Strategy and Competitive Advantage in Diversified Companies

Strategy Tasks

Picking the industries to enter and how to enter Actions to boost the combined performance of the businesses Leverage business relationships into a competitive advantage Establish investment priorities

When to Diversify

There are organizational, managerial and strategic advantages to focusing on a single business Consider diversification when firm begins to run out of opportunities in its main business Risk is putting all your eggs in one basket

When to Diversify

Diminishing growth prospects in current business Opportunities to Add value to customers Gain competitive advantage Transfer existing competencies Cost saving opportunities Have financial and organizational resources

When to Diversify

Justifiable only if it builds shareholder wealth The 3 tests to judge Industry attractiveness Cost-of-entry Better-off

Related Diversification

Businesses share competitively valuable relationships Transfer expertise or capabilities Combining activities lowers costs Exploit common brand name Collaboration creates strengths Develops synergy

Related Diversification

Strategic fits along the value chain Upstream Company • R & D and technology • Sales and marketing • Manufacturing • Managerial and support Downstream Economies of scope

Unrelated Diversification

Acquisition of “good” companies Targets are usually judged on their ability to provide financial gain Companies with undervalued assets Companies in financial distress

Unrelated Diversification

Pros Diversify risk over several industries Invest capital to best advantage Stabilize profits Shrewd acquisitions can enhance shareholder wealth Cons Unreasonable expectations for managers Corporate meddling Stabilization of profits is not realized in practice

Unrelated Diversification

No synergies are produced Exceptional managerial talent is required to enhance shareholder wealth Consistent success is difficult to achieve Historically most have failed

Entering New Businesses

Acquisition of an existing business Vertical integration Internal development Joint ventures

Diversified Company Strategies

Enter into additional businesses Retrenching and divestiture Restructure the portfolio of businesses Multinational diversification Related DMNC can outperform rivals Higher than average overall returns Lower than average overall risk