STRATEGIC MANAGEMENT CHAPTER 9 STRATEGY AND COMPETITIVE ADVANTAGE IN DIVERSIFIED COMPANIES To acquire not to acquire on the question.

-- Shakespeare

Strategy making in a diversified company: We are moving now to the bigger picture than the single business.
How do you enter?

1. Key Areas. The task of crafting corporate strategy for a diversified company falls in four areas: Picking the new industry and deciding the means of entry. Initiating actions to boost combined performance of the business, the firm has already entered. Pursuing opportunities to leverage cross business value chain relationship and strategic fits into competitive advantage. Investment priorities. Establish, steering corporate resources to most attractive business.

Identify way to strengthen

Strengthen long term competitive position

1. Identify the business from the (already having).

attractive business

2. Channel resources to the most profitable business lie low on unpromising business units Diminishing the growth prospect of the present business (main business)

2. When to Diversify? situation.

Depends on the company

Company Growth. Diminishes prospects. Opportunities in its Present Industry. To add value is available to customers, broaden market. Opportunity to utilize resources. Building Share Holders Value. If resources permit (financial and other reasons), ultimate justification. Test for Judging Diversification.

Cost saving opportunity need to be exploited by diversifying closely related business. Diversification justified when A+B=3 consolidated profit is more than single business of A&B.

3.

Not so high that exceeds profit margin

Industry attractiveness. (Good return), attractive enough. Cost of Entry Test. Better test (1+1=3); Potential of the company both of existing and new business. 1

Related and Unrelated Business

4. Once decision is made for diversification, the question is whether to diversify in Related or Unrelated Business. When value chain has relationship in new business (strategic fit exists) 1 + 1 = 3. Unrelated when value chain is dissimilar; no potential to transfer skill or technology from one business to another.

5. Strategy for Related Diversification. When strategic fit exist/value chain similar) and provide following opportunities:
Strategic fit in related business: a. Efficient transfer of skills, technology, expertise. b. Lower cost . c. Share common brand name. d. Creation of valuable resources, strength.

Transfer of expertise including technology. Combining related value chain to single operation. Exploiting use of brand name. Cross business collaboration to create competitive value (i.e. R&D, Technology, Value chain, manufacturing plant distribution system etc. collaboration/use of). Reduce cost, share common brand name.

6. Unrelated Diversification. In URD there is no deliberate effort to look for strategic fit. The criterias may be: Diversifying into whatever industry and business hold promise for profit and attractiveness. When business can meet corporate target. Whether the business is big enough to contribute. Whether the business is significant growth potential. an industry with

Two Drawbacks of Unrelated Diversification. Difficulty of managing efficiently business. No advantage of cross business strategic fit.

Sony Company Operation. More than 100 countries, TV, CD, VCR insurance, play station, music financing business, etc. 2

Pros and Cons of Unrelated Diversification. Business risk scattered (over diverse industries), select industries which offer best opportunity, some time one industry performs better than other (Drawback: Managing different business). Pros & Cons of Unrelated Diversification: Has appeal from several financial angle: (1) Business risk scattered (different technology). (2) Financial resources engaged in best business available. (3) Profitability may be stable (if one fails, other is available). 7. Strategy for Entering New Business.
Drawbacks: a. Cost of entry barrier. b. Time it takes.

Acquisition of existing business. Finding a suitable company is a challenge. Internal Startup. Creating new company under corporate umbrella. Joint Venture and Strategic Partnership.

Concentrated on core competencies

8.

Strategic Option Company Already Diversified. Broaden the base by adding business. Corporate restructuring/review strategy

a. Radical changes in the composition of business. b. Make the corporate healthy. c. When industry is ailing.

Multinational diversification strategy. Strategy for each industry needed.

9. Multinational Diversification Strategy. Characteristics: Diversity of business Diversity of national market Strategic Challenges

10. Why Multinational Diversification Attractive. Offers ways to build advantage: Full capture of economy of scale and experience curve effect. Opportunity to capitalize on cross border economics scope. Opportunity to transfer resources. Use of brand name; established brand name. Utilization of cross border subsidiary etc to be 3

competitive beat rival. Concluding Remarks Powerful Reasons for Diversification (Corporate Level). a. Capitalization of Core competency (value creating skills). b. c. d. e. Most translate if meaningful advantage. Enough similarity of business. Difficult to imitate.

Sharing of infrastructure. Balance financial resources. Maintain growth. Reduce risk.

Key Points. a. Most company has core business which brings maximum profit. When this dies down, then it is wise to diversify. Purpose of diversification is to build share holder value. b. Two fundamental of approaches of diversification:
Advantage: Lower Transaction Cost, coordination easy.

Related business. Unrelated business. Additional Points Forms of Diversification (Another way of looking at it). a. Vertical Diversification. When more than one step to convert raw materials into product, delivered and ready for consumption. Fishing Fleet Vertical Wholesale Fish Market Vertical Up Stream -----------Down Stream

Disadvantage: Flexibility reduced.

b.

Horizontal Diversification. Retail Jewelry

Retail Food Store

Horizontal

Moving into more than one industry, in unrelated business.