Corpoate Diversification Strategies- Lecture 1

Strategic Management (for final exam.)

Lecture - 1

CORPORATE DIVERSIFICATION STRATEGIES NEED FOR CORPORATE DIVERSIFICATION STRATEGIES Corporate strategy-making is a bigger picture exercise than crafting single-business strategy. In a diversified company, corporate managers have to craft multibusiness, multiindustry strategic action plan. Diversification becomes an attractive strategy when a company turns out of profitable growth opportunities in its core business. When to diversify depends partly on a company’s growth opportunities in its competitive positions in slow-growth industries. When company growth potential starts to wane, a company may go for diversification into other lines of business. It can diversify into closely related business or into totally unrelated business.

DIVERSIFICATION STRATEGIES  Strategies to diversify: 1. Strategies for entering new industries 2. Related diversification strategies 3. Unrelated diversification

 Strategies to strengthen positions and performance of diversified companies: 1. Divestiture and liquidation strategies 2. Corporate turnaround, retrenchment and restructuring strategies 3. Multinational diversification strategies.

 Strategies for entering new industries: Entry into new business can take any of three forms: 1. Acquisition of an existing business 2. Internal start up creating a new company under the corporate umbrella. 3. Joint ventures

 Related diversification strategies: Related diversification involves diversifying into business whose value chains have appealing strategic fits. Strategic fit exists when different businesses have sufficiently related value chains that there are important opportunities for (i) Transferring skills and expertise from one business to another or (ii) Combining the related activities of separate business into a single operation and reducing costs. The bigger the strategic-fit benefits, the bigger the competitive advantage of related diversification and the more that related diversification satisfies the better-off test for building shareholder value. Strategic fits among related businesses offer the competitive advantage potential of (a) lower cost (b) skills, technological expertise,

or managerial know-how from one business to another, or (c) ability to share a common brand name.

 Unrelated or conglomerate diversification strategies: It involved diversification into any industry with a good profit opportunity. A strategy of unrelated diversification involves diversifying into whatever industries and businesses hold promise for attractive financial gain; exploiting strategic-fit relationship is secondary. Companies that pursue unrelated diversification newly always enter new businesses by acquiring an established company rather than by forming a start-up subsidiary within their own corporate structures.

 Divestiture and liquidation strategies: Divestiture occurs when the investment in the present business is considered unattractive. When a particular line of business loses its appeal, the most attractive solution is to sell it. Divestiture can take either of two forms: i. The parent company can spin off a business as a financially and managerially independent company in which the parent company may or may not retain partial ownership. ii. The parent company may sell the unit outright, in which case a buyer needs to be found. Liquidation is the most unpleasant and painful event where it means the organization ceases to exist.

 Corporate turnaround, retrenchment and restructuring strategies: These come into play when corporate management has to restore an ailing business portfolio to good health. Corporate turnaround strategies focus on effort to restore money-losing business to profitability instead of divesting them. They are most appropriