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Strategy & Competitive Advantage in Diversified Companies
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Pros & Cons of Single & Diversified Businesses
Single Business: + focus + clear identity - risk Diversified Business: + spreading risk + increased opportunity - complexity / mgt
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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.
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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
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3 Tests for Judging a Diversification Move
The industry attractiveness test The cost-of-entry test The better-off test
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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.
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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
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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
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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.
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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.
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Diversification Strategies
C. Strategies for entering new business… (i) Acquisition: + quicker + hurdles entry barriers - difficult to find right company Apply cost-of-entry test
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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.
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Diversification Strategies
(iii) Joint Ventures Useful when… Independent action uneconomical / risky Pooling resources results in synergy Only or best source of access
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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.
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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
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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
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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
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