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MODULE 7

MODULE 7. CORPORATE DIVERSIFICATION STRATEGIES. MODULE OUTLINE. From single-business to Diversification Building Shareholder Value Diversification Strategies Related Diversification Strategies Unrelated Diversification Strategies Divestiture and Liquidation Strategies

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MODULE 7

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  1. MODULE 7 CORPORATE DIVERSIFICATION STRATEGIES

  2. MODULE OUTLINE From single-business to Diversification Building Shareholder Value Diversification Strategies Related Diversification Strategies Unrelated Diversification Strategies Divestiture and Liquidation Strategies Corporate runaround,Retrenchment, and Portfolio Restructuring Strategies Multinational Diversification Strategies Combination Diversification Strategies

  3. CORPORATE DIVERSIFICATION & CORPORATESTRATEGY A diversified firm is a COLLECTION of individual businesses Diversification makes corporate strategy- Making a bigger picture exercise than crafting strategy for a single business In a diversified firm, corporate managers Must craft a MULTI-BUSINESS, MULTI-INDUSTRY strategy action plan for a number of different businesses competing in diverse industry environments

  4. FROM SINGLE-BUSINESTO DIVERSIFICATION STAGE 1 Most firms begin as small single- business enterprises serving a local or regional market STAGE 2 Geographical expansion STAGE 3 Vertical integration STAGE 4 As growth slows, strategic options include : Take market from rivals Focus on diversification

  5. MAJOR GROWTH STRATEGIES( The Growth Matrix) Growth via Market Penetration (Concentration) Growth via Market Development Growth via Product Development Growth via Diversification Related ( “ Concentric” ) Diversification Unrelated (“ Conglomerate”) Diversification

  6. MAJOR GROWTH STRATEGIES(The Growth Matrix) Growth via Market Penetration (Concentration) Growth via Market Development Growth via Product Development Growth via Diversification Related ( “ Concentric”) Diversification Unrelated (“ Conglomerate”) D

  7. MAJOR GROWTH STRATEGIES(The Growth Matrix) Growth via Market Penetration (Concentration) Growth via Market Development Growth via Product Development Growth Via Diversification Related (“ Concentric”) Diversification Unrelated (“Conglomerate”) Diversification

  8. MARKET PENERATION (Same Products, Same Markets) When current markets are not saturated with your particular products/services When the usage rate of present customers could be significantly increased When the market shares of some major Competitors have been declining while total industry Demand has been rising When the correlation between sales and marketing Expenditures has historically been high When increased economies of scale provide major competitive Advantages

  9. MARKET DEVELOPMENT(Same Products, New Markets) When new channels of distribution are available that are reliable, inexpensive, And of good quality when an organization is very successful at what it does When new untapped or unsaturated markets markets exists When the firm has the needed capital and human resources to manage expanded operations When an organization an organization’s basic industry is rapidly becoming global in scope

  10. PRODUCT DEVELOPMENT (New Products, Same Markets) When the has successful products that are in the product life cycle (I.e. , attract satisfied customers to try new, improved products as a result of their prior experiences) When an organization competes in an industry that is characterized by rapid technological change when major competitors offer better quality products at competes in a high-growth industry when an organization has especially strong research and development capabilities.

  11. STRATEGIC MANAGEMENT PRINCIPLE Diversification doesn’t need to become a strategic priority until a company begins to run out of growth opportunities in its core business!

  12. COMPETITIVE STRENGTHS OF A SINLE BUSINESS STRATEGY Less ambiguity about “ who we are” Energies of firm directed down one path Entrepreneurial efforts focused on keeping strategy responsive to industry change Less chance limited resources will be thinly stretched Managers maintain hands-on contact with core business

  13. COMPETITIVE STRENGTHS OF A SINGLE BUSINESS STRATEGY Dependence on one business provides incentive position Full force of firm’s resources used to become better at what firm does important competencies more likely to emerge Higher probability innovative ideas will emerge

  14. RISK OF A SINGLE BUSINESS STRATEGY Putting all firm’s “ eggs” in one industry basket If industry stagnates, then Firm’s growth rate tougher to sustain Profits harder to achieve Changing customer needs, Technological innovation, or new substitutes can Undermine a single-business firm

  15. WHEN DOES DIVERSIFICATION START TO MAKE SENSE? WHEN to DIVERSIFY depends on Firm’s competitive position AND Remaining opportunities in home base industry

  16. WHEN DOES DIVERSIFICATION START TO MAKE SENSE?

  17. WHY DIVERSIFY? To build SHAREHOLDER VALUE A diversification move is capable of increasing SHAREHOLDER VALUE if it passes 3 tests: Attractiveness Test Cost of Entry Test Better-Off Test

  18. 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 enterprise.

