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STRATEGY AND COMPETITIVE ADVANTAGE IN DIVERSIFIED COMPANIES

CHAPTER 7 . STRATEGY AND COMPETITIVE ADVANTAGE IN DIVERSIFIED COMPANIES. Screen graphics created by: Jana F. Kuzmicki, PhD, Indiana University Southeast. Chapter Outline. When to Diversify Building Shareholder Value Entering New Businesses Related Diversification Strategies

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STRATEGY AND COMPETITIVE ADVANTAGE IN DIVERSIFIED COMPANIES

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  1. CHAPTER 7 STRATEGY AND COMPETITIVE ADVANTAGE IN DIVERSIFIED COMPANIES Screen graphics created by: Jana F. Kuzmicki, PhD, Indiana University Southeast

  2. 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

  3. 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 diverseindustry environments

  4. Stages in Transitioning from a Single Business to a Diversified Company What next? STAGE 1:Small single-business serving a regional market STAGE 2:Geographic expansion STAGE 3:Vertical integration(optional) STAGE 4:Diversification--usually initiated when growth opportunities dwindle in the company’s present business

  5. When to Diversify? • When it makes sense to diversifydepends 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

  6. 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

  7. 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!

  8. Corporate Strategy Alternatives • Make new acquisitions • Divest weak units • Restructure portfolio • Retrench • Become a DMNC • Liquidate Post-Diversification Strategic Alternatives Vertical Integration Diversify into Related Businesses Diversify into Unrelated Businesses Single Business Concentration Diversify into Related & Unrelated Businesses

  9. Diversification Strategies • Entering new industries • Related diversification • Unrelated diversification • Divestiture and liquidation • Corporate turnaround, retrenchment, and restructuring • Multinational diversification

  10. Strategies for EnteringNew Businesses Acquire existing company Start-up new business internally Joint venture with another company

  11. 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

  12. 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

  13. Types of Strategic Fit Technology Fits Operating Fits Distribution & Customer-Related Fits Managerial Fits

  14. What Is Unrelated Diversification? • Involves diversifying into businesses with • Nostrategic 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

  15. 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!

  16. 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?

  17. 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

  18. 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

  19. 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

  20. How Broadly Shoulda Company Diversify? • Two questions should guide unrelated diversification efforts: 1.What is the least diversification it will take to achieve acceptable growth and profitability? 2.What is the most diversification that can be managed, given its added complexity?

  21. Diversification and Shareholder Value • RELATED DIVERSIFICATION • A strategy-drivenapproach to creating shareholder value • UNRELATED DIVERSIFICATION • A finance-drivenapproach to creating shareholder value

  22. Post-Diversification Strategies • Divestiture and liquidation • Corporate turnaround • Corporate retrenchment • Portfolio restructuring • Multinational diversification

  23. Multinational Diversification Strategies • Distinguishing characteristic • Diversity of businesses anddiversity 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

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