Diversification and Corporate Strategy

1
Diversification and Corporate Strategy

• A company is diversified when it is in two or
  more lines of business
• Strategy-making in a diversified company is a
  bigger picture exercise than crafting a strategy
  for a single line-of-business
• A diversified company needs a multi-industry,
  multi-business strategy
• A strategic action plan must be developed for
  several different businesses competing in diverse
  industry environments

2
Stages in Transitioning from a Single Business
to a Diversified Company

• STAGE 1 Small single-business serving a
  regional market
• STAGE 2 Geographic expansion
• STAGE 3 Vertical integration (optional)
• STAGE 4 Diversification--usually initiated when
  growth opportunities dwindle in the companys
  present business

3
When to Diversify?

• When it makes sense to diversify depends on
• Growth potential in present business
• Attractiveness of opportunities to transfer
  existing competencies to new businesses
• Potential cost-saving opportunities to be
  realized by entering related businesses
• Availability of adequate financial and
  organizational resources
• Managerial expertise to cope with complexity of
  operating a multi-business enterprise

4
When Does DiversificationStart to Make
Sense?

• Strong competitive position, rapid market growth
  -- Not a good time to diversify

• Weak competitive position, rapid market growth --
  Not a good time to diversify

• Strong competitive position, slow market growth
  -- Diversification is top priority consideration

• Weak competitive position, slow market growth --
  Diversification merits consideration

5
Corporate Strategy Alternatives
Vertical Integration
Diversify into Related Businesses
Diversify into Unrelated Businesses
Single Business Concentration
Diversify into Related Unrelated Businesses
6
Diversification Strategies

• Entering new industries
• Related diversification
• Unrelated diversification
• Divestiture and liquidation
• Corporate turnaround, retrenchment, and
  restructuring
• Multinational diversification

7
Strategies for EnteringNew Businesses
Acquire existing company
Start-up new business internally
Joint venture with another company
8
Types of Strategic Fit
Technology Fits
Operating Fits
Distribution Customer-Related Fits
Managerial Fits
9
What Is Unrelated Diversification?

• Involves diversifying into businesses with
• No strategic fit
• No meaningful value chainrelationships
• No unifying strategic theme
• Approach is to venture into any business in
  which we think we can make a profit
• Firms pursuing unrelated diversification are
  often referred to as conglomerates

10
Acquisition Criteria For Unrelated
Diversification Strategies

• Can business meet corporate targets for
  profitability and ROI?
• Will business require substantial infusions of
  capital?
• Is business in an industry with growth potential?
• Is business big enough to contribute to the
  parent firms bottom line?
• Is there potential for union difficulties or
  adverse government regulations?
• Is industry vulnerable to recession, inflation,
  high interest rates, or shifts in government
  policy?

11
Attractive Acquisition Targets

• Companies with undervalued assets
• Capital gains may be realized
• Companies in financial distress
• May be purchased at bargain prices and turned
  around
• Companies with bright
  prospects but limited capital

12
Appeal of Unrelated Diversification

• Business risk scattered over different industries
• Capital resources can be directed to those
  industries offering best profit prospects
• Stability of profits -- Hard times in one
  industry may be offset by good times in another
  industry
• If bargain-priced firms with big profit potential
  are bought, shareholder wealth can be enhanced

13
Drawbacks of Unrelated Diversification

• Difficulties of competently managing many diverse
  businesses
• There are no strategic fits which can be
  leveraged into competitive advantage
• Consolidated performance of unrelated businesses
  tends to be no better than sum of individual
  businesses on their own (and it may be worse)
• Promise of greater sales-profit stability over
  business cycles seldom realized