Diversification strategies

Ch6-1

What commonalities do you find?

Ch6-2

Strategy levels
Business level strategy (competitive)
Concerned with the choice a firm makes when deciding on how to compete in individual product markets

Corporate level strategy (company wide)

Concerned with actions taken by the firm to gain a competitive advantage by selecting and managing a group of different businesses competing in several product markets

Ch6-3

What is Diversification?
A collection of businesses under one corporate umbrella

A company is said to be diversified when it is in two or more lines of business

Diversification is used to expand firms' operations by adding markets, products, services, or stages of production to the existing business.
Ch6-4

Levels and Types of Diversification

Low Levels of Diversification
Single business
> 95% of revenues from a single business unit A A B

Dominant business

Between 70% and 95% of revenues from a single business unit

Moderate to High Levels of Diversification

Related constrained
> 70% of revenues from dominant business; all businesses share product, technological and distribution linkages B

A C

Related linked (mixed)

70% of revenues from dominant business, A and only limited links exist B C A

Very High Levels of Diversification

Unrelated-Diversified
Business units not closely related B

When Should a Firm Diversify?

It is faced with diminishing growth prospects in present business It has opportunities to expand into industries whose technologies and products complement its present business It can leverage existing competencies and capabilities by expanding into businesses where these resource strengths are key success factors It can reduce costs by diversifying into closely related businesses It has a powerful brand name it can transfer to products of other businesses to increase sales and profits of these businesses
Ch6-6

Types of Diversification
Related Diversification Involves diversifying into businesses similar to its initial business in terms of at least one function like marketing,engineering , distribution etc Unrelated Diversification

Involves diversifying into businesses with no similarity with the initial business.

Ch6-7

Alternative forms of Diversification Strategies

Concentric (related) diversification

Conglomerate (unrelated) diversification

Ch6-8

Johnson & Johnson-Related diversification

Consumer - baby products (wipes, shampoos, cotton buds etc); wound care (bandaid); dental products

Medical - non-prescription drugs (Tylenol, Pepcid AC); prescription drugs; surgical products; Accuvue contact lenses

Ch6-9

ITC- Unrelated diversification

FMCG Cigarettes ,Foods ,Lifestyle Retailing, Personal Care , Education & Stationery Safety Matches Agarbattis Paperboards &packaging Paperboards & Specialty Papers Packaging Agri-Businesses Agri Commodities e-Choupal Leaf Tobacco Information Technology Hotels
Ch6-10

Virgin group- unrelated diversification

Ch6-11

How does Related and Unrelated Diversification enhance Competitiveness and create Value?
Related Diversification
Sharing activities Corporate relatedness Market power Vertical integration

Unrelated Diversification
Financial economies Efficiencies in internal capital market allocation Restructuring of businesses

Ch6-12

How does Related Diversification enhance Competitiveness and create Value?

Sharing activities

Operational relatedness
Activity sharing is created by sharing either a primary activity such as inventory delivery systems or support activity such as purchasing

Activity sharing requires sharing strategic control over business units Activity sharing may create risks because business unit ties create links between outcomes

Ch6-13

Sharing Resources at Procter & Gamble

Ch6-14

How does Related Diversification enhance Competitiveness and create Value?

Corporate relatedness:
Sharing activities Transferring core competencies
using complex sets of resources to link different businesses through managerial and technological knowledge, experience and expertise Eliminates resource duplication in the need to allocate resources for a second unit to develop a competence that already exists in another unit Provides intangible resources that are difficult for competitors to understand and imitate

Ch6-15

How does Related Diversification enhance Competitiveness and create Value?

Market power exists when a firm can: Sell its products above the existing competitive level Reduce the costs of its primary and support activities below the competitive level Market power is also associated with Multi-point competition wherein two or more diversified firms simultaneously compete in the same product or geographic areas

Sharing activities Transferring core competencies Market power

Ch6-16

How does Related Diversification enhance Competitiveness and create Value?

Backward integration Exists when firm produces its own inputs Forward integration
Exists when firm operates its own distribution system for delivering on its inputs

Sharing activities Transferring core competencies Market power Vertical integration

Benefits
Builds entry barriers Reduces transaction costs Better control and co-ordination of operations

Ch6-17

How does Unrelated Diversification enhance Competitiveness and create Value?

Financial Economies

Possible cost savings attained through reduction in cost of capital

Ch6-18

How does Unrelated Diversification enhance Competitiveness and create Value?

Corporate office distributes capital to businesses to create value for the company as a whole Efficient internal capital market allocation entails that deserving divisions of the firm receive their due share of investments (BCG Matrix) Corporate office ordinarily has superior access to information about business segments actual and prospective performance vis vis external markets Efficiencies gained through financial economies and efficient allocation of resources are more easily replicable by competitors than gains attained through operational and corporate relatedness
Ch6-19

Financial Economies Efficient ICM Allocation

How does Unrelated Diversification enhance Competitiveness and create Value?

Competencies associated with turning around diverse businesses

Financial Economies Efficient ICM Allocation Restructuring

Ch6-20

Sonys diversification Strategy

Ch6-21

Risks of Diversification
Attention may be diverted from the core business. Managing the new business may be difficult.

The new business may be over valued.

Ch6-22

Growth does not always lead a business to build on success. All too often it converts a highly business into alead Growth successful does not always large business. businessmediocre to build on success.

All too often it converts a highly successful business into a - Richard Branson mediocre large business.

Ch6-23