Strategy & Competitive Advantage in Diversified Companies Presenter: Qamar Bilal Syed

Moving up a level…  Strategy-making for single business enterprise   

Strategy-making for diversified enterprise

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Diversification: Things to consider The task of crafting corporate strategy for a diversified company encomes four (4) areas: 

1. Picking the new industries to enter and deciding on the means of entry – The 1st concern in diversifying is what new industries to get into and whether to enter by:  starting a new business from ground up,  acquiring a company already in the target

industry, or  forming a strategic alliance or t venture with another company 3

Diversification: Things to consider 2.Initiating actions to boost the combined performance of the business the firm has entered – As positions are created in the chosen industries, corporate strategists typically focus on ways to strengthen the long term competitive advantage. The corporate parents can help their business subsidiaries be more successful by  providing financial resources,  supplying missing skills or technological know-

how,  providing new cost reduction avenues

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Diversification: Things to consider 3.Pursuing opportunities to leverage cross-business value chain relationships & strategic fits into competitive advantage – A company that diversifies into a related value-chain business gains competitive advantage potential not open to a company that diversifies into a business that value-chain C o m m o n are totally unrelated.  Pertaining to technology,  Supply-chain logistics,

cu sto m e rs Pro d u ctio n

 Overlapping distribution channels 5

Diversification: Things to consider 4.Establishing investment priorities & steering corporate resources into the most attractive business unit –

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WHEN TO DIVERSIFY?

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When to diversify? When to diversify depends:  partly on a company’s growth opportunities in

its present industry; and  partly on the opportunities to utilize its resources, technology, expertise, competencies, and capabilities to other market area. A company must ask itself,

 “what type and how much diversification?”  Related business v totally unrelated business.

There is no urgency to diversification, wait for

the best time but be attentive!

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Why rushing to diversify isn’t necessarily a good strategy? Companies that continue to concentrate on a

single business can achieve enviable success over many decades without relying on diversification to sustain their growth.  McDonald’s, Coca-Cola, Apple Computers, Wal-

Mart, FedEx, Timex, Cam[bell Soup, Xerox, Ford Motor Company all won their reputations in a single business.

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Why rushing to diversify isn’t necessarily a good strategy? (Cont..) Concentrating on a single line of business

(totally or with a small close of diversification) has important organizational, managerial & strategic advantages.  It entails less ambiguity about “who we are

and what we do?”  The energies of whole organization are directed down one business path, creating less chance of loss of managerial time & resources.

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The risk of concentrating on a single business: The big risk of remaining concentrated on a

single business is putting all of a firm’s eggs in one industry basket. The market may become saturated, competitively un-attracted, or eroded by the appearance of new technologies or new products or fast-shifting buyer preferences.

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The risk of concentrating on a single business: (Cont..) Examples:  What digital cameras are doing to the market

for films and film-processing, and  What computer disk technology is doing to the market for cassette tapes and 3.5” floppy disks.

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Factors that signal when it's time to diversify: There is no formula for determining when a

company ought to diversify. Judgments about when to diversify have to be made on the basis of a company’s own situation. However, we can identify the symptoms & trace out the genuine need for diversification.

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Factors that signal when it's time to diversify: (Cont..) Generally speaking, a company is a prime

candidate for diversification when it has: 1.Diminishing growth prospects in its present business, 2.Opportunities to add value for its customers or gain comp adv by broadening its present business to include complementary products or technologies, 3.Attractive opportunities to transfer its existing competencies & capabilities to new business arenas, 4.Cost saving opportunities that can be exploited by diversifying into closely related 14 businesses, and

BUILDING SHAREHOLDER VALUE: The ultimate justification for diversification

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The ultimate justification for diversification: Diversification is justifiable only if it builds

shareholder value. To create shareholder value, a diversified company must get into businesses that can perform better under common management than they could perform as stand-alone enterprises.

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Three (3) tests for judging a diversification move: 1.The industry attractiveness test 2. 3.The cost-of-entry test 4. 5.The better-off test:  1+1 = 3

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CHOOSING THE DIVERSIFICATION PATH Related v Unrelated Businesses

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Related versus unrelated business Businesses are said to be related when they

are competitively valuable relationship among the activities comprising their respective value chains. The 1+1=3 rules definitely applies here.

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Related versus unrelated business (Cont..) Businesses are said to be unrelated when the

activities comprising their respective value chain are so dissimilar that no real potential exists to transfer skills or technology from one business to another or to combine similar activities and reduce costs or to otherwise produce competitively valuable benefits from operating and under a common corporate umbrella.

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Diversify Into Related Businesses : Build shareholder value by capturing cross-business strategic fi Transferring skills & capabilities from one business to anothe Sharing facilities or resources to reduce costs Leveraging use of a common brand name Combining resources to create new competitive strengths and cap

ns for Company Looking to Diversify

Diversify Into Unrelated Businesses :

es. superior job of choosing businesses to diversify into & of managing th

Diversify Into Both Related & Unrelated Business 21

THE CASE FOR RELATED DIVERSIFICATION STRATEGIES Finding the strategic fit…

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Strategic-Fit A related diversification strategy involves

adding business whose value chain possess competitively valuable “strategic-fit” with the value chain of the company’s present business.

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Value chain for related business Representative Value Chain Activities

Company SAu p p ly C h a in A ctivitie s Te ch n o lo g y O p e ra tioSnasle s & M a rke ti Dnigstrib u tiCo nu sto m e r S e rvice

Company B

S u p p ly C h a in A ctivi e sn o lo g y O p e ra tioSnasle s & M a rke ti Teti ch Dnigstrib u tiCo nu sto m e r S e rvice

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Cross-business strategic-fit along the value chain R&D and Technology Activities:  AT&T – from telephones to cable TV & Internet

access

Supply chain Activities:  Dell’s strategic partnership with leading

suppliers of microprocessors, mother boards, disk drives, memory chips monitors, modems, long-life batteries & other laptop and desktop PC components.

Manufacturing Activities:  Emerson electrics diversified in chain-saw

business. Become cost-leader by using t assembly facilities.



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Cross-business strategic-fit along the value chain (Cont..) Distribution Activities:  Sunbeam (FMCG Co.) acquire Mr. Coffee since

retailers were same ; Wal-Mart, Kmart, department stores ,etc.

Sales & Marketing Activities:  P&Gs lineup products like Ivory soap, Crest

toothpaste, Jif peanut butter & Duncan Hines cake mix have different competitors, suppliers & production requirements, but they all move through the same wholesale distribution system. 

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Cross-business strategic-fit along the value chain (Cont..) Managerial & istrative Activities:  Ford transferred its automobile financing &

credit know-how to the savings-and-loan industry by acquiring some failing S&L associations during the 1989 bailout.

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Strategic-fit, Economies of scope, & Competitive advantage Economies of scope - a concept distinct from

economies of scale arise from the ability to eliminate costs b y operating two or more businesses under the same corporate umbrella; the cost saving opportunities can stem from strategic fit relationships anywhere along the business’ value chain.  These are cross-business cost-saving

opportunities  The greater the economies of scope associated with cross-business costsaving opportunities, the greater the potential for creating a competitive advantage based on lower costs.

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Strategic-fit, Economies of scope, & Competitive advantage (Cont..) A diversified firm can achieve a consolidated

performance greater than the sum of what the businesses can earn pursuing independent strategies.  Cross-business strategic-fits adds potential of

the firms individual businesses.

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Capturing strategic-fit benefits: The related value chain activities must be

merged into a single functional unit and coordinated; then the cost savings must be squeezed out. A company that can expand its stock of strategic assets faster & at lower cost than rivals, obtain sustainable competitive advantage .  Related know-how must be utilized to

accelerate the creation of valuable new competencies & competitive capabilities. 30

THE CASE FOR UNRELATED DIVERSIFICATION STRATEGIES No strategic fit…

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Unrelated diversification Despite the strategic fit benefits associated

with related diversification, many companies opt for unrelated diversification.  It involves diversifying into whatever

industries and businesses hold promise for attractive financial gain; exploiting strategic fit relationship is secondary!

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Unrelated diversification (Cont..) Such companies go for opportunistic search for

“good companies” to acquire.  The premise of unrelated diversification is that

any company that can be acquired on good financial & has satisfactory profit prospects represents a good business to diversify into.  Like ARY-group and mostly famous Deewangroup!

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No Strategic-Fit for Unrelated Business Representative Value Chain Activities

Company SAu p p ly C h a in A ctivitie s Te ch n o lo g y O p e ra tioSnasle s & M a rke ti Dnigstrib u tiCo nu sto m e r S e rvice

ompletely valuable strategic fits b/w the value chain for Business-A and th

Company B

S u p p ly C h a in A ctivi e sn o lo g y O p e ra tioSnasle s & M a rke ti Teti ch Dnigstrib u tiCo nu sto m e r S e rvice

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The Criteria for unrelated diversification strategies Whether the business can meet corporate

targets for profitability& ROI? Whether the business will require substantial infusions of capital to replace out-of-date plants & equipment, fund expansion & provide WC? Whether the business is in the industry with significant growth potential? Whether the business is big enough to contribute significantly to the parent firm’s bottom line? 35

The Criteria for unrelated diversification strategies (Cont..) Whether there is potential for union difficulties

or adverse government regulations concerning product safety or environment? Whether there is industry vulnerability to recession, inflation, high interest rates, or shifts in government policy?

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Unrelated diversification opportunities: 2 Special Situations! Companies whose assets are

undervalued:  Opportunities may exist to acquire such

companies for less than full market value & make substantial capital gains by reselling their assets and businesses for more than their acquired costs. Companies that are financially distressed:  Such businesses can be purchased at a

bargain price.  Their operations turned around with the aid of the parent company financial resources.  As these businesses re-grow, they can be 37 converted into long-term investment area for

A real time example (Table page:305) WALT DISNEY COMPANY  Theme parks  Disney cruise line  Resort properties  Movie production (for both children and adults)  Video production  TV Broadcasting (ABC, Disney Channel, Toon

Disney, Classic Sports Network, ESPN, E!, Lifetime, and A&E Networks)  Radio broadcasting (Disney Radio)  Theatrical productions 38

A real time example (Table page:305) WALT DISNEY COMPANY (Cont..)  Musical recordings  Animation are sales  Anaheim Mighty Ducks NHL franchise  Anaheim Angels Major League Baseball

franchise  Book and magazine publishing  Interactive software and internet sites  The Disney Store retail shops

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The Pros & Cons of unrelated diversification Advantages:  Business risk is scattered over a set of diverse

industries.

  Cash flows from company businesses with

lower growth and profit prospects can be diverted to acquiring & expanding businesses with higher growth and profit potentials.

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The Pros & Cons of unrelated diversification (Cont..) Advantages (Cont..):  Company overall profitability may prove

somewhat more stable because hard times in one industry may be partially offset by good times in another.

  If the corporate managers are exceptionally

smart at spotting bargain-priced companies with big upside profit potential, shareholder wealth can be enhanced.

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The Pros & Cons of unrelated diversification (Cont..) Disadvantages – 2 biggest drawbacks are:  The difficulties of competently managing

many different businesses, and

  Being without the added source of competitive

advantage that cross-business strategic-fit provides.

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The Pros & Cons of unrelated diversification (Cont..) Corporate managers have to be talented

enough to:  Discern a good acquisition from a bad

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acquisition,  Select capable managers to run each of many different businesses,  Discern when the major strategic proposals of strategic business unit managers are sound,  Know what to do when a business unit stumbles. “never acquire a business you don’t know how to run.” 43

The Pros & Cons of unrelated diversification (Cont..) Some more drawbacks:  It offers no basis for cost reduction, skills

transfer, or technology sharing.  Although in theory unrelated diversification offers the potential for greater sales-profit stability over the course of the business cycle, in practice, attempts at countercyclical diversification fall short of the mark.

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The Pros & Cons of unrelated diversification (Cont..) Despite these drawbacks, unrelated

diversification can sometimes be a desirable corporate strategy. It certainly merits consideration when a firm needs to diversify away from an endangered or unattractive industry and has no distinctive competencies or capabilities it can transfer to an adjacent industry.

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Unrelated diversification & Shareholder Value Unrelated diversification is a financial approach

to creating shareholder value; Related diversification, in contrast, represents a strategic approach

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Unrelated diversification & Shareholder Value (Cont..) Corporate strategists must exhibit superior

skills in creating and managing a portfolio of diversified business interest:  Doing a superior job of diversifying into new

businesses that can produce consistently good returns on investment (satisfying the attractive test).  Doing an excellent job of negotiating favorable acquisition price (satisfying the cost-of-entry test).  Making smart moves to sell previously acquired business subsidiaries at their peak & getting price.

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Unrelated diversification & Shareholder Value (Cont..) Corporate strategists must exhibit superior

skills in creating and managing a portfolio of diversified business interest: (Cont..)  Being sharp in shifting corporate financial

resources out of the businesses where profit opportunities are dim & into businesses where rapid earnings growth and high ROI are occurring.  Smartly managing firm subsidiaries (by providing expert problem-solving skills, creative strategy suggestions, and decisionmaking guidance to business-level managers.

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COMBINATION RELATED-UNRELATED DIVERSIFICATION Opting for every possible opportunity!

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Combination related-unrelated diversification strategies There is nothing to exclude a company from

diversifying into both related and unrelated businesses. In practice, the business make up of diversified companies varies considerably.  Dominant business enterprises  Narrowly diversified enterprises  Broadly diversified enterprises  Several unrelated groups of related businesses

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Combination related-unrelated diversification strategies (Cont..) 1.Dominant business enterprises:  One major “core” business s for 50-

80% of total revenues & a collection of small related or unrelated businesses s for the remainder.

2.Narrowly diversified enterprises:  Narrowly diversified around a few (2-5) related

or unrelated businesses.

3.Broadly diversified enterprises:  Have a wide ranging collection of either

related or unrelated businesses or a mix of both. 51

Combination related-unrelated diversification strategies (Cont..) 4.Several unrelated groups of related businesses:  Few multi-business enterprises have

diversified into unrelated areas but have a collection of related businesses within each other.

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There is ample room for companies to

customize their diversification strategies to incorporate elements of both related & unrelated diversification, as may suit their own risk preference and strategic vision  52

CASE ON UNILEVER ive Study 

By : Mr . Abid Iqbal

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