Diversification (2)
- 2. What is Diversification? Diversification is a corporate strategy to enter into a new market or industry which the business is not currently in, whilst also creating a new product for that new market. Most risky section of Ansoff matrix
- 3. Why do Firms Diversify? When they have excess resources, capabilities, and core competencies that have multiple uses Diminishing growth prospects in present industry Cost saving opportunities Capture strategic fits Capture financial economies Spread business risk Leverage brand name
- 4. Building Shareholder Value Ultimate justification for diversifying A diversification move must pass three tests The industry attractiveness test The cost-of-entry test The better-off test Decision to Diversify Requires Two Additional Decisions: Level and Degree of Diversification Number and Relatedness Mode of Diversification Acquisition, Internal Development, Joint Venture
- 5. Major Corporate Level Strategies Single Business Dominant Business Related Diversification Unrelated Diversification
- 6. Dominant-business firms One major core business accounting for 50 - 80 percent of revenues, with several small related or unrelated businesses accounting for remainder Narrowly diversified firms Diversification includes a few (2 - 5) related or unrelated businesses Broadly diversified firms Diversification includes a wide collection of either related or unrelated businesses or a mixture Multibusiness firms Diversification portfolio includes several unrelated groups of related businesses Combination Related-Unrelated Diversification Strategies
- 7. What is Related Diversification? This means that there is a technological similarity between the industries, which means that the firm is able to leverage its technical know-how to gain some advantage. The company could seek new products that have technological or marketing synergies with existing product lines appealing to a new group of customers.
- 8. Examples of Related Diversification? Proctor and Gamble (distribution/marketing) Provides branded consumer goods products worldwide 3 GBUs Beauty GBU Beauty segment Grooming segment Health and Well-Being GBU Health Care segment Snacks, Coffee, and Pet Care segment Household Care GBU Fabric Care and Home Care segment Baby Care and Family Care segment
- 9. Examples of Related Diversification? Johnson and Johnson Engages in the research and development, manufacture, and sale of various products in the health care field worldwide 3 segments Consumer segment Products for baby care, skin care, oral care, wound care, and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products Pharmaceutical segment Products for anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology, and virology Medical Devices and Diagnostics segment Products for circulatory disease management, orthopaedic joint reconstruction and spinal care, wound care and women’s health, minimally invasive surgical, blood glucose monitoring and insulin delivery, and diagnostic products, as well as disposable contact lenses
- 10. Examples of Related Diversification? Campbell Soup Company Engages in the manufacture and marketing of branded convenience food products worldwide 4 segments U.S. Soup, Sauces, and Beverages Baking and Snacking International Soup, Sauces, and Beverages North America Foodservice
- 11. Strategic Appeal of Related Diversification Capture Strategic Fits/Synergies/Scope Economies Strategic fits along value chain Cost reductions Spread investor risks over a broader base Preserves strategic unity in its business activities Achieve consolidated performance greater than the sum of what individual businesses can earn operating independently
- 12. Involves diversifying into businesses with No strategic fit No meaningful value chain relationships 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 What is Unrelated Diversification?
- 13. Example of Unrelated Diversification? W. R. Grace Chemicals Coal Mining Oil and Gas Extraction Food Manufacturing Paper Products Health Services
- 14. Example of Unrelated Diversification? Textron, Inc. Operates in the aircraft, industrial, and finance industries worldwide. 4 segments Bell – helicopters plus parts and service Cessna – general aviation aircraft Industrial – auto parts, food containers, hydrolics, golf carts Finance – aircraft finance, asset-based lending, distribution finance, golf finance, resort finance
- 15. Strategic options for Diversification Acquisition / Merger Acquire or merge with company competing in market Greenfield Venture / Internal Development Start up new business unit and use it to enter in to market Strategic Alliances and Joint Ventures Combine resources with partners
- 16. Strategies for entering new businesses Acquisition Internal new venture (start-up) Joint venture Diversifying into New Businesses
- 17. Strategy options for a firm that is already Diversified Stick with the Existing Business Lineup Broaden the Diversification Base with New Acquisitions Divest and Retrench to a Narrower Diversification Base Restructure through Divestitures and Acquisitions Strategy Options for a Firm That Is Already Diversified
- 18. THANK YOU