1. DIVERSIFICATION Strategies for Managing a Group of Businesses Topics: ► DIVERSIFICATION Reading: ► TSG:Part1, Ch. 9 Diversification: Strategies for Managing a Group of Businesses Strategic Management Welcome to CSBD

2. The Strategy-Making, Strategy-Executing Process Monitoring, evaluating performance, and making corrective adjustments Developing a strategic vision Setting Objectives Crafting a strategy Implementing and Executing the strategy Revise as needed in light of actual performance, changing conditions, new opportunities, and new ideas CCorporate Products Markets Domestic & Foreign Foreign Competitive Strategy to win a competition profitably Business Function Analyzing Industry & Competitors External Analysis Internal Analysis Strategic Group Maps Types of Industry KSFs 7s Mc. Kinsey 5 M Value Chain SWOT Profit & Growth Financial Performance Strategic Performance Strategic Management Welcome to CSBD

3. What ? A diversified company is a collection of individual businesses. Why ? The purpose of diversification is to build shareholder value When ? Diversification merits strong consideration whenever a single-business company is faced with diminishing market opportunities and stagnating sales in its principal business. Diversification becomes an attractive strategy when a company runs out of profitable growth opportunities in its original business Factors That Signal It Is Time to Diversify 1.When it can expand into industries whose technologies and products complement its present business. 2.When it can leverage existing competencies and capabilities by expanding into businesses where these same resource strengths are valuable competitive advantage. 3.When diversifying into closely related businesses opens new avenues for reducing costs. 4.When it has a powerful and well-known brand name that can be transferred to the products of other businesses. Welcome Strategic Management CSBD to DIVERSIFICATION Strategies for Managing a Group of Businesses

4. DIVERSIFICATION Strategies for Managing a Group of Businesses Diversification Diversify into Related BusinessesRelated Businesses ●Enhance shareholder value by capturing cross-business strategic fits: - Transfer skills and capabilities from one business to another. - Share facilities or resources to reduce costs. - Leverage use of a common brand name - Combine resources to create new strengths and capabilities. Diversify into Unrelated BusinessesUnrelated Businesses ●Spread risks across completely different businesses. ● Build shareholder value by doing a superior job of choosing businesses to diversify into and of managing the whole collection of businesses in the company’s portfolio. Diversify into Both Related and Unrelated Businesses ☺ Acquisition ☺Internal Start-Up ☺ JV & SA Devising a corporate strategy has 4 distinct facet: 1. Picking new industries to enter and decide on the means of entry. 2. Initiating actions to boost the combined performance of the businesses the firm has entered. 3. Pursuing opportunities to leverage cross-business value chain relationships and strategic fit into competitive advantage. 4. Establishing investment priorities and steering corporate resources into the most attractive business units Corporate Strategy: Build and Maximize Shareholders (Stakeholders) Value PIPE businesses Restructurization TAMO ADAB Strategic Management Welcome to CSBD

5. How? There are two fundamental approaches to diversification—into related businesses and into unrelated businesses. The Rationale for related diversification is strategic fit. Diversify into businesses with strategic fits along their respective value chains, capitalize on strategic-fit relationships to gain competitive advantage, and then use competitive advantage to achieved the desired 1 + 1 = 3 impact on shareholder value. Businesses have strategic fit when their value chains offer potential (1) for realizing economies of scope or cost-saving efficiencies associated with sharing technology, facilities, functional activities, distribution outlets, or brand name; (2) for competitively valuable cross-business transfers of technology, skills, know-how, or other resource capabilities; (3) for leveraging use of a well-known and trusted brand name, and (4) for competitively valuable cross-business collaboration to build new or stronger resource strengths and competitive capabilities. The basic premise of unrelated diversification is that any business that has good profit prospects and can be acquired on good financial terms is a good business to diversity into. Unrelated diversification strategies surrender the competitive advantage potential of strategic fit in return for such advantage as (1) spreading business risk over a variety of industries and (2) providing opportunities for financial gain. Welcome Strategic Management CSBD to DIVERSIFICATION Strategies for Managing a Group of Businesses

6. Welcome Strategic Management CSBD to DIVERSIFICATION Strategies for Managing a Group of Businesses JOHNSON & JOHNSON Baby products (powder, shampoo, oil, lotion Band-Aids and other first-aid products Women’s health and personal care products (Stayfree, Carefree, Sure & Natural PEPSICO Soft drinks (Pepsi, Diet Pepsi, Pepsi One, Mountain Dew, Mug, Slice) Fruit juices (Tropicana and Dole) Sport drinks (Gatorade) TEXTRON, INC. Bell Helicopters Cessna Aircraft Textron Automotive (instrument panels, plastic fuel tanks, plastic interior and exterior trim). THE WALT DISNEY COMPANY Theme Parks Resort properties Movie, video, TV broadcasting RELATED BUSINESSUNRELATED BUSINESS

7. Welcome Strategic Management CSBD to DIVERSIFICATION Strategies for Managing a Group of Businesses A Diversified Company Strategy Is the company’s diversification based narrowly in few industries or broadly in many industries? What is the company’s approach to allocating investment capital and resources across its present businesses? Are the businesses the company has diversified into related, unrelated or a mixture of both? Is the scope of company operations mostly, mostly domestic, increasingly multinational, or global? Any effort to capture cross business strategic fit? Any recent moves to divest weak business units? Any recent moves to build positions in new industries? Any recent moves to strengthen the company’s positions in existing businesses? Identifying a Diversified Company’s Strategy

8. Welcome Strategic Management CSBD to DIVERSIFICATION Strategies for Managing a Group of Businesses Evaluating industry attractiveness 1 Evaluating business-unit competitive strength 2 Checking the competitive advantage potential of cross- business strategic fits. 3 Ranking the business units on the basis of performance and priority for resource allocation 5 Steps for Evaluating the Strategy of a Diversified Company Checking for resource fit 4 Crafting new strategic moves to improve overall corporate performance. 6

9. Welcome Strategic Management CSBD to DIVERSIFICATION Strategies for Managing a Group of Businesses Strategy Options for a Company That is Already Diversified Broaden the Diversification Base ●Acquire more businesses and build positions in new related or unrelated industries ● Add businesses that will complement and strengthen the market position and competitive capabilities of business in industries where the company already has a stake. Divest Some Businesses and Retrench to a Narrower Diversification Base ●Get out of businesses that are competitively weak that are unattractive industries, or that lack adequate strategic and resource fits. ● Focus corporate resources on businesses in a few, carefully selected industry arenas. Restructure the Company’s Business Lineup ●Sell off competitively weak businesses, businesses in unattractively industries, businesses with little strategic or resource fit, and non-core businesses. ● Use cash from divestures plus unused debt capacity to make acquisition in other, more promising industries Pursue Multinational Diversification ●Offer two major avenue for sustained growth—entering more businesses or entering more country markets. ● Contains more competitive advantage potential than any other diversification strategy.

10. Company performs activities in its value chain Competencies and capabilities gradually emerge in certain competitively important value chain activities Company proficiency in performing one or two value chain activities rises to the level of a core competencies Company proficiency in performing a core competency continues to build and evolves into a distinctive competence Company gains a basis for sustainable competitive advantage Steps of Translating Company Performance of Value Chain Activities into Competitive Advantage Welcome Strategic Management CSBD to Hariadi Ismail

11. VALUE CHAIN within a Company Firm Infrastructure (General Mgt, Acc. & Fin., Legal, Corp. Planning) Human Resource Management Technology Development Procurement In-Bound Production / Out-BoundMarketing Service Logistics Operations Logistics& Sales MARGINMARGIN MARGINMARGIN Primary Activities Support Activities Welcome Strategic Management CSBD to Hariadi Ismail Processor Input (Suppliers) Out (Customers) Feedback Value Creating System Customer Value Customer Benefit Cost of Purchase =-

12. Welcome Strategic Management CSBD to Hariadi Ismail Resources: The financial, physical, human, technological, and organizational resources of the company can be divided into tangible resources (land, buildings, plant, and equipment) and intangible resources (brand names, reputation, patents, and technological or marketing know-how). Capabilities refer to a company’s skills at coordinating its resources and putting them to productive use. These skills reside in an organization’s routines, that is, in the way a company makes decisions and manages its internal processes in order to achieve organizational objectives. More generally, a company’s capabilities are the product of organizational structure and control systems. A Distinctive Competency is a unique strength that allows a company to achieve superior efficiency, quality, innovation, or customer responsiveness and thereby to create superior value and attain a competitive advantage. Resources Distinctive Competencies Capabilities  Superior:  Efficiency  Quality  Innovation  Customer Responsiveness  Low Cost  Differentiation Higher Profit The Root of Competitive Advantage Source: Strategic Management, CWL. Hill and GR. Jones