Strategy & Competitive

Advantage in Diversified
Companies
Presenter:
Qamar Bilal Syed
Moving up a level…

Strategy-making for single business enterprise


Strategy-making for diversified enterprise

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Diversification: Things to
consider
The task of crafting corporate strategy for a


diversified company encompasses four (4) areas:

1. Picking the new industries to enter and deciding on
the means of entry – The 1st concern in
diversifying is what new industries to get
into and whether to enter by:
 starting a new business from ground up,
 acquiring a company already in the target
industry, or
 forming a strategic alliance or joint venture
with another company
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Diversification: Things to
consider
2.Initiating actions to boost the combined
performance of the business the firm has
entered – As positions are created in the
chosen industries, corporate strategists
typically focus on ways to strengthen the
long term competitive advantage. The
corporate parents can help their business
subsidiaries be more successful by
 providing financial resources,
 supplying missing skills or technological know-
how,
 providing new cost reduction avenues
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Diversification: Things to
consider
3.Pursuing opportunities to leverage cross-business
value chain relationships & strategic fits into
competitive advantage – A company that
diversifies into a related value-chain
business gains competitive advantage
potential not open to a company that
diversifies into a business that value-chain
are totally unrelated. C o m m o n
 Pertaining to technology, cu sto m e rs
 Supply-chain logistics, Pro d u ctio n
 Overlapping distribution channels

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Diversification: Things to
consider
4.Establishing investment priorities & steering
corporate resources into the most attractive
business unit –

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WHEN TO DIVERSIFY?

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When to diversify?
When to diversify depends:
 partly on a company’s growth opportunities in
its present industry; and
 partly on the opportunities to utilize its
resources, technology, expertise,
competencies, and capabilities to other
market area.
A company must ask itself,
 “what type and how much diversification?”
 Related business v totally unrelated business.
There is no urgency to diversification, wait for
the best time but be attentive!
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Why rushing to diversify isn’t
necessarily a good strategy?
Companies that continue to concentrate on a
single business can achieve enviable success
over many decades without relying on
diversification to sustain their growth.
 McDonald’s, Coca-Cola, Apple Computers, Wal-
Mart, FedEx, Timex, Cam[bell Soup, Xerox,
Ford Motor Company all won their
reputations in a single business.

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Why rushing to diversify isn’t
necessarily a good strategy?
(Cont..)
Concentrating on a single line of business
(totally or with a small close of diversification)
has important organizational, managerial &
strategic advantages.
 It entails less ambiguity about “who we are
and what we do?”
 The energies of whole organization are
directed down one business path, creating
less chance of loss of managerial time &
resources.

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The risk of concentrating on a
single business:
The big risk of remaining concentrated on a
single business is putting all of a firm’s eggs
in one industry basket.
The market may become saturated,
competitively un-attracted, or eroded by the
appearance of new technologies or new
products or fast-shifting buyer preferences.

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The risk of concentrating on a
single business: (Cont..)
Examples:
 What digital cameras are doing to the market
for films and film-processing, and
 What computer disk technology is doing to the
market for cassette tapes and 3.5” floppy
disks.

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Factors that signal when it's time to
diversify:
There is no formula for determining when a
company ought to diversify.
Judgments about when to diversify have to be
made on the basis of a company’s own
situation.
However, we can identify the symptoms &
trace out the genuine need for diversification.

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Factors that signal when it's time to
diversify: (Cont..)
Generally speaking, a company is a prime
candidate for diversification when it has:
1.Diminishing growth prospects in its present
business,
2.Opportunities to add value for its customers or
gain comp adv by broadening its present
business to include complementary products
or technologies,
3.Attractive opportunities to transfer its existing
competencies & capabilities to new business
arenas,
4.Cost saving opportunities that can be
exploited by diversifying into closely related
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businesses, and
BUILDING SHAREHOLDER
VALUE:
The ultimate justification for diversification

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The ultimate justification for
diversification:
Diversification is justifiable only if it builds
shareholder value.
To create shareholder value, a diversified
company must get into businesses that can
perform better under common management
than they could perform as stand-alone
enterprises.

