m MUHAMMAD Qamar uz zaman

m Final project
CORPORATE
DIVERSIFICATION
STRATEGIES
Strategic Mgt. In
Diversified Companies

m O e tribal wisdom of t e Lakota Indians

passed on from one generation to t e
next, says t at w en you discover t at
you are riding a dead orse, t e best
strategy is to dismount. However,
members of modern, corporate
management teams ave developed
new tec niques.
a. Buying a stronger w ip.
b. C anging riders..
c. O reatening t e orse wit termination...
d. Appointing a committee to study t e orse....
e. Arranging to visit ot er sites to see ow t ey
ride dead orses...
f. Lowering t e standards so t at dead orses can
be included.....
g. Reclassifying t e dead orse as living
impaired.....
. Hiring outside contractors to ride t e dead
orse.....
i . Harnessing several dead orses toget er to
increase speed.....
j. Providing additional funding to increase t e dead
orse's performance.
k. Doing a productivity study to see if lig ter riders
would improve t e dead orse's performance.
l. Declaring t at t e dead orse carriers lower
over ead and t erefore performs better t an some
ot er orses....
m. Rewriting t e expected performance requirements
for all orses.
n. Promoting t e dead orse to a supervisory position
Overview

m  at is Diversification
m  at is senior Mgtƞs responsibility in
Diversified Companies?
m  y and  en does a company diversify?
m How does a company accomplis it
m Related and Unrelated Diversification
m  en to stop.
What is Diversification?

m A collection of businesses under one

corporate umbrella
Diversification and
Corporate Strategy
m w
 
 
     
     
m    
 

 is a
 picture exercise t an crafting a strategy for
a single line-of-business
m A diversified company needs a 
   
   
m A  

  must be developed for
  different    competing in
 

   environments
Diversification and
Corporate Strategy

m In addition to a business strategy w ic

identifies and maintains a sustainable
competitive advantage in eac of t e
business units, 
 

 
   

  is needed w ic creates value
and is internally consistent.
Diversification and
Corporate Strategy

m A co erent corporate strategy can best be

t oug t of as ow, in pursuit of a vision
vision, t e
corporation aligns its goals and objectives,
objectives
organizational structure, systems and processes,
processes
and c oice of industries and strategies to build
and leverage t e unique resources to give it a
corporate advantage.
m It is t roug t ese actions t at t e corporation
will create value and so justify its existence as a
multi-business entity
Five Components of
Corporate Strategy

m @ision- For t e corporation as a w ole

m Goals and Objectives
m Structure, systems and procedures
m Deploy corporate resources into t e businesses
m Establis t e context for decentralized decision
making
m Routine public company functions
m Contain multiple elements e.g. structure,
budgeting,strategic planning, management style etc.
Five Components of
Corporate Strategy-Resources

m Set of tangible and intangible assets, establis ed over

time, w ic canƞt be readily imitated, acquired or
duplicated.
m Make t e corporation unique
m  en t ey are competitively superior and t ey
contribute to sustainable competitive advantage in t e
SBUƞs, t ey become a corporate advantage.
advantage
m Resources, effectively used, create value
m One time=restructuring
m Ongoing=use of corporate brand
Five Components of Corporate
Strategy-Businesses and Industries

m Industries in w ic t e corporation
c ooses to compete
m Competitive strategies adopted by t e
business units in t ose industries.
m How t e units are related to eac ot er.
Tasks of Senior
Management

m Create an appropriate vision

m Establis goals and objectives
m Finding and moving into compatible businesses
and industries
m Leverage Resources
m Boost combined performances
m Find synergies among related businesses t at result
in competitive advantage
m Move resources into businesses
Because you are dealing
with multiple industries,
businesses and locations,

Diversified businesses are

harder to manage
Why and When does a
company diversify?
FROM SINGLE-BUSINESS
TO DIVERSIFICATION

á
  Most firms begin as small single-

business enterprises serving a local or regional
market
á
  Geograp ical expansion
á
  @ertical integration
á
  As growt slows, strategic options
include:
m Oake market s are from rivals
m Focus on diversification
When do we diversify?

m  en a company runs out of growt

opportunities in t e core business and not
before!
m  en diversification results in creation of
value
WHEN DOES DIVERSIFICATION
START TO MAKE SENSE?

Strong competitive eak competitive

position, rapid market position, rapid market
growt -- R a good growt -- R a good
time to diversify time to diversify
Strong competitive eak competitive
position, slow market position, slow market
growt -- Diversification growt -- Diversification
is top priority merits consideration
consideration
When you can increase
value based on three tests

m Attractiveness Oest-O e industry must be

attractive
m Cost of Entry Oest - Cost as to be
reasonable ( Catc 22)
m Better off Oest - Diversification results in a
competitive advantage and creation of
value.
How to Diversify

m Find ways to enter new industries

m Decide w et er t e businesses related to
eac ot er or not?
m Strengt en t e performance of t e
businesses youƞve got
m Get rid of t e bad ones t at canƞt be fixed
m Fix t e bad ones t at can be fixed
STRATEGIES FOR ENTERING
NEW BUSINESSES

 Acquire existing firm in target

industry

 Start new company internally

 Form joint venture

ACQUIRING AN EXISTING
COMPANY

m Most popular approac to diversification

m Advantages
m Quicker entry into target market
m Hurdling certain entry barriers
m Oec nological inexperience
m Gaining access to reliable suppliers
m Being of a size to matc rivals in terms of
efficiency & costs
m Getting adequate distribution access
DIVERSIFICATION VIA
INTERNAL STARTUP
6
 
  !"R
!"R
m Ample time exists
m Incumbent firms slow in responding
m It involves lower costs t an acquiring existing firm
m Firm already as most of needed skills
m Additional capacity will not adversely impact supply-
demand balance in industry
m New start-up does not ave to go ead-to- ead
against powerful rivals
DIVERSIFICATION VIA
JOINT VENTURES
   
 !"R

m Uneconomical or risky to go it alone
m Pooling competencies of two partners
provides more competitive strengt
m Foreign partners needed to surmount
m Import quotas
m Oariffs
m Nationalistic political interests
m Cultural roadblocks
DRAWBACKS OF JOINT
VENTURES
m Raises questions about -
m  ic partner will do w at &
m  o as effective control
m Requires precise agreements
Related Diversification

m Are t e businesses t at we are divesting

into related to one anot er and if so,
ow?
Concept:
á
 

m Exists among different businesses w en t eir 


are sufficiently  to offer opportunities
m Offers
 
  of
m a
 
m Efficient    of
m ey skills
m Oec nological expertise
m Managerial know- ow
m Use of a    
 
m Presence of strategic fit in a diversified firmƞs portfolio, along wit
corporate managementƞs skill in capturing benefits of t e interrelations ips
makes related diversification capable of being a  #  $ %
p enomenon
Types of Strategic Fit

O

  






 
    




Several lines of business
with a strategic fit that
becomes a strategic
advantage
RELATED DIVERSIFICATION
& STRATEGIC FIT
m &'w&"()* +)& can be based on
m S ared tec nology
m Common labor skills
m Common distribution c annels
m Common suppliers & raw materials sources
m Similar operating met ods
m Similar kinds of managerial know- ow
m Ability to s are common sales force
m Customer overlap
m Any area w ere meaningful s aring opportunities exist
in businessesƞ value c ains
COMMON APPROACHES TO
RELATED DIVERSIFICATION
m Entering businesses w ere sales force, advertising, &
distribution activities can be s ared
m Exploiting closely related tec nologies
m S aring manufacturing facilities
m Oransferring know- ow & expertise from one business to
anot er
m Oransferring firmƞs brand name & reputation wit
customers to a new product/service
m Acquiring new businesses to uniquely elp firmƞs
position in existing businesses
Value of Related
Diversification

Allows a company to enjoy

economies of scope
CONCEPT: ECONOMIES
OF SCOPE
m Utilize strategic fits to gain cost or ot er competitive
advantage.
m Economies of scale use size to gain advantage
m Arise from ability to 
  by operating two
or more businesses under same corporate umbrella
m Exist w enever it is 
  for two or more
businesses to operate under centralized management
t an to function independently
m *   opportunities can stem from
interrelations ips anyw ere along businessesƞ 


Unrelated Diversification

m If t e businesses we diversify into arenƞt

related to eac ot er, w atƞs t e point?
Unrelated Diversification

m Financially driven rat er t an Strategically

driven
m Strategic fit, value c ain relations ips or
strategic t eme are not important
m Profitability and size are key.
m Look for a bargain
m undervalued assets, financially distressed,
turnarounds, brig t future wit limited capital
Unrelated diversification

m Go into any business w ere we can make

a profit
m Referred to as conglomerates
m No unifying strategic t eme
APPEAL OF UNRELATED
DIVERSIFICATION

m Business risk scattered over different industries

m Capital resources invested in t ose industries offering
best profit prospects
m Stability of profits -- Hard times in one industry may be
offset by good times in anot er industry
m If management is exceptionally astute at spotting
bargain-priced firms wit big profit potential, t en -
m S are older wealt can be en anced
Tasks of Senior
Management

m  en you arenƞt looking for businesses,

w at do you do?
m Leverage t e Resource base
m Boost combined performances
Strengthen the
Performances of
Companies we own

m Fix w at can be fixed

m Get rid of w at cannot be fixed
m If it isnƞt broken, please donƞt fix it.
When it can·t be fixed

m Divest
m Liquidate
DIVESTITURE &
LIQUIDATION STRATEGIES

m Situations arise w en one or more

subsidiaries ave to be sold or s ut down
m Misfits cannot be completely avoided
m Industry attractiveness c anges over time
m Subpar performance of some subsidiaries is
bound to occur
m Diversification appearing sensible based on
strategic fit lacks compatibility of values essential
to *,a&,'wa +)&
Divestiture

m Spin off
m Sale
When it can be fixed

m Ournaround
m Cure t e problems t at make t e losing
business unsuccessful
m Done w en t e business is in an attractive
industry
m And w en divesting doesnƞt make strategic
sense
COMMENT: TREND IN
DIVERSIFICATION

O e present trend toward narrower

diversification as been driven by a
growing preference to gear
diversification around creating strong
competitive positions in a few, well-
selected industries as opposed to
scattering corporate investments across
many industries!
STRATEGY OF MULTINATIONAL
DIVERSIFICATION





 



§)-"')&. › ë,)R"" &
§)-"')&. › Rw&)/Rwa
0w'1"&
m Presents a big strategy-making
c allenge
MULTI-NATIONAL
DIVERSIFICATION: THE 1960s
m 6   
 

m Management tasks at eadquarters focused on
m Finance functions
m Oec nology transfer
m Export coordination
m Primary competitive advantage of an 6R - Ability to
transfer certain skills from country to country efficiently &
c eaply
m 6R market position in a country negotiated wit ost
government, not due to pressures of international
competition
MULTI-NATIONAL
DIVERSIFICATION: THE
1970s
m Oraditional 6R driven to integrate operations
across national borders
m Manufacturing a complete product range in eac
country became less prevalent
m Gains in manufacturing efficiencies from
converting to world-scale plants more t an
offset increased international s ipping costs
m In many industries, firms moved to locate plants
in low-wage countries to ac ieve labor cost
savings
MULTI-NATIONAL
DIVERSIFICATION: THE
1980s
m Anot er source of competitive advantage
emerged
m Using strategic fit advantages of related
diversification to build a stronger global position
m Often, being a §6R was competitively
superior to an 6R due to "/2/6)" /+
/3"
When to Stop Diversifying

m  en you ac ieve acceptable levels of

growt and profitability
m Before complexity outstrips management's
ability to manage