Growth Strategies: Ansoffs

Product/Market Expansion Grid

Current
products

1. MarketCurrent
penetration
markets
strategy

New 2. Marketdevelopment
markets

strategy

New
products

3. Productdevelopment
strategy

(Diversification
strategy)

WHY FIRMS DIVERSIFY

1. A firms objectives can be no longer be met within the scope of the present
business portfolio.

Market Saturation, General Decline in Demand, Competitive Pressure on

Product line, or Obsolescence may reduce immediate or long term profitability. A
typical symptom would be a drop in the rate of return on reinvestments.
2. Even if attractive expansion opportunities are still available and past objectives are
being met, a firm may diversify because the retained cash exceeds the total expansion
needs of the present portfolio.

3. Even if current objectives are being met, a firm may diversify when diversification
opportunities promise greater profitability than expansion opportunities.

When diversification opportunities are sufficiently attractive to offset their

inherently lower synergy.

When firms R&D produces outstanding diversification by-products.

When Synergy is not considered important by firms and Synergy advantages

of expansion over diversification are not considered important. This is typically the
case in conglomerate firms.

4. Firms may suffer from the grass is greener on the other side
syndrome.

Lacking reliable information about diversification alternatives, such

firms tend to plunge rather than probe diversification alternatives. A much less
costly approach is to buy reliable information before plunging.

LEVELS OF DIVERSIFICATION

Low Levels of Diversification

Single Business: More than 95% of revenue comes from a single business
Dominant Business: Between 70% to 95% of revenue comes from a single
business
Moderate to High Levels of Diversification
Related Constrained: Less than 70 % revenues come from the dominant
business. All businesses share product, technological and market linkages.
Related Linked (mixed related and unrelated): Less than 70 % revenues come
from the dominant business. There are only limited links between the
businesses.
Very High Levels of Diversification
Unrelated: Less than 70 % revenues come from the dominant business. There
are no links between businesses.

FUNDAMENTAL ROLE OF DIVERSIFICATION

The fundamental role of diversification is for Corporate

Managers to create value for stockholders in ways that
stockholders cannot do better for themselves.

DIVERSIFICATION: A CORPORATE STRATEGY

Diversification: The fundamental role of diversification is for Corporate
Managers to create value for stockholders in ways stockholders cannot do for
themselves.
Forms of Diversification
Vertical

Acquisition

Strategic
Alliances
Internal
Growth

Horizontal

Global

VALUE CREATION THROUGH DIVERSIFICATION

(ACQUISITION)

Company A
Revenues
150
Operating Costs
118
Earnings
32
Cash
55
Other Assets (Book Value) 185
Total Assets
240
Price Per Share
48
Number Of Shares
10.0
Market Value
480

Figures in Rs. Crores except price per share

Company B
20
16
4
2.5
17
19.5
16
2.5
40

Merged
172
(+2)
132
(-2)
40
(+4)

VALUE CREATION THROUGH DIVERSIFICATION (ACQUISITION)

Economic Gain (Increased Earnings) of the Acquisition

= Rs. 4 Crores

Assuming that

It is a permanent gain. It is a perpetuity.

The cost of capital is

Then, Present Value of Economic Gain is

= 20 %
= Rs.4/.2 Crores
= Rs. 20 Crores

Total Market Value of the Firms:

(Say, company A paid Rs. 47.5 Crores to acquire Company B)
Market Value of Co. A (Before Acquisition)

= Rs.480 Crores

Market Value of Co. B

= Rs. 40 Crores

Present Value of Gains

= Rs. 20 Crores

Cash paid to acquire

= Rs. 47.5 Crores

Post Merger Market Value

= Rs.492.5 Crores

VALUE CREATION THROUGH DIVERSIFICATION (ACQUISITION)

Cash Purchase

Exchange of Shares

Earnings

40

40

Cash

10

57.5

Other Assets (Book Value) 202

202

Total Assets

212

259.5

Price per Share

49.25

49.85

Number of shares

10.0

10.8333

Market Value

492.5

540

Figures in Rs. Crores except Price per Share

COST AND BENEFIT SHARING BETWEEN THE COMPANIES

First Case: All cash Deal

Benefits to the Shareholders of Company B

Gains

= Receipts - Market Value

= Rs. 47.5 Crores - Rs. 40 Crores
= Rs. 7.5 Crores

Benefits for the shareholders of Company A

Gains

= Market Value Post merger - Market Value Pre Merger

= Rs 492.5 Crores - Rs. 480 Crores
= Rs 12.5 Crores

Total Economic Gain = Rs 20 Crores.

