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Strategy and Competitive Advantage in Diversified Companies

Strategy and Competitive Advantage in Diversified Companies. Strategy Tasks. Picking the industries to enter and how to enter Actions to boost the combined performance of the businesses Leverage business relationships into a competitive advantage Establish investment priorities.

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Strategy and Competitive Advantage in Diversified Companies

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  1. Strategy and Competitive Advantage in Diversified Companies

  2. Strategy Tasks • Picking the industries to enter and how to enter • Actions to boost the combined performance of the businesses • Leverage business relationships into a competitive advantage • Establish investment priorities

  3. When to Diversify • There are organizational, managerial and strategic advantages to focusing on a single business • Consider diversification when firm begins to run out of opportunities in its main business • Risk is putting all your eggs in one basket

  4. When to Diversify • Diminishing growth prospects in current business • Opportunities to • Add value to customers • Gain competitive advantage • Transfer existing competencies • Cost saving opportunities • Have financial and organizational resources

  5. When to Diversify • Justifiable only if it builds shareholder wealth • The 3 tests to judge • Industry attractiveness • Cost-of-entry • Better-off

  6. Related Diversification • Businesses share competitively valuable relationships • Transfer expertise or capabilities • Combining activities lowers costs • Exploit common brand name • Collaboration creates strengths • Develops synergy

  7. Related Diversification • Strategic fits along the value chain • Upstream • Company • R & D and technology • Sales and marketing • Manufacturing • Managerial and support • Downstream • Economies of scope

  8. Unrelated Diversification • Acquisition of “good” companies • Targets are usually judged on their ability to provide financial gain • Companies with undervalued assets • Companies in financial distress

  9. Pros Diversify risk over several industries Invest capital to best advantage Stabilize profits Shrewd acquisitions can enhance shareholder wealth Cons Unreasonable expectations for managers Corporate meddling Stabilization of profits is not realized in practice Unrelated Diversification

  10. Unrelated Diversification • No synergies are produced • Exceptional managerial talent is required to enhance shareholder wealth • Consistent success is difficult to achieve • Historically most have failed

  11. Entering New Businesses • Acquisition of an existing business • Vertical integration • Internal development • Joint ventures

  12. Diversified Company Strategies • Enter into additional businesses • Retrenching and divestiture • Restructure the portfolio of businesses • Multinational diversification • Related DMNC can outperform rivals • Higher than average overall returns • Lower than average overall risk

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