  19. DIVERSIFICATION STARTEGIES Entering new industries Related diversification Unrelated diversification Divestiture & Liquidation Corporate turnaround, Retrenchment , & restructuring Multinational diversification

  20. STRATEGIES FOR ENTERINGNEW BUSINESSES Acquire existing firm in target industry Start new company internally Form joint venture

  21. ACQUIRING AN EXISTING COMPANY Most popular approach to diversification Advantages Quicker entry into target market Hurdling certain entry barriers Technological inexperience Gaining access to reliable suppliers Being of a size to match rivals in terms of efficiency & costs Getting adequate distribution access

  22. DIVERSIFICATION VIAINTERNAL START UP Ample time exists Incumbent firms slow in responding It involves lower costs than acquiring existing firm Firm already has most of needed skills Additional capacity will not adversely impact supply-demand balance in industry New start-up does not have to go head-to-head Against powerful rivals.

  23. DIVERSIFICATION VIA JOINT VENTURES Uneconomical or risky to go it alone Pooling competencies of two partners Provides more competitive strength Foreign partners needed to surmount import quotas Tariffs Nationalistic political interests Cultural roadblocks

  24. DRAWBACKS OF JOINT VENTURES Raises questions about- Which partner will do what & Who has effective control Potential conflicts Sourcing of components Exporting Whether operations should conform to foreign firm’s standards or to local preferences Control over cash flows & profits

  25. WHAT IS RELATED DIVERSIFICATION? DEFINITION Diversification is RELATED When a firm has several lines of business that, although distinct, possess some kind of STRATEGIC FIT

  26. WHAT IS RELATEDDIVERSIFICATION? Principle What makes related Diversification attractive is the opportunity to turn Strategic fit into competitive Advantage!

  27. RELATED DIVERSIFICATION & STRATEGIC FIT STRATEGIC FIT be based on Shared technology Common labor skills Common distribution channels Common suppliers & raw materials sources Similar operating methods Similar kinds of managerial know-how Ability to share common sales force Customer overlap Any area where meaningful sharing opportunities exist in businesses’ value chains

  28. COMMON APPROACHES TO RELATED DIVERSIFICATION Entering businesses where sales force, advertising, & distribution activities can be shared. Exploiting closely related technologies Sharing manufacturing facilities Transferring know-how & expertise from one Business to another Transferring firm’s brand name & reputation with Customers to a new product/service Acquiring new businesses to uniquely help firm’s position In existing businesses.

  29. APPEAL OF RELATED DIVERSIFICATION Allows firm to maintain unity in business activities & gain benefits of skills transfer or cost sharing while Spreading risks over broader base Exploits what firm does best & allows transfer of core competencies from one business to another Helps achieve ECONOMIES OF SCOPE

  30. APPEAL OF RELATED DIVERSIFICATION Strategic fits among related businesses Offer competitive advantage potential of Lower costs via sharing common resources & combining related activities efficient transfer of Key skills or core competencies Technological expertise or Managerial know-how Common use of same brand name

  31. CONCEPT: ECONOMIES OF SCOPE Arise from ability to eliminate costs by Operating two or more businesses under same corporate umbrella Exist whenever it is less costly for two or more businesses to operate under centralized management than to function independently. Cost savings opportunities can stem from interrelationships anywhere along businesses’value chains

  32. CONCEPT: STRATEGIC FIT Exists when different businesses have sufficiently related value chains that permit Transferring skills & expertise from one business to another Combining performance of related activities so as to reduce costs Presence of strategic fit in a diversified firm’s portfolio, along with corporate management’s skill in capturing benefits of the interrelationships Makes related diversification capable Of being a2+2=5 phenomenon

  33. TYPES OF STRATEGIC FIT Market-Related Fits Operating Fit Management Fit

  34. MARKET-RELATED FITS Arise when value chains of different businesses overlap so products can be Used by same customers Marketed & promoted in similar ways Distributed through common dealers & retailers

