Chapter 14

Diversification PPT 14-1

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Diversification

Chapter Fourteen

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“Indecision and delays are the parents of failure.”

- George Canning

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Diversification

• The strategy of entering product markets different from those the firm is currently engaged.

• Related Diversification – new business shares meaningful commonalities with the core business. Involves exporting or exchanging assets and competencies

• Unrelated Diversification – lacks shared commonalities. Financially motivated: to generate larger, less uncertain or more stable profit streams.

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Related Diversification Can Involve Sharing of:

• Customers

• Sales Force or Channel of Distribution

• Brand Name and its Image

• Facilities

• R & D

• Staff and Operating Systems

• Marketing and Marketing Research

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Leveraging Assets and Competencies(Figure 14.1)

Three Steps to Take In Evaluating Related Diversification

Assess Assets,Competencies,

and ExcessCapacity

Identify BusinessPlans that will

Leverage Assetsand Competencies

Implementthe

Business Plans

Figure 14.1

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Related DiversificationExporting or Exchanging Assets and Competencies

Brand Name – e.g., Disney, Sony, IBM, Virgin

1. Does the brand fit the new product context?

2. Does the brand add value to the offering in the new product class?

3. Will the extension enhance the brand name and image?

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Related DiversificationExporting or Exchanging Assets and Competencies

• Marketing Skills – e.g., Black & Decker & Ernhart

• Capacity in Sales or Distribution - e.g., Nestle & Coke

• Manufacturing Skills - e.g., Honda with small motors; Sony with small products

• R&D Skills - e.g., GE with turbines and light bulbs

• Achieving Economies of Scale

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The Mirage of Synergy

• Potential synergy does not exist - e.g., General Foods & Burger Chef

• Potential synergy exists, but implementation barriers make it unattainable - e.g., Daimler-Benz & Chrysler

• Potential synergy is overvalued - e.g., Quaker Oats & Snapple

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Unrelated Diversification

• Managing and Allocating Cash Flow - e.g., tobacco firms buying General Foods, Nabisco, and Del Monte

• Entering Business Areas with High ROI Prospects - e.g., Fuji Film and Kodak getting into digital cameras and accessories; disastrous examples: Avon buying Tiffany’s and Giorgio Beverly Hills, Quaker buying Snapple, Daimler-Benz buying Chrysler

• Obtaining a Bargain Price for a Business• The Potential to Refocus a Firm - e.g., Esmark selling its

oil and gas business and Swift to focus on its core (consumer products).

• Reducing Risk - e.g., Hershey buying Friendly Ice Cream and Skinner Macaroni Company

• Tax Implications

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Unrelated Diversification

• Obtaining Liquid Assets - e.g., banks & insurance cos.

• Vertical Integration Motivations

• Defending Against a Takeover

• Providing Executive Interest

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Unrelated Diversification

• Risks of Unrelated Diversification

– Attention may be diverted from the core business.

– Managing the new business may be difficult.

– The new business may be over valued.

• Performance of Diversified Firms– McKinsey Study from 1990 to 2000 shareholder returns

(n = 412 of S&P 500)

• Focused 8%

• Moderately Diversified 13%

• Diversified 4%

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Entry Strategies (Figure 14.3)

Entry Strategies Major Advantages Major Disadvantages

Internal Development• Uses existing resources• Avoids acquisition cost• Especially if unfamiliar

with product/market

• Time lag• Uncertain prospects

Internal Venture • Uses existing resources• May keep talented

entrepreneurs

• Mixed success record• Can create internal stresses

Acquisition • Saves calendar time• Overcomes entry barriers

• costly-usually buy redundant assets

• Problem of integrating two organizations

Joint Venture or Alliance • Technological/marketing unions can exploit small/large firm synergies

• Distributes risk

• Potential for conflict in operations between firms• Value of one firm may be reduced over time

Figure 14.3

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Entry Strategies (Figure 14.3)

Entry Strategies Major Advantages Major Disadvantages

Licensing from Others• Rapid access to technology• Reduced financial risk

• Will lack proprietary technology and technological skills

• Will be dependent on licensor

Educational acquisitions • Provides window and initial staff

• Risk of departure of entrepreneurs

Venture Capital and Nurturing

• Can provide window on new technology or market

• Unlikely alone to be a major stimulus of firm growth

Licensing to Others • Rapid access to a market• Low cost/risk

• Will lack knowledge/control of market

• Will be dependent on licensee

Figure 14.3

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Joint

Ventures

Venture capital or educational acquisitions

Venture capital or education acquisitions

Internal market developments or acquisitions (or joint ventures)

Internal ventures or acquisitions or licensing

Venture capital or educational acquisitions

Internal base developments (or acquisitions)

Internal product developments or acquisitions or licensing

Joint ventures

Figure 14.4

Optimal Entry Strategies

BaseBase

New/Familiar

New/Familiar

New/UnfamiliarNew/Unfamiliar

New/Unfamiliar

New/Unfamiliar

New/FamiliarNew/Familiar

BaseBase

Mar

ket

Fac

tors

Technologies or Services Embodied in the Product

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Key Learnings

• Related diversification involves the potential to attain synergies by exporting or exchanging assets or competencies.

• The brand is one asset that often can be leveraged. Disney and Sony are examples of brands that have provided the basis for a broad array of businesses.

• A brand should fit a proposed new product market and add value. And, importantly, the new product market context should enhance and reinforce the brand (and certainly should not damage it).

• Synergy can be illusory, being perceived when in fact it does not exist, implementation barriers make it unachievable, or it is overvalued.

• There are eleven motivations for unrelated diversification, including to manage cash flow, to obtain attractive businesses, to refocus a firm and to reduce risk.

• Figure 14.3 illustrates eight approaches to market entry based on how new the technology or market is to the organization.