Corporate Strategy and Diversification

Corporate Level Strategy is the

strategy for a company and all of its
business units as a whole.
Diversification is the primary approach
to corporate level strategy.
Diversified firms vary according to the:
Level of diversification.
Degree of relatedness.

Why do Firms Diversify?

When they have excess resources,
capabilities, and core competencies that
may be put to multiple uses.
Diminishing growth prospects in the
present industry.
There are cost saving opportunities.
There are opportunities to capture
Strategic Fits advantages.
There are opportunities to capture
Financial Economies.
Spreading business risk.
Leverage of brand name.

Making the Diversification
Decision
Decision to diversify depends on the
following two parameters:

Level and Degree of Diversification
Number and Relatedness
Mode of Diversification
Merger and Acquisition Strategies,
Internal Development, Joint Venture
Diversification-Corporate
Strategies
Concentration
Vertical Integration
Diversification:
a. Unrelated
Diversification
b. Related Diversification
Advantages of Concentration
Allows a firm to master one business:
In-depth knowledge.
Easier to achieve competitive advantage.
Organizational resources under less
strain.
Prevents proliferation of Management
levels and staff functions.
Sometimes found more profitable than
other strategies (dependent on the
nature of the industry).

Disadvantages of
Concentration
Risky in unstable
environments.
Product obsolescence and
industry maturity.
Cash flow problems.
The Vertical Integration
Supply Chain
7
Raw
Materials
Extraction
Primary
Manufac-
turing
Final
Product
Manufac-
turing
Whole-
saling
Retailing
Vertical Integration: The extent to which
an organization is involved in multiple
stages of the industry supply chain.
When to Vertically Integrate?
Common reasons for Vertical
Integration
Increased control over quality of
supplies or the way the product is
marketed.
Better information about supplies or
markets.
Greater opportunities for differentiation
through coordinated efforts.
Opportunity to make greater profits by
performing another function in the
vertical supply chain.

Unrelated Diversification
Large, highly diversified firms are
called CONGLOMERATES.
Not a high performing strategy for
most firms but with a few notable
exceptions.
Difficult for the top Manager to
understand and appreciate the core
technologies, key success factors, and
special requirements of each
business.
Related Diversification
Based on tangible and intangible
relatedness.
At conceptual level can lead to synergy,
which is often illusive.
Often a higher performing strategy than
the unrelated diversification (lower risk
and higher profitability).
Can lead to corporate-level distinctive
competencies giving an edge over
contemporaries.
Combination of Related-
Unrelated Diversification
Strategies
Dominant-Business Firms
One major/core business accounting for 50 - 80
percent of revenues, with several small related or
unrelated businesses accounting for remaining
revenues.
Narrowly Diversified Firms
Diversification includes a few (2 - 5) related or
unrelated businesses.
Broadly Diversified Firms
Diversification includes a wide collection of either
related or unrelated businesses or a mixture of
businesses.
Multi-Business Firms
Diversification portfolio includes several unrelated
groups of related businesses
STRATEGIES FOR ENTERING
INTO NEW BUSINESSES
Acquisition
Internal new
venture (start-up)
Joint venture Merger
Diversifying into
New Businesses
Strategy of a Diversified
Company Evaluation
Parameters
Step1: Assess attractiveness/worth of each
industry firm competing with each other.
Step 2: Assess competitive strength of firms
business units.
Step3: Check competitive advantage potential of
cross-business strategic fits among
business units.
Step4: Check whether firms resources fit
requirements of present businesses.
Step 5: Rank performance prospects of businesses
and assign a priority for resource
allocations
Step 6: Craft new strategic moves to improve
overall performance of the company.
Strategy Options for a Already
Diversified Firm
Stick with
the Existing
Business
Lineup
Broaden the
Diversification
Base with New
Acquisitions
Divest and
Retrench to
a Narrower down
the
Diversification
Base
Restructure
through
Divestitures
and
Acquisitions
Strategy Options for a
Already Diversified Firm

Why Firms Expand Globally?
Gain access to new customers and markets.
Achieve lower costs and enhance
competitiveness.
Capitalize on the core
competencies/expertise of the Firm.
Spread business risk across wider market
base.
Access to raw materials, machinery,
manpower etc. at low price/cost.
Minimize exchange rate fluctuations.
Take benefits of the trade and tariffs
policies.
Going Global - Cross Country Differences
Points to Ponder

Cultures and lifestyles
Market demographics
Market conditions -
Growth rate
Distribution systems/channels
Need for responsiveness/CSR Union
Carbide (Bhopal)
Location/home ground advantage/home
sickness
Fluctuating currency exchange rates
Host government restrictions/SOPs and
reservations backward/hilly/tribal/border
and educationally backward minority
concentrated areas
Diversification Methods

Internal Ventures
Mergers and
Acquisitions
Joint Ventures
Internal Ventures
Internal ventures make use of the research and
development programs of the organization as it
-

Provides high level of control over the
venture
Proprietary information is not shared with
other firms
All profits are retained by the venturing
company

Disadvantages of internal ventures:

Risk of failure is high
Takes a lot of time



Mergers and Acquisitions

Mergers and acquisitions are
sometimes seen as a way to buy
innovations rather than producing
in-house. Acquisition and mergers
need knowledge and skills.

