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 firm’s 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 won’t 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 mis‘fit’ “If we weren’t 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