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Three (3) tests for judging a
diversification move:
1.The industry attractiveness test
2.
3.The cost-of-entry test
4.
5.The better-off test:
 1+1 = 3

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 CHOOSING THE
DIVERSIFICATION PATH
Related v Unrelated Businesses

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Related versus unrelated
business
Businesses are said to be related when they
are competitively valuable relationship
among the activities comprising their
respective value chains. The 1+1=3 rules
definitely applies here.

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Related versus unrelated business
(Cont..)
Businesses are said to be unrelated when the
activities comprising their respective value
chain are so dissimilar that no real potential
exists to transfer skills or technology from
one business to another or to combine similar
activities and reduce costs or to otherwise
produce competitively valuable benefits from
operating and under a common corporate
umbrella.

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 Diversify Into Related Businesses :
Build shareholder value by capturing cross-business strategic fi
Transferring skills & capabilities from one business to anothe
Sharing facilities or resources to reduce costs
Leveraging use of a common brand name
Combining resources to create new competitive strengths and cap

ns for Company Looking to Diversify

Diversify Into Unrelated Businesses :

es.
superior job of choosing businesses to diversify into & of managing th

Diversify Into Both Related & Unrelated Business

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THE CASE FOR RELATED
DIVERSIFICATION
STRATEGIES
Finding the strategic fit…

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Strategic-Fit
A related diversification strategy involves
adding business whose value chain possess
competitively valuable “strategic-fit” with the
value chain of the company’s present
business.

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 Value chain for related business
Representative Value Chain Activities

Company SAu p p ly C h a in A ctivitie s

Te ch n o lo g y O p e ra tioSnasle s & M a rke ti
Dnigstrib u tiCo nu sto m e r S e rvice

Company B
S u p p ly C h a in A ctivi
Tetie sn o lo g y O p e ra tioSnasle s & M a rke ti
ch Dnigstrib u tiCo nu sto m e r S e rvice

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Cross-business strategic-fit along
the value chain
R&D and Technology Activities:
 AT&T – from telephones to cable TV & Internet
access
Supply chain Activities:
 Dell’s strategic partnership with leading
suppliers of microprocessors, mother boards,
disk drives, memory chips monitors,
modems, long-life batteries & other laptop
and desktop PC components.
Manufacturing Activities:
 Emerson electrics diversified in chain-saw
business. Become cost-leader by using joint
assembly facilities. 25

Cross-business strategic-fit along
the value chain (Cont..)
Distribution Activities:
 Sunbeam (FMCG Co.) acquire Mr. Coffee since
retailers were same ; Wal-Mart, Kmart,
department stores ,etc.
Sales & Marketing Activities:
 P&Gs lineup products like Ivory soap, Crest
toothpaste, Jif peanut butter & Duncan Hines
cake mix have different competitors,
suppliers & production requirements, but
they all move through the same wholesale
distribution system.


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Cross-business strategic-fit along
the value chain (Cont..)
Managerial & Administrative Support Activities:
 Ford transferred its automobile financing &
credit know-how to the savings-and-loan
industry by acquiring some failing S&L
associations during the 1989 bailout.

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Strategic-fit, Economies of scope, &
Competitive advantage
Economies of scope - a concept distinct from
economies of scale arise from the ability to
eliminate costs b y operating two or more
businesses under the same corporate
umbrella; the cost saving opportunities can
stem from strategic fit relationships anywhere
along the business’ value chain.
 These are cross-business cost-saving
opportunities
 The greater the economies of scope
associated with cross-business cost-
saving opportunities, the greater the
potential for creating a competitive 28
advantage based on lower costs.
Strategic-fit, Economies of scope, &
Competitive advantage (Cont..)
A diversified firm can achieve a consolidated
performance greater than the sum of what
the businesses can earn pursuing
independent strategies.
 Cross-business strategic-fits adds potential of
the firms individual businesses.

