1. 1 Diversification Presented by Group 1 Yogendra A.Girase (07) Mohamed Anish Iqbal Hafizi (09) Vaibhav Mahadik (18) Sreehari Nair (27) Abhinav Savla (59)

2. 2 Diversification The process of firms expanding their operation by entering new businesses.

3. 3 Diversification implies two levels of strategy 1. Business-Level Capabilities/resources to create competitive advantage within each business - low cost - differentiation 2. Corporate-Level Capabilities/resources needed to create value across businesses

4. 4 Corporate Strategy Decisions 1. What businesses to be in? 2. How to manage interrelationships? 3. Who decides what? Corporate Strategy is focused on generating returns in excess of those that shareholders can obtain for themselves by diversifying investments

5. 5 Corporate Strategy Principal concern: To identify the business areas in which a company should participate in order to maximize long-run profitability & should value across it’s businesses Options:  Focus on one business  Vertical integration  Strategic alliances  Diversification

6. 6 Chapter 4 Chapter 4 The Internal The Internal Organization Chapter 6 Chapter 6 Competitive Rivalry and Competitive Rivalry and Competitive Dynamics Competitive Dynamics Chapter 9 Chapter 9 International Strategy International Strategy Chapter 3 Chapter 3 The External The External Environment Chapter 5 Chapter 5 Business-Level Strategy Chapter 8 Chapter 8 Acquisition and Acquisition and Restructuring Strategies Restructuring Strategies Strategic Intent Strategic Intent Strategic Mission Strategic Mission Chapter 7 Chapter 7 Corporate-Level Strategy Corporate-Level Strategy Chapter 10 Chapter 10 Cooperative Strategy Cooperative Strategy Strategic Analysis Creating Competitive Advantage The Strategic Management Process Chapter 5 Chapter 5 Business-Level Strategy Chapter 6 Chapter 6 Competitive Rivalry and Competitive Rivalry and Competitive Dynamics Competitive Dynamics Chapter 7 Chapter 7 Corporate-Level Strategy Corporate-Level Strategy

7. 7 Growth through Strategic Directions (Ansoff Matrix)

8. 8 Types of Diversification Related diversification Firm creates value by building upon or extending its: –Resources, Capabilities,Core competencies Economies of scope Based on transferring and leveraging competencies, sharing resources, and bundling products Unrelated diversification :Entry into industries that have no obvious connection to any of a company’s value-chain activities in its present industry or industries Based on using only general organizational competencies to increase profitability of each business unit

9. 9 Levels and Types of Diversification Low Levels of Diversification Single Business > 95% of business from a single business unit Dominant Business Between 70 and 95% of business from a single business unit

10. 10 Related Constrained < 70% of revenues from dominant business; all businesses share product, technological and distribution linkages Levels and Types of Diversification Moderate to High Levels of Diversification

11. 11 Related Linked (Mixed) < 70% of revenues from dominant business, and only limited links exist Levels and Types of Diversification Moderate to High Levels of Diversification

12. 12 Levels and Types of Diversification Unrelated < 70% of revenue comes from the dominant business, and there are no common links between businesses Very High Levels of Diversification

13. 13 Reasons for Diversification Reasons to Enhance Strategic Competitiveness Economies of scope Market power Financial economics

14. 14 Adding Value by Diversification Diversification most effectively adds value by either of two mechanisms: –Economies of scope: cost savings attributed to transferring the capabilities and competencies developed in one business to a new business –Market power: when a firm is able to sell its products above the existing competitive level or reduce the costs of its primary and support activities below the competitive level, or both

15. 15 Diversification to achieve, Value creation and growth objective of a business………Through Economies of scope adapting/transferring resources and activities across businesses Market power - e.g., Vertical & horizontal integration, scale economies (Porter) Financial economics (e.g., advantages w.r.t. time, uncertainty, options, information)

16. 16 Incentives with Neutral Effects on Strategic Competitiveness Anti-trust regulation Tax laws Low performance Uncertain future cash flows Firm risk reduction Incentives Resources ManagerialMotives Reasons for Diversification

17. 17 Incentives to Diversify External Incentives: Relaxation of anti-trust regulation allows more related acquisitions than in the past Relaxation of anti-trust regulation allows more related acquisitions than in the past Before 1986, higher taxes on dividends favored spending retained earnings on acquisitions Before 1986, higher taxes on dividends favored spending retained earnings on acquisitions After 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of tax deductible interest payments After 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of tax deductible interest payments

18. 18 Incentives to Diversify Internal Incentives: Poor performance may lead some firms to diversify an attempt to achieve better returns Poor performance may lead some firms to diversify an attempt to achieve better returns Firms may diversify to balance uncertain future cash flows Firms may diversify to balance uncertain future cash flows Firms may diversify into different businesses in order to reduce risk Firms may diversify into different businesses in order to reduce risk

19. 19 Resources and Diversification Besides strong incentives, firms are more likely to diversify if they have the resources to do so. Besides strong incentives, firms are more likely to diversify if they have the resources to do so. Value creation is determined more by appropriate use of resources than incentives to diversify. Value creation is determined more by appropriate use of resources than incentives to diversify.

20. 20 Managerial Motives to Diversify Managers have motives to diversify –diversification increases size; size is associated with executive compensation –diversification reduces employment risk –effective governance mechanisms may restrict such motives

21. 21 Reasons for Pursuing Diversification

22. 22 When Should a Firm Diversify? It is faced with diminishing growth prospects in present business It has opportunities to expand into industries whose technologies and products complement its present business It can leverage existing competencies and capabilities by expanding into businesses where these resource strengths are key success factors It can reduce costs by diversifying into closely related businesses It has a powerful brand name it can transfer to products of other businesses to increase sales and profits of these businesses

23. 23 Relationship Between Diversification and Performance Performance Level of Diversification Dominant Business Unrelated Business Related Constrained

24. 24 Relationship Between Firm Performance and Diversification Relationship Between Firm Performance and Diversification Incentives ManagerialMotives Resources DiversificationStrategy FirmPerformance InternalGovernanceStrategyImplementation Capital Market Intervention and the Market for Managerial Talent

25. 25 Corporate Parenting and Restructuring Parenting advantage The positive contributions of the corporate office to a new business as a result of expertise and support provided 6-25

26. Managing the Industrial Business 2 main approaches to “Parenting Influence” Input (or behavioral) control Monitoring & approving business level decisions Output ( or performance) control Setting & monitoring the achievement of performance targets Primarily through strategic planning system & capital expenditure approval system Primarily through performance management system, incl. budgetary process, & HR appraisal system

27. 27 Corporate Restructuring Corporate management must –Have insight to detect undervalued companies or businesses with high potential for transformation –Have requisite skills and resources to turn the businesses around Can involve changes in –Assets –Capital –Management 6-27

28. 28 Portfolio Management Portfolio management –assessing the competitive position of a portfolio of businesses within a corporation, –suggesting strategic alternatives for each business –identifying priorities for the allocation of resources across the businesses. 6-28

29. 29 BCG Portfolio Matrix Key Each circle represents one of the firm’s business units Size of circle represents the relative size of the business unit in terms of revenue 6-29

30. 30 Parenting Managers try to strike a balance between: Managers try to strike a balance between: –competing among divisions for scarce capital resources –creating opportunities for cooperation to develop synergies The goal is to maximize overall firm performance The goal is to maximize overall firm performance The decision-making of managers in a multidivisional structure may be: The decision-making of managers in a multidivisional structure may be: –centralized or decentralized –bureaucratic or non-bureaucratic

31. 31 Parenting Balance on these dimensions may change over time Balance on these dimensions may change over time Structure will evolve over time with: Structure will evolve over time with: –changes in strategy –degree of diversification –geographic scope –nature of competition

32. 32 SBU Form of Parenting: Structural integration devices create tight links among all divisions Structural integration devices create tight links among all divisions Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions R&D is likely to be centralized R&D is likely to be centralized Rewards are subjective and tend to emphasize overall corporate performance, in addition to divisional performance Rewards are subjective and tend to emphasize overall corporate performance, in addition to divisional performance Culture emphasizes cooperative sharing Culture emphasizes cooperative sharing Related-Linked Strategy

33. 33 Organizational Structure of Diversified Group: Unrelated Diversification Strategy President LegalAffairsFinanceAuditing Headquarters Office DivisionDivisionDivisionDivisionDivisionDivision

34. 34 Benefits of Parenting Strategic control Strategic control –operating divisions –each division is separate business or profit center Top corporate officer delegates responsibilities to division managers Top corporate officer delegates responsibilities to division managers –for day-to-day operations –for business-unit strategy Appropriate when the firm grows through diversification Appropriate when the firm grows through diversification

35. 35 Value activities Value-Adding Activities Value-Destroying Activities

36. 36. Portfolio and Synergy Managers and Parental Developers

37. 37 Increasing Profitability Through Diversification A diversified company can create value by:  Transferring competencies among existing businesses  Leveraging competencies to create new businesses  Sharing resources to realize economies of scope  Using product bundling  Managing rivalry by using diversification as a means in one or more industries  Exploiting general organizational competencies that enhance performance within all business units

38. 38 Impacts of Diversification  Related :  Value chains  strategic fits : cross-biz relationships  Combined performance  Industry structure  entry barriers : new, existing  Unrelated :  Financial capital ↑  investment priorities ↑  Biz scope ↑  spread risks

39. 39 Dilemmas of Diversification –If a biz is attractive and prospective  rush new entrants (hi competition) –If existing resources are effectively utilized  transmit existing competitive relationships to new biz domain –If new biz requires different behavior or culture as the KSFs  conflict w/o existing system or culture

40. 40 Strategies for Entering New Businesses Acquire existing company Internal start-up Joint ventures/strategic partnerships

41. 41 TWO KINDS OF RELATEDNESS Similarities in resources Similarity in strategies RESOURCE RELATEDNESS AND STRATEGIC SIMILARITY

42. 42 Commonalities Between Value Chains of Three Business Units

43. THANK YOU 43