Strategy & Competitive

Advantage in Diversified
Companies

Pros & Cons of Single & Diversified

Businesses
Single Business:

+ focus
+ clear identity
- risk

Diversified Business: + spreading risk

+ increased opportunity
- complexity / mgt

Strategy & Competitive Advantage in

Diversified Companies
Challenge is to craft a multi-business, multi-industry
strategy.
When to diversify?
What businesses to enter?
How to enter them?
Actions to boost the combined performance /
competitive advantage of businesses?
Prioritising & steering corporate resources in right
directions.

When to diversify?
Diminishing growth prospects in present business
Competencies & capabilities readily transferable
Resources & managerial depth to expand
Increases shareholder value 2+2=5
What kind & how much?
Related / unrelated diversification / combo
Small extent (<10% tot.rev) or large extent
Small no. of large businesses / large number of small
businesses

3 Tests for Judging a Diversification Move

The industry attractiveness test
The cost-of-entry test
The better-off test

Diversification Strategies
A. Related Diversification Strategies
Common approaches:
Entering business where salesforce, advertising,
distribution facilities may be shared.
Closely related technologies / expertise
Transferring know-how from one business to another or
brandname & reputation to new product / service
Acquiring new business that will uniquely help firms
position in existing business.
The greater the relatedness the bigger the window for
creating competitive advantage.

Diversification Strategies
Advantages of Related Diversification...
+ Degree of unity in business activities
+ Strategic fits - technology, operating,
distribution / customer
related, management
+Economies of scope
IMPORTANCE OF SKILL AT EXPLOITING LINKAGES

Diversification Strategies
B. Unrelated Diversification Strategies
Diversifying into any business with a good profit potential
(usually through acquisition)
Screening nb:

targets for profit & ROI

degree of investment required
industry growth potential
impact on bottom line of parent co.

Often taking advantage of undervalued co.s / lack capital

Unrelated Diversification Strategies

Advantages & Disadvantages
+ diverse spread of risk
+ optimal ST use of financial resources
+ more stable corporate profits
+ increased shareholder wealth
- complexity / managerial expertise
- without c.ad. of fits whole may be </= sum
- difficult to coordinate cyclical nature of ind.

Unrelated Diversification Strategies

Unrelated diversification is a financial approach
to creating shareholder value; related
diversification is a strategic approach.
To succeed

- achieve consistently high ROI

- negotiate gd. acquisition prices
- sell at right time
- shift resources at right time
- manage better than if indep.

Diversification Strategies
C. Strategies for entering new business
(i) Acquisition: + quicker
+ hurdles entry barriers
- difficult to find right company
Apply cost-of-entry test

Diversification Strategies
(ii) Internal Start-up: + Good fit & control
- Entry barrier
- Capital investment
- Speed
Attractive when
ample time, aggressive response unlikely,
cost of entry lower than acquisition, skills exist
in-house, new capacity wont over-supply,
industry fragmented.

Diversification Strategies
(iii) Joint Ventures
Useful when
Independent action uneconomical / risky
Pooling resources results in synergy
Only or best source of access

Diversification Strategies
D. Divestiture & Liquidation Strategies
due to change or misfit
If we werent in this business today would we
want to get into it now?
When is a turnaround possible or not?
Sell - partial / outright
Early liquidation better than bankruptcy / depletion.

Diversification Strategies
E. Corporate turnaround, retrenchment &
portfolio restructuring strategies
Poor performance in one or more business units
Turnaround - problems are ST, ind. is attractive
Retrenchment - smaller no. of businesses
Restructuring - change the mix of businesses

Diversification Strategies
F. Multinational Diversification (DMNCs)
Diverse businesses & national markets
- Complexity of strategising across businesses
& countries
+ opportunity for strategic coordination /
sustainable c.ad. not open to companies who
operate only domestically

Diversification Strategies
Sources of Advantage for a DMNC
Fits / Economies of scope - expertise,
technology, worldwide distribution, bargaining
power, leveraging brandname.
Cross subsidisation / multiple profit sanctuaries
Fit advantages more reliable & sustainable
than cross-subsidisation