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Capturing strategic-fit benefits:
The related value chain activities must be
merged into a single functional unit and
coordinated; then the cost savings must be
squeezed out.
A company that can expand its stock of
strategic assets faster & at lower cost than
rivals, obtain sustainable competitive
advantage .
 Related know-how must be utilized to
accelerate the creation of valuable new
competencies & competitive capabilities.

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THE CASE FOR UNRELATED
DIVERSIFICATION
STRATEGIES
No strategic fit…

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Unrelated diversification
Despite the strategic fit benefits associated
with related diversification, many companies
opt for unrelated diversification.
 It involves diversifying into whatever
industries and businesses hold promise for
attractive financial gain; exploiting strategic
fit relationship is secondary!

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Unrelated diversification
(Cont..)
Such companies go for opportunistic search for
“good companies” to acquire.
 The premise of unrelated diversification is that
any company that can be acquired on good
financial terms & has satisfactory profit
prospects represents a good business to
diversify into.
 Like ARY-group and mostly famous Deewan-
group!

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 No Strategic-Fit for Unrelated
Business
Representative Value Chain Activities

Company SAu p p ly C h a in A ctivitie s

Te ch n o lo g y O p e ra tioSnasle s & M a rke ti
Dnigstrib u tiCo nu sto m e r S e rvice

ompletely valuable strategic fits b/w the value chain for Business-A and th

Company B
S u p p ly C h a in A ctivi
Tetie sn o lo g y O p e ra tioSnasle s & M a rke ti
ch Dnigstrib u tiCo nu sto m e r S e rvice

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The Criteria for unrelated
diversification strategies
Whether the business can meet corporate
targets for profitability& ROI?
Whether the business will require substantial
infusions of capital to replace out-of-date
plants & equipment, fund expansion &
provide WC?
Whether the business is in the industry with
significant growth potential?
Whether the business is big enough to
contribute significantly to the parent firm’s
bottom line?
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The Criteria for unrelated
diversification strategies (Cont..)
Whether there is potential for union difficulties
or adverse government regulations
concerning product safety or environment?
Whether there is industry vulnerability to
recession, inflation, high interest rates, or
shifts in government policy?

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Unrelated diversification
opportunities:
2 Special Situations!
Companies whose assets are
undervalued:
 Opportunities may exist to acquire such
companies for less than full market value &
make substantial capital gains by reselling
their assets and businesses for more than
their acquired costs.
Companies that are financially distressed:
 Such businesses can be purchased at a
bargain price.
 Their operations turned around with the aid of
the parent company financial resources.
 As these businesses re-grow, they can be 37
converted into long-term investment area for
A real time example (Table
page:305)
WALT DISNEY COMPANY
 Theme parks
 Disney cruise line
 Resort properties
 Movie production (for both children and adults)
 Video production
 TV Broadcasting (ABC, Disney Channel, Toon
Disney, Classic Sports Network, ESPN, E!,
Lifetime, and A&E Networks)
 Radio broadcasting (Disney Radio)
 Theatrical productions

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A real time example (Table
page:305)
WALT DISNEY COMPANY (Cont..)
 Musical recordings
 Animation are sales
 Anaheim Mighty Ducks NHL franchise
 Anaheim Angels Major League Baseball
franchise
 Book and magazine publishing
 Interactive software and internet sites
 The Disney Store retail shops

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The Pros & Cons of unrelated
diversification
Advantages:
 Business risk is scattered over a set of diverse
industries.

 Cash flows from company businesses with
lower growth and profit prospects can be
diverted to acquiring & expanding
businesses with higher growth and profit
potentials.

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The Pros & Cons of unrelated
diversification (Cont..)
Advantages (Cont..):
 Company overall profitability may prove
somewhat more stable because hard times
in one industry may be partially offset by
good times in another.

