Documente Academic
Documente Profesional
Documente Cultură
1. MarketCurrent
penetration
markets
strategy
New 2. Marketdevelopment
markets
strategy
New
products
3. Productdevelopment
strategy
(Diversification
strategy)
3. Even if current objectives are being met, a firm may diversify when diversification
opportunities promise greater profitability than expansion opportunities.
4. Firms may suffer from the grass is greener on the other side
syndrome.
LEVELS OF DIVERSIFICATION
Acquisition
Strategic
Alliances
Internal
Growth
Horizontal
Global
Company A
Revenues
150
Operating Costs
118
Earnings
32
Cash
55
Other Assets (Book Value) 185
Total Assets
240
Price Per Share
48
Number Of Shares
10.0
Market Value
480
Company B
20
16
4
2.5
17
19.5
16
2.5
40
Merged
172
(+2)
132
(-2)
40
(+4)
= Rs. 4 Crores
Assuming that
= 20 %
= Rs.4/.2 Crores
= Rs. 20 Crores
= Rs.480 Crores
= Rs. 40 Crores
= Rs. 20 Crores
= Rs.492.5 Crores
Cash Purchase
Exchange of Shares
Earnings
40
40
Cash
10
57.5
202
Total Assets
212
259.5
49.25
49.85
Number of shares
10.0
10.8333
Market Value
492.5
540
Gains
Company A has issued 1 share to stockholders of Co. B for every 3 shares held
by them.
Number of Additional Shares issued
= Rs 49.85 * 83,33,333
= Rs 41.5 Crores
VERTICAL INTEGRATION
Benefits:
Building Barriers to Entry.
Reduced Transaction Costs.
Note: Tapered Integration.
Limits:
MES
HORIZONTAL DIVERSIFICATION
Horizontal Diversification entails moving into more than one industry. It
can be
Related Diversification
Unrelated Diversification or Conglomerate Diversification
The case for Conglomerates
Corporate managers have capability to spot low valued stocks.
Corporations may be able to borrow money at Lower interest rates and pay
lower per share brokerage.
The case against Conglomerates
Conglomerate discounts. Resulting in Corporate Raiders.
Takeover Premiums.
Locational Economies.
Least Power to
Create Value
Reducing
Risk
Not
recommended
as Reason to
Diversify
Most Power to
Create Value
Maintaini
ng Growth
Balancing
Cash
Flow
Sharing
Infrastruct
ure
Increasing
Market
Power
Capitalizi
ng on Core
Competen
ce
Recommended
as Reason to
Diversify
PRODUCT SALES
20%18%16%14%12%10%8%6%4%2%0
10x
4x
2x 1.5x
1x
HIGH
CASH
USE
(Growth
Rate)
LOW
Modest
+ or Cash
Flow
Large Negative
Cash Flow
Large Positive
Cash Flow
Modest
+ or Cash
Flow
HIGH
LOW
SUCCESS SEQUENCE
20%18%16%14%12%10%8%6%4%2%0
10x
4x
2x 1.5x
1x
DISASTER SEQUENCE
20%18%16%14%12%10%8%6%4%2%0
10x
4x
2x 1.5x
1x
Growth
Maturity
Decline
Push
High
Competitive
Strength
Medium
Low
Caution
Danger
Market Share
Core Competencies
Profit Margin vs Competitors
Ability to Match Price/Service
Market Size
Growth Rate
High
Profit Margin
Competition Intensity
Seasonality
Medium
Cyclicality
Technology & Capital
Social Impact
Regulation
Low
Environment
Opportunities & Threats
Barriers to Exit/Entry
Strong
Average
Relative Costs
Knowledge
Technological Ability
Management Caliber
Weak
FEAR OF OPPORTUNISM
COSTLY TO WRITE A
CONTRACT
COSTLY TO ENFORCE A
CONTRACT
ASYMMETRIC
INFORMATION BETWEEN
BUYERS AND SELLERS
RELATIONSHIP SPECIFIC
INVESTMENTS
UNCLEAR PROPERTY
RIGHTS
DEVELOPING
Equity focused
Under-developed weak
equity market &
Nationalized Banks
Monitoring
by disclosure rules
Market for corporate
control
FACTOR
MARKET
DEVELOPED
Many B
Schools and
Consulting
firms offering
talent
Certified skills
enhancing
mobility
DEVELOPING
Few of these
CAPITAL
MARKET
FIRM
Weak Monitoring
PRODUCT
MARKET
CONTRACT
DEVELOPED
ENFORCEMENT
DEVELOPED DEVELOPING Reliable
enforcement
Predictable Unpredictable of liability laws
GOVT REGULATIONS
Efficient
Low.
Relatively
free of
Corruption
Not So
DEVELOPING
Limited
enforcement
of liability laws
Little
dissemination dissemination
of Information of Information
Activist
Consumers
Few Activist
Consumers