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Corporate Strategy and Diversification

Corporate Level Strategy is thestrategy for a company and all of itsbusiness units as a whole.

Diversification is the primary approachto corporate level strategy.

Diversified firms vary according to the: Level of diversification. Degree of relatedness.

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Why do Firms Diversify?

When they have excess resources,capabilities, and core competencies thatmay be put to multiple uses.Diminishing growth prospects in thepresent industry.There are cost saving opportunities.There are opportunities to captureStrategic Fits advantages.There are opportunities to captureFinancial Economies.Spreading business risk.

Leverage of brand name.

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Making the DiversificationDecision

Decision to diversify depends on thefollowing two parameters:

Level and Degree of Diversification Number and Relatedness

Mode of Diversification Merger and Acquisition Strategies,

Internal Development, Joint Venture

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Diversification-CorporateStrategies

ConcentrationVertical IntegrationDiversification:

a. UnrelatedDiversification

b. Related Diversification

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Advantages of Concentration

Allows a firm to master one business: In-depth knowledge. Easier to achieve competitive advantage.

Organizational resources under lessstrain.Prevents proliferation of Managementlevels and staff functions.Sometimes found more profitable thanother strategies (dependent on thenature of the industry).

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Disadvantages ofConcentration

Risky

in unstableenvironments.

Product obsolescence andindustry maturity.

Cash flow problems.

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The Vertical Integration Supply Chain

7

RawMaterialsExtraction

PrimaryManufac-turing

Final

ProductManufac-turing

Whole-saling Retailing

Vertical Integration : The extent to whichan organization is involved in multiplestages of the industry supply chain.

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When to Vertically Integrate?

Common reasons for VerticalIntegrationIncreased control over quality of

supplies or the way the product ismarketed.Better information about supplies or

markets.Greater opportunities for differentiationthrough coordinated efforts.

Opportunity to make greater profits by

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Unrelated Diversification

Large, highly diversified firms arecalled CONGLOMERATES.

Not a high performing strategy formost firms but with a few notableexceptions.

Difficult for the top Manager tounderstand and appreciate the coretechnologies, key success factors, andspecial requirements of each

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Related Diversification

Based on tangible and intangiblerelatedness.

At conceptual level can lead to synergy,

which is often illusive .

Often a higher performing strategy thanthe unrelated diversification (lower risk

and higher profitability).

Can lead to corporate-level distinctivecompetencies giving an edge overcontemporaries.

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Combination of Related-Unrelated Diversification

StrategiesDominant-Business Firms One major/core business accounting for 50 - 80

percent of revenues, with several small related orunrelated businesses accounting for remainingrevenues.

Narrowly Diversified Firms Diversification includes a few (2 - 5) related or

unrelated businesses.

Broadly Diversified Firms Diversification includes a wide collection of eitherrelated or unrelated businesses or a mixture ofbusinesses.

Multi-Business Firms

Diversification portfolio includes several unrelatedgroups of related businesses

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STRATEGIES FOR ENTERINGINTO NEW BUSINESSES

Acquisition Internal newventure (start-up)

Joint ventureMerger

Diversifying intoNew Businesses

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Strategy of a DiversifiedCompany Evaluation

ParametersStep1 : Assess attractiveness/worth of eachindustry firm competing with each other.

Step 2 : Assess competitive strength of firms business units.

Step3 : Check competitive advantage potential ofcross-business strategic fits amongbusiness units.

Step4 : Check whether firms resources fit

requirements of present businesses.Step 5 : Rank performance prospects of businessesand assign a priority for resourceallocations

Step 6 : Craft new strategic moves to improve

overall performance of the company.

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Strategy Options for a AlreadyDiversified Firm

Stick withthe ExistingBusinessLineup

Broaden theDiversificationBase with NewAcquisitions

Divest andRetrench toa Narrower downtheDiversificationBase

Restructurethrough

DivestituresandAcquisitions

Strategy Options for aAlready Diversified Firm

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Why Firms Expand Globally?

Gain access to new customers and markets. Achieve lower costs and enhancecompetitiveness.

Capitalize on the corecompetencies/expertise of the Firm.Spread business risk across wider market

base. Access to raw materials, machinery,manpower etc. at low price/cost.

Minimize exchange rate fluctuations.