M & A Strategies are:

Fastest way to enter new markets,
Acquire new products or services,
Learn new technologies,
Facilitates vertical integration,
Broaden the markets
geographically penetration and/or
market mix with more/high profit
motives, and
Suits to the corporate image and its
overall branding.



Mergers and Acquisitions
Most research indicates that mergers
and acquisitions perform poorly:

High premiums
Increased
interest costs
on outstanding
loans or debts
High advisory or
consultancy
fees
Poison pills
sugar coated

High turnover
Managerial
distraction
Less innovation
Lack of strategic fit
Increased risk of
failure

Mergers that Dont Work
Large or extraordinary debt/loan
Overconfident or incompetent
Management
Ethical concerns
Changes in Top Management Team
and/or Organizational Leadership
Inadequate analysis (due diligence)
Diversification away from the firms core
competencies
Mergers that Work
Strong relatedness of the firms
Friendly negotiations across the table without
a third party intervention
Low-to-moderate debt
Continued focus on core strengths of firm
Careful selection and negotiations only with
the target firms
Strong cash position
Firm cultures and management styles are
similar
Sharing resources across companies
optimal utilization/judicious use

STRATEGIC MANAGEMNT
GLOBALIZATION

Why Going Global The Basic
Reasons

1. Homogeneity of Demands.
2. Spread Research and
Development Costs.
3. Increased Market Size.
4. Rising Economies of Scale
cutting costs.
5. Favorable Government Policies.
6. Exploit Local Advantages.

Going Global Risks Involved


Failure to understand Foreign
Customers Preferences.
Failure to Appreciate the Level,
Intensity and Complexities of
Competitions in Global
Markets.
Failure to Understand Host
Countrys Rules of the Game.
Failure to Understand the
Political Risks and
Uncertainties.

Going Globalization Pre-
requisites


Learn new or other languages with proper ascent.
Understand host countrys laws, rules, regulations,
systems and procedures restrictions on foreign
investments etc.
Any specific benefit offered by the host country low
tax rates, tax holiday, rent free land, low-interest or no-
interest loans, subsidized energy and transportation
cost and well developed infrastructure.
Ability to deal with volatile currencies.
Ability to face political risks and/or uncertainties.
Redesign products to suit the needs of different
segments of customers and the expectations of their
traditions, rituals and cultural environment.
Cost effective place.
Availability of large market for goods and services.



GLOBAL EXPENSION
STRATEGIES

Standardize Products
Locate Plant to maximize System-wide
Advantages.
Leverage Technology across Multiple
Markets.
Undertake World-wide Marketing Efforts.
Compete with Rivals through Cross-
subsidization.
Product Adaptation.
Do value-addition locally.
Use local Distribution Channels.
Strongly Global Image.

ENTRY INTO FOREIGN
MARKETS

Enter into fewer numbers of countries
for business when:
Market entry and market control costs
are high.
Products and communication adaption
cost are high.
Population, income size and growth are
high in initial countries chosen.
Dominant foreign firms are able to erect
high barriers to entry.


ACQUIRING/BUILDING
COMPETITIVE ADVANTAGE HOW?

Strategic route for acquiring/building
competitive advantages are -

Must innovate and continue to innovate,
and master the art of change. Maintain
flexibility, continuously improve quality,
and beat competition through innovative
products and services.

Integrate horizontally and vertically to
garner optimal benefits.

Be open for alliances, mergers and
acquisitions to climb up the value chain
and survive in the market.

Focus on research and development for
producing unique ideas and methods
leading to new and improved products
and services.

Create entry barriers in terms of large
size, low investment, substantial cost
advantage, formidable distribution
network, powerful brand (Bajaj Auto,
Maruti Udyog, Asian Paints, TELCO,
Thermax etc.)

Benchmark with the best rivals in the
world.



Use strong value chain approach add nine (9)
values

Primary Activities (5) Inbound logistics,
Operations, Outbound Logistics, Marketing &
Sales Services.
Support Activities (4) Firms Infrastructure,
HRM, Technology Development and the
Procurement.

Divide entire operations into Strategic Business
Units (SBU) Structure

Single/related business can be planned separately,
Have own set of competitors for SBU, and
Do strategic planning for performance and control
factors affecting profit.

CORE COMPETENCY

Certain long lasting and unique
competitive advantages that can not
be easily imitated by the competitors.
Such core competencies put the firm
ahead of others as a winner on most
occasions.

Acquire core competence through
heavy investments in technology,
research and development followed by
new product innovations.



Core Competency - Examples



Honda Engine design and technology

3M Research and development especially in
substrates, coatings and adhesives.

Dupont Chemical Technology

Sony Miniaturization, micro-processor
designs

Xerox Research strength in material science, `
mechanics and optics

NEC (Japan) Computing, communications and
components.


Core Competency -
Attributes

Provides access to the Firm to the
important markets areas and/or
segments/pockets.

Contributes significantly to customers
satisfaction, and the benefits in the
end products.

Proves difficult for competitors to
imitate or copy.