  35. TYPES OF MARKET-RELATED FITS Common sales force to call on customers Advertising related products together Use of same brand names Joint delivery & shipping Joint after-sales service & repair work Joint order processing & billing Joint promotional tie-ins Cents-off couponing,trial offers, trial offers, specials joint dealer networks

  36. OPERATING FITS Arise when different businesses present opportunities for cost-sharing or skills transfer Procurement of purchased inputs R&D/technology Manufacture & assembly Administrative support functions Marketing & distribution

  37. POTENTIAL BENEFITSOF OPERATING FITS Cost savings Tapping into more scale economies and/or economies of scope Increased operating efficiency through sharing of related activities

  38. MANAGEMENT FITS Emerge when different business units have comparable types of Entrepreneurial Administrative or Operating problems Allow accumulated managerial know how in one business to be useful in managing another business

  39. CAPTURING BENEFITSOF STRATEGIC FIT Management must take actions to capture benefits Benefits don’t just happen Businesses with sharing potentialmust be reorganized so activities to be shared are merged & coordinated Where skills transfer is comer stone of strategic fit, a means must be found to make transfer effective Management must access that some centralized Strategic control is great enough to centralized Strategic control is great enough to justify Sacrificing business-unit autonomy

  40. WHAT IS UNRELATEDDIVERSIFICATION? Unrelated diversification involves NO Common linkage of strategic fit among a diversified firm’s lines of business Meaningful value chain interrelationships Corporate strategy approach Venture into “ any industry & any business In which we think we can make a profit” Firms pursuing unrelated diversification are referred to as CONGLOMERATES NO unifying strategic theme

  41. ACQUISITION CRITERIA:PURSUINGUNRELATED DIVERSIFICATION Can business meet corporate target for profitability & Rol? Will business require substantial infusions of capital? Is business in industry with growth potential ? Is business big enough to contribute to parent firm’s bottom line? Is business big enough to contribute to contribute to 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?

  42. COMPETITIVE STRENGHT OF A DMNC IN GLOBAL MARKETS A DMNC has a strategic arsenal capable Of defeating both A SINGLE-BUSINESS MNC and A SINGLE-BUSINESS domestic firm in a long-term competitive struggle

  43. ATTRACTIVE ACQUISITION TARGETS Companies with undervalued assets Capital gains may be realized Companies that are financially distressed May be purchased at bargain prices Companies with bright prospects, but limited capital.

  44. APPEAL OF UNRELATED DIVERSIFICATION Business risk scattered over different industries CAPITAL RESOURCES INVESTED I THOSE INDUSTRIES OFFERING BEST PROFIT PROSPECTS Stability of profits – Hard times in one industry may be offset by good times in another industry if management is exceptionally astute at spotting bargain-priced firms with big profit potential, then- Shareholder wealth can be enhanced

  45. DRAWBACKS OF UNRELATEDDIVERSIFICATION Places big demand on corporate management More divers the businesses, harder it is to oversee each subsidiary & spot problems judge caliber of strategic plans of subsidiaries consolidated performance of unrelated portfolio tends to be No better than sum of individual businesses on their own and it may be worse Promises greater sales –profit stability over business cycles, but is seldom realized

  46. HOW BROADLY SHOULD A COMPANY DIVERSIFY? With unrelated diversification, corporate managers have to be shrewd enough to discern good acquisitions from bad ones select capable managers to run many different businesses judge soundness of strategic proposals of business-unit managers Know what to do if a subsidiary stumbles

  47. HOW BROADLY SHOULDA COMPANY DIVERSIFY? Two questions should guide a firm’s unrelated diversification efforts what is the LEAST diversification it will take to achieve acceptable growth & profitability? what is the MOST diversification that can be managed, given its added complexity?

  48. DIVERSIFICATION & SHAREHOLDER VALUE RELATED DIVERSIFICATION STRATEGY-DRIVERN approach to creating shareholder value UNRELATED DIVERSIFICATION FINANCE –DRIVEN approach to creating shareholder value

  49. DIVESTITURE &LIQUIDATION STRATEGIES situations arise when one or more subsidiaries to be sold or shut down misfits cannot be completely avoided industry attractiveness changes over time subpart performance of some subsidiaries is bound to occur diversification appearing sensible based on strategic fit lacks compatibility of values essential to CULTURAL FIT

  50. Divestiture & liquidationstrategy options Two types of divestiture options Divest business by spinning it off as independent company divest business by selling it liquidation Most painful option Involves terminating firm’s existence

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