BENEFIT SHARING BETWEEN STOCKHOLDERS OF THE COMPANIES

Second Case: Acquisition financed by stock.

Company A has issued 1 share to stockholders of Co. B for every 3 shares held
by them.
Number of Additional Shares issued

= 2.5 Crores/3 = 83,33,333

Value of shares of Co. B

= Rs 49.85 * 83,33,333
= Rs 41.5 Crores

Gains Captured by Shareholders of Co. B

= Rs 41.5 Crores - Rs. 40 Crores

= Rs 1.5 Crores

Gains of Shareholders of Co. A

= Economic Gain - Cost

= Rs. 20 Crores - Rs. 1.5 Crores

= Rs. 18.5 Crores.

VERTICAL INTEGRATION
Benefits:
Building Barriers to Entry.
Reduced Transaction Costs.
Note: Tapered Integration.
Limits:
MES

Responsibility for Technology Up-gradation and Innovation in all businesses.

Integration of Cultures
Questions for Deciding when to Vertically Integrate:

Are our existing suppliers or Customers meeting the Consumers needs?

Can you own the business without really buying it?
Is it giving any structural advantage? How volatile is the competitive environment

HORIZONTAL DIVERSIFICATION
Horizontal Diversification entails moving into more than one industry. It
can be
Related Diversification
Unrelated Diversification or Conglomerate Diversification
The case for Conglomerates
Corporate managers have capability to spot low valued stocks.

Corporations may be able to borrow money at Lower interest rates and pay
lower per share brokerage.
The case against Conglomerates
Conglomerate discounts. Resulting in Corporate Raiders.
Takeover Premiums.

Discounting worldwide competition represents a serious mistake for

several reasons:
Research has shown that early entrants into a new internationalised market not
only gain greater market shares but also outlast the late entrants. This implies that
the firms should not only enter the international scene but should attempt to get
there early.
The trend towards worldwide market makes it difficult to predict where the
competition may spring from. The case of TCS, Mumbai becoming a serious
competitor in the world software programming industry.
Foreign investments would keep growing as foreign firms buy up domestic
businesses.
The greatest growth opportunities exist overseas in developed and developing
nations. For instance, the European Union of twelve countries now represents the
largest market in the world. Countries such as China, Mexico are economies
growing at a faster pace than others. These could be markets of opportunities.

Advantages of Global Diversification:

Locational Economies.

Achieve economies of scale through greater volumes using international

sales opportunities.

To compete effectively in domestic markets, the corporations must be

willing to fight the international players in their home turf. Case of Michelin
tyres and Fuji Xerox.

EVALUATING REASONS TO DIVERSIFY

Least Power to
Create Value

Reducing
Risk

Not
recommended
as Reason to
Diversify

Most Power to
Create Value
Maintaini
ng Growth

Balancing
Cash
Flow

Sharing
Infrastruct
ure

Increasing
Market
Power

Capitalizi
ng on Core
Competen
ce
Recommended
as Reason to
Diversify

BOSTON CONSULTING GROUP GROWTH SHARE MATRIX

A Typical Product Portfolio Chart of a Comparatively strong and diversified company

Market growth rate

PRODUCT SALES

20%18%16%14%12%10%8%6%4%2%0

10x

4x

2x 1.5x

1x

.5x .4x .3x .2x .1x

Relative market share

BOSTON CONSULTING GROUP GROWTH-SHARE MATRIX

HIGH

CASH
USE
(Growth
Rate)
LOW

Modest
+ or Cash
Flow

Large Negative
Cash Flow

Large Positive
Cash Flow

Modest
+ or Cash
Flow

HIGH

LOW

CASH GENERATION (Market Share)

BOSTON CONSULTING GROUP GROWTH SHARE MATRIX

Market growth rate

SUCCESS SEQUENCE

20%18%16%14%12%10%8%6%4%2%0

10x

4x

2x 1.5x

1x

.5x .4x .3x .2x .1x

Relative market share

BOSTON CONSULTING GROUP GROWTH SHARE MATRIX

Market growth rate

DISASTER SEQUENCE

20%18%16%14%12%10%8%6%4%2%0

10x

4x

2x 1.5x

1x

.5x .4x .3x .2x .1x

Relative market share

BOSTON CONSULTING GROUP GROWTH SHARE MATRIX

Strategy for Cash Cows:

The goal is to do just enough to
DEFEND a cash cows market
position so it can efficiently generate
cash to reallocate to business
investments elsewhere!

BOSTON CONSULTING GROUP GROWTH SHARE MATRIX

Strategy for Dogs:

Harvest
Divest or spin off
Liquidate or close down

BOSTON CONSULTING GROUP GROWTH SHARE MATRIX

Strategy for Stars:

Offer excellent profit & growth opportunities
Vary as to whether they are
Self-sustaining or
Require infusions of investment funds from
corporate parent

BOSTON CONSULTING GROUP GROWTH SHARE MATRIX

Strategy for Question Marks or Problem Child:

Rapid industry market growth makes businesses
attractive, but low relative share positions raise
questions about future potential.
Cash needs are high & internal cash generation is
low, making them cash hogs.

Market Life Cycle Competitive Strength Matrix

Introduction

Growth

Maturity

Decline

Push
High

Competitive
Strength
Medium

Low

Caution
Danger

General Electrics Industry AttractivenessBusiness Strength Matrix

Business Strength
Industry
Attractiveness

Market Share
Core Competencies
Profit Margin vs Competitors
Ability to Match Price/Service

Market Size
Growth Rate
High
Profit Margin
Competition Intensity
Seasonality
Medium
Cyclicality
Technology & Capital
Social Impact
Regulation
Low
Environment
Opportunities & Threats
Barriers to Exit/Entry

Strong

Average

Relative Costs
Knowledge
Technological Ability
Management Caliber
Weak

TRANSACTION COSTS AS A BASIS FOR

DIVERSIFICATION

HIGH COST OF TRANSACTIONS

COSTS OF FINDING BUYERS

AND SELLERS

FEAR OF OPPORTUNISM

COSTLY TO WRITE A
CONTRACT

COSTLY TO ENFORCE A
CONTRACT

ASYMMETRIC
INFORMATION BETWEEN
BUYERS AND SELLERS

LONG TERM CONTRACT

UNDER DYNAMIC
CONDITIONS

RELATIONSHIP SPECIFIC
INVESTMENTS

UNCLEAR PROPERTY
RIGHTS

CONGLOMERATES AS ALTERNATIVE TO MARKETS

DEVELOPED

DEVELOPING

Equity focused

Under-developed weak
equity market &
Nationalized Banks

Monitoring
by disclosure rules
Market for corporate
control

FACTOR
MARKET

DEVELOPED
Many B
Schools and
Consulting
firms offering
talent
Certified skills
enhancing
mobility

DEVELOPING
Few of these

CAPITAL
MARKET

FIRM

Weak Monitoring

PRODUCT
MARKET

CONTRACT
DEVELOPED
ENFORCEMENT
DEVELOPED DEVELOPING Reliable
enforcement
Predictable Unpredictable of liability laws
GOVT REGULATIONS
Efficient
Low.
Relatively
free of
Corruption

Not So

DEVELOPING
Limited
enforcement
of liability laws

Little
dissemination dissemination
of Information of Information
Activist
Consumers

Few Activist
Consumers