companies, Inc., 1998
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When Does DiversificationStart to Make Sense?
Strong competitive
position, rapid market
growth -- Not a good
time to diversify
Strong competitive position, slow market
growth -- Diversification is top
priority consideration
Weak competitive
position, rapid market
growth -- Not a good
time to diversify
Weak competitive position, slow market
growth -- Diversification merits
consideration
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© The McGraw-Hill Companies, Inc., 1998
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Strategic Management Principle
To create shareholder value, a diversifying firm must get into
businesses that can perform better under common management than they could perform operating as
independent stand-alone enterprises!
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Corporate Strategy Alternatives
Vertical Integration
Single Business
Concentration
Diversify into Related Businesses
Diversify into
Unrelated Businesses
Diversify into Related & Unrelated Businesses
Make new acquisitions
Divest weak units
Restructure portfolio
Retrench
Become a DMNC
Liquidate
Post-Diversification
Strategic Alternatives
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© The McGraw-Hill Companies, Inc., 1998
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Diversification Strategies
Entering new industries
Related diversification
Unrelated diversification
Divestiture and liquidation
Corporate turnaround, retrenchment, and restructuring
Multinational diversification
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Strategies for EnteringNew Businesses
Acquire existing company
Start-up new business internally
Joint venture with another company
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Concept: Economies of Scope
Arise from ability to eliminate costs by operating two or more businesses under same corporate umbrella
Exist when it is less costly for two or more businesses to operate under centralized management than to function independently
Cost saving opportunities can stem from interrelationships anywhere along businesses’ value chains
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Concept: Strategic Fit
Exists among different businesses when their value chains are sufficiently similar to offer opportunities
Offers competitive advantage potential of Lower costs Efficient transfer of
Key skills Technological expertise Managerial know-how
Use of a common brand name
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Types of Strategic Fit
Technology Fits
Distribution &Customer-
RelatedFits
Operating Fits
Managerial Fits
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Involves diversifying into businesses with
No strategic fit
No meaningful value chainrelationships
No unifying strategic theme
Approach is to venture into “any business in which we think we can make a profit”
Firms pursuing unrelated diversification are often referred to as conglomerates
What Is Unrelated Diversification?
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Basic Premise ofUnrelated Diversification
Any company that can be
acquired on good financial
terms and offers good
prospects for profitability is a
good business to diversify into!
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Acquisition Criteria For Unrelated Diversification Strategies
Can business meet corporate targets for profitability and ROI?
Will business require substantial infusions of capital?
Is business in an industry with growth potential? Is business big enough to contribute to the parent
firm’s bottom line? Is there potential for union difficulties or adverse
government regulations? Is industry vulnerable to recession, inflation, high
interest rates, or shifts in government policy?
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Attractive Acquisition Targets
Companies with undervalued assets
Capital gains may be realized
Companies in financial distress
May be purchased at bargain prices and turned around
Companies with bright prospects but limited capital
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Appeal of Unrelated Diversification
Business risk scattered over different industries
Capital resources can be directed to those industries offering best profit prospects
Stability of profits -- Hard times in one industry may be offset by good times in another industry
If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced
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Drawbacks of Unrelated Diversification
Difficulties of competently managing many diverse businesses
There are no strategic fits which can be leveraged into competitive advantage Consolidated performance of unrelated
businesses tends to be no better than sum of individual businesses on their own (and it may be worse)
Promise of greater sales-profit stability over business cycles seldom realized
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© The McGraw-Hill Companies, Inc., 1998
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How Broadly Shoulda Company Diversify?
Two questions should guide unrelated diversification efforts:
1. What is the leastleast diversification it will take to achieve acceptable growth and profitability?
2. What is the mostmost diversification that can be managed, given its added complexity?
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Diversification and Shareholder Value
RELATED DIVERSIFICATION
A strategy-driven approach to creating shareholder value
UNRELATED DIVERSIFICATION
A finance-driven approach to creating shareholder value
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Post-Diversification Strategies
Divestiture and liquidation
Corporate turnaround
Corporate retrenchment
Portfolio restructuring
Multinational diversification
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Multinational Diversification Strategies
Distinguishing characteristic
Diversity of businesses and diversity of national markets
Presents a big strategy-making challenge
Strategies must be conceived and executed for each industry, with as many multinational variations as is appropriate