 If the corporate managers are exceptionally
smart at spotting bargain-priced companies
with big upside profit potential, shareholder
wealth can be enhanced.

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The Pros & Cons of unrelated
diversification (Cont..)
Disadvantages – 2 biggest drawbacks are:
 The difficulties of competently managing
many different businesses, and

 Being without the added source of competitive
advantage that cross-business strategic-fit
provides.

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The Pros & Cons of unrelated
diversification (Cont..)
Corporate managers have to be talented
enough to:
 Discern a good acquisition from a bad
acquisition,
 Select capable managers to run each of many
different businesses,
 Discern when the major strategic proposals of
strategic business unit managers are sound,
 Know what to do when a business unit
stumbles.
 “never acquire a business you don’t know
how to run.”
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The Pros & Cons of unrelated
diversification (Cont..)
Some more drawbacks:
 It offers no basis for cost reduction, skills
transfer, or technology sharing.
 Although in theory unrelated diversification
offers the potential for greater sales-profit
stability over the course of the business
cycle, in practice, attempts at
countercyclical diversification fall short of
the mark.

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The Pros & Cons of unrelated
diversification (Cont..)
Despite these drawbacks, unrelated
diversification can sometimes be a desirable
corporate strategy.
It certainly merits consideration when a firm
needs to diversify away from an endangered
or unattractive industry and has no distinctive
competencies or capabilities it can transfer to
an adjacent industry.

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Unrelated diversification &
Shareholder Value
Unrelated diversification is a financial approach
to creating shareholder value;
Related diversification, in contrast, represents
a strategic approach

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Unrelated diversification &
Shareholder Value (Cont..)
Corporate strategists must exhibit superior
skills in creating and managing a portfolio of
diversified business interest:
 Doing a superior job of diversifying into new
businesses that can produce consistently
good returns on investment (satisfying the
attractive test).
 Doing an excellent job of negotiating favorable
acquisition price (satisfying the cost-of-entry
test).
 Making smart moves to sell previously
acquired business subsidiaries at their peak
& getting premium price.
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Unrelated diversification &
Shareholder Value (Cont..)
Corporate strategists must exhibit superior
skills in creating and managing a portfolio of
diversified business interest: (Cont..)
 Being sharp in shifting corporate financial
resources out of the businesses where profit
opportunities are dim & into businesses
where rapid earnings growth and high ROI
are occurring.
 Smartly managing firm subsidiaries (by
providing expert problem-solving skills,
creative strategy suggestions, and decision-
making guidance to business-level
managers.
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 COMBINATION
RELATED-UNRELATED
DIVERSIFICATION
Opting for every possible opportunity!

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Combination related-unrelated
diversification strategies
There is nothing to exclude a company from
diversifying into both related and unrelated
businesses.
In practice, the business make up of diversified
companies varies considerably.
 Dominant business enterprises
 Narrowly diversified enterprises
 Broadly diversified enterprises
 Several unrelated groups of related businesses

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Combination related-unrelated
diversification strategies (Cont..)
1.Dominant business enterprises:
 One major “core” business accounts for 50-
80% of total revenues & a collection of small
related or unrelated businesses accounts for
the remainder.
2.Narrowly diversified enterprises:
 Narrowly diversified around a few (2-5) related
or unrelated businesses.
3.Broadly diversified enterprises:
 Have a wide ranging collection of either
related or unrelated businesses or a mix of
both.
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Combination related-unrelated
diversification strategies (Cont..)
4.Several unrelated groups of related businesses:
 Few multi-business enterprises have
diversified into unrelated areas but have a
collection of related businesses within each
other.


There is ample room for companies to

customize their diversification strategies to
incorporate elements of both related &
unrelated diversification, as may suit their
own risk preference and strategic vision

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CASE ON UNILEVER
Supportive Study


By : Mr . Abid Iqbal

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