Diversification Strategies

Diversification and Corporate Strategy A company is diversified when it is in two or more lines of business that operate in diverse market environments

Pick new industries to enter and decide on means of entry

Pursue opportunities to leverage cross-business value chain relationships

Establish investment priorities, steering resources into most attractive business units

When Should a Firm Diversify?Diminishing growth prospects in present business

Opportunities to expand into industries whose technologies and products complement its present business

Leverage powerful brand name extended to products of other businesses

Reduce costs by diversifying into closely related businesses

Strategies for Entering New BusinessesAcquire existing companyInternal start-upJVs / Strategic partnerships

Related vs. Unrelated DiversificationRelated Diversification

Involves diversifying into businesses whose value chains possess competitively valuable strategic fits with value chain(s) of firms present business(es)Unrelated Diversification

Involves diversifying into businesses with no competitively valuable value chain match-ups or strategic fits with firms present business(es)

Why Unrelated Diversification?Competitive advantage can result from related diversification when a company captures cross-business opportunities to:

Business risk scattered over different industries

Financial resources can be directed to those industries offering best profit prospects

If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced

Stability of profits Hard times in one industry may be offset by good times in another industry

Appeal of Unrelated Diversification

How to Evaluate a Diversified Companys StrategyStep 1: Assess long-term attractiveness of each industry firm is in

Step 2: Assess competitive strength of firms business units

Step 3: Check competitive advantage potential of cross-business strategic fits among business units

Step 4: Check whether firms resources fit requirements of present businesses

Step 5: Rank performance prospects of businesses and determine priority for resource allocation

Step 6: Craft new strategic moves to improve overall company performance

Attractiveness of eachindustry in portfolioEach industrys attractiveness relative to competitorsAttractiveness of allindustries as a groupEvaluate Industry AttractivenessStep 1Step 2Step 3

Industry Attractiveness FactorsMarket size and projected growth

Intensity of competition

Emerging opportunities and threats

Presence of cross-industry strategic fits

Resource requirements

Seasonal and cyclical factors

Social, political, regulatory, and environmental factors

Industry profitability

Degree of uncertainty and business riskStep 1

Step 1

Interpreting Industry Attractiveness ScoresIndustries with a score much below 5.0 do not pass the attractiveness test

If a companys industry attractiveness scores are all above 5.0, the group of industries the firm operates in is attractive as a whole

To be a strong performer, a diversified firms principal businesses should be in attractive industriesthat is, industries with:

A good outlook for growth

Above-average profitability Step 1

Difficulties in CalculatingIndustry Attractiveness ScoresDeciding on appropriate weights for industry attractiveness factors

Different analysts may have different views about which weights are appropriate for the industry attractiveness factors

Different weights may be appropriate for different companies

Gaining sufficient command of an industry to assign accurate and objective ratings

Gathering statistical data to assign objective ratings is straightforward for some factors market size, growth rate, industry profitability

Assessing the intensity of competition factor is more difficult due to the different types of competitive influences

Step 1

Evaluate Each Business-Units Competitive StrengthAppraise how well each business is positioned in its industry relative to rivals

Evaluate whether it is or can be competitively strong enough to contend for market leadershipStep 2

Factors to Use inEvaluating Competitive StrengthRelative market shareCosts relative to competitorsAbility to match/beat rivals on key product attributesAbility to benefit from strategic fits with sister businessesAbility to exercise bargaining leverage with key suppliers or customersCaliber of alliances and collaborative partnershipsBrand image and reputationCompetitively valuable capabilities Profitability relative to competitorsStep 2

Step 2

Interpreting Competitive Strength ScoresBusiness units with ratings above 6.7 are strong market contendersBusinesses with ratings in the 3.3 to 6.7 range have moderate competitive strength vis--vis rivalsBusiness units with ratings below 3.3 are in competitively weak market positionsIf a diversified firms businesses all have scores above 5.0, its business units are all fairly strong market contenders

Step 2

Plotting Industry Attractiveness and Competitive Strength in a Nine-Cell MatrixUse industry attractiveness and competitive strength scores to plot location of each business in matrixIndustry attractiveness plotted on vertical axisCompetitive strength plotted on horizontal axis

Each business unit appears as a bubble

Size of each bubble is scaled to percentage of revenues the business generates relative to total corporate revenuesStep 2

Nine-Cell Industry Attractiveness-Competitive Strength MatrixStep 2

Strategy Implications of Attractiveness/Strength MatrixBusinesses in upper left corner

Accorded top investment priorityStrategic prescription grow and build

Businesses in three diagonal cells

Given medium investment priorityInvest to maintain position

Businesses in lower right corner

Candidates for harvesting or divestitureMay, based on potential for good earnings and ROI, be candidates for an overhaul and reposition strategy

Step 2

Evaluate Portfolio for Competitively Valuable Cross-Business Strategic FitsStep 3

Companys Four Main Strategic Alternatives After It Diversifies