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STAGE 4STAGE 4:: DiversificationDiversification--usually initiated --usually initiated when growth opportunities dwindle when growth opportunities dwindle in the company’s present businessin the company’s present business
Competitive strengths of a Competitive strengths of a single business strategy – 1single business strategy – 1•Less ambiguity about “who we are”Less ambiguity about “who we are”•Energies of firm, resources and Energies of firm, resources and capabilities can be directed down one capabilities can be directed down one business path and keeping strategy business path and keeping strategy responsive to industry changeresponsive to industry change•Less chance resources will be Less chance resources will be stretched thinly over too manystretched thinly over too manycompeting activitiescompeting activities
Competitive strengths of a Competitive strengths of a single business strategy – 2single business strategy – 2•Higher probability innovative ideas and Higher probability innovative ideas and important competencies will emergeimportant competencies will emerge•Top executives can maintain hands-on Top executives can maintain hands-on contact with core businesscontact with core business•Ability to parlay experience and Ability to parlay experience and reputation intoreputation into
Sustainable competitive advantageSustainable competitive advantageProminent leadership positionProminent leadership position
When to diversify?When to diversify?When it makes sense to diversifyWhen it makes sense to diversify depends ondepends on
Growth potentialGrowth potential in present businessin present business Attractiveness of opportunities to Attractiveness of opportunities to
transfertransfer existing existing competenciescompetencies to to new businessesnew businesses
Potential Potential cost-saving opportunitiescost-saving opportunities to to be realized by entering related businessesbe realized by entering related businesses
AvailabilityAvailability of adequate financial and organizational of adequate financial and organizational resourcesresources Managerial expertiseManagerial expertise to cope with complexity of operating a to cope with complexity of operating a
To build To build shareholder valueshareholder value
Make 2 + 2 = 5Make 2 + 2 = 5
Diversification Diversification cancan increase increase shareholder shareholder valuevalue if it passes if it passes Porter’s three testsPorter’s three tests::
1.1. Attractiveness testAttractiveness test2.2. Cost of entry testCost of entry test
Must not capitalize all future profitsMust not capitalize all future profits3.3. Better-off testBetter-off test
Combined unit must be better than the Combined unit must be better than the ones it replacesones it replaces
Entry into new business activity based on shared Entry into new business activity based on shared commonalities in the components of the value commonalities in the components of the value chains of the firms – chains of the firms – good strategic or resource good strategic or resource fitfit
AA strategy-drivenstrategy-driven approach to creating approach to creating shareholder valueshareholder value
Entry into a new business area that has no Entry into a new business area that has no obvious relationship with any area of the obvious relationship with any area of the existing business.existing business.
A A finance-drivenfinance-driven approach to creating approach to creating shareholder valueshareholder value
These capabilities help each business unit perform at a higher These capabilities help each business unit perform at a higher level than if it operated as an individual company:level than if it operated as an individual company:
1.1. Entrepreneurial capabilities –Entrepreneurial capabilities – encourage risk taking while encourage risk taking while managing & limiting the amount of risk undertaken managing & limiting the amount of risk undertaken
2.2. Organizational design –Organizational design – create structure, culture, and control create structure, culture, and control systems that motivate and coordinate employeessystems that motivate and coordinate employees
3.3. Superstrategic capabilities –Superstrategic capabilities – effectively manage the managers effectively manage the managers of the business units and helping them think through strategic of the business units and helping them think through strategic problemsproblems
General organizational competencies are skills of a company’s top managers and functional experts that transcend individual functions or business units.
These managerial skills are often not present, as they are rare and difficult to develop and put into action.
Exploiting general organizational Exploiting general organizational competenciescompetencies
Finance-driven diversification Finance-driven diversification often dissipates valueoften dissipates value
Diversifying to pool risksDiversifying to pool risks Stockholders can diversify their own portfolios at lower costs than the company can.Stockholders can diversify their own portfolios at lower costs than the company can. This represents an unproductive use of resources as profits can be returned to shareholders This represents an unproductive use of resources as profits can be returned to shareholders
as dividends.as dividends. Research suggests that corporate diversification is not an effective way to pool risks. Research suggests that corporate diversification is not an effective way to pool risks.
Diversifying to achieve greater growthDiversifying to achieve greater growth Growth on its own does not create value.Growth on its own does not create value. Business cycles of different industries are inherently difficult to predict.Business cycles of different industries are inherently difficult to predict.
Based on a large number of academic studies:Extensive diversification tends to reduce,
Most popular approach to diversificationMost popular approach to diversification AdvantagesAdvantages::
Quicker entry into target marketQuicker entry into target market Easier to hurdle certain entry barriersEasier to hurdle certain entry barriers
Technological inexperienceTechnological inexperience Gaining access to reliable suppliersGaining access to reliable suppliers Being of a size to match rivals in terms of Being of a size to match rivals in terms of
efficiency and costsefficiency and costs Getting adequate distribution access Getting adequate distribution access
Internal startupInternal startupMore attractive whenMore attractive when Incumbents slow in responding to new entryIncumbents slow in responding to new entry Less expensive than acquiring an existing firmLess expensive than acquiring an existing firm Company already has most of needed skillsCompany already has most of needed skills Additional capacity will not adversely impact Additional capacity will not adversely impact
supply-demand balance in industry supply-demand balance in industry New start-up does not have to go head-to-head New start-up does not have to go head-to-head
Single business enterprises – strengths and Single business enterprises – strengths and weaknessesweaknessesDiversification – Porter’s three testsDiversification – Porter’s three testsRelated diversification and unrelated Related diversification and unrelated diversificationdiversification
Good strategy vs. bad financeGood strategy vs. bad financeNew market entryNew market entry