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Going Global - Cross Country DifferencesPoints to Ponder

Cultures and lifestylesMarket demographicsMarket conditions - Growth rate Distribution systems/channels Need for responsiveness/CSR Union

Carbide (Bhopal)Location/home ground advantage/home

sicknessFluctuating currency exchange ratesHost government restrictions/SOPs andreservations backward/hilly/tribal/border

and educationally backward minority

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Diversification Methods

Internal VenturesMergers and

AcquisitionsJoint Ventures

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Internal Ventures

Internal ventures make use of the research anddevelopment programs of the organization as it-

Provides high level of control over theventureProprietary information is not shared withother firms

All profits are retained by the venturingcompany

Disadvantages of internal ventures :

Risk of failure is highTakes a lot of time

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Mergers and Acquisitions

Mergers and acquisitions aresometimes seen as a way to buy innovations rather than producing in-house . Acquisition and mergersneed knowledge and skills.

M & A Strategies are:Fastest way to enter new markets,

Acquire new products or services,Learn new technologies,Facilitates vertical integration,Broaden the markets geographically penetration and/ormarket mix with more/high profitmotives, andSuits to the corporate image and itsoverall branding.

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Mergers and Acquisitions

Most research indicates that mergersand acquisitions perform poorly :

High premiums

Increasedinterest costson outstanding

loans or debts High advisory orconsultancyfees

Poison pills

High turnover

Managerialdistraction

Less innovation

Lack of strategic fit Increased risk offailure

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Mergers that Dont Work

Large or extraordinary debt/loan

Overconfident or incompetent

ManagementEthical concerns

Changes in Top Management Team

and/or Organizational Leadership

Inadequate analysis (due diligence) Diversification away from the firms core

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Mergers that WorkStrong relatedness of the firmsFriendly negotiations across the table withouta third party interventionLow-to-moderate debt

Continued focus on core strengths of firmCareful selection and negotiations only withthe target firmsStrong cash positionFirm cultures and management styles aresimilarSharing resources across companies

optimal utilization/judicious use

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STRATEGIC MANAGEMNT

GLOBALIZATION Why Going Global The Basic

Reasons

1. Homogeneity of Demands.2. Spread Research and

Development Costs.3. Increased Market Size.4. Rising Economies of Scale

cutting costs.5. Favorable Government Policies.6. Exploit Local Advantages.

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o ng o a s s nvo ve Failure to understand Foreign

Customers Preferences.Failure to Appreciate the Level,

Intensity and Complexities ofCompetitions in GlobalMarkets.

Failure to Understand HostCountrys Rules of the Game.Failure to Understand the

Political Risks and

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o ng o a za on re-requisites

Learn new or other languages with proper ascent.

Understand host countrys laws, rules, regulations,systems and procedures restrictions on foreigninvestments etc.

Any specific benefit offered by the host country lowtax rates, tax holiday, rent free land, low-interest or no-interest loans, subsidized energy and transportationcost and well developed infrastructure.

Ability to deal with volatile currencies. Ability to face political risks and/or uncertainties.Redesign products to suit the needs of differentsegments of customers and the expectations of theirtraditions, rituals and cultural environment.Cost effective place.

Availability of large market for goods and services.

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GLOBAL EXPENSION

STRATEGIES Standardize ProductsLocate Plant to maximize System-wide

Advantages.Leverage Technology across Multiple

Markets.Undertake World-wide Marketing Efforts.Compete with Rivals through Cross-subsidization.

Product Adaptation.Do value-addition locally.Use local Distribution Channels.Strongly Global Image.

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ACQUIRING/BUILDING

COMPETITIVE ADVANTAGE HOW?

Strategic route for acquiring/buildingcompetitive advantages are -

Must innovate and continue to innovate,and master the art of change. Maintainflexibility, continuously improve quality,and beat competition through innovative

products and services.

Integrate horizontally and vertically togarner optimal benefits.

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Be open for alliances, mergers andacquisitions to climb up the value chainand survive in the market.

Focus on research and development forproducing unique ideas and methodsleading to new and improved productsand services.

Create entry barriers in terms of largesize, low investment, substantial costadvantage, formidable distributionnetwork, powerful brand (Bajaj Auto,Maruti Udyog, Asian Paints, TELCO,Thermax etc.)

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CORE COMPETENCY

Certain long lasting and uniquecompetitive advantages that can notbe easily imitated by the competitors.

Such core competencies put the firmahead of others as a winner on mostoccasions.

Acquire core competence throughheavy investments in technology,

research and development followed by

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Core Competency - ExamplesHonda Engine design and technology

3M Research and development especially insubstrates, coatings and adhesives.

Dupont Chemical Technology

Sony Miniaturization, micro-processordesigns

Xerox Research strength in material science, `mechanics and optics

NEC (Japan) Computing, communications andcomponents.

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Core Competency - Attributes

Provides access to the Firm to theimportant markets areas and/orsegments/pockets.

Contributes significantly to customers

satisfaction, and the benefits in theend products.

Proves difficult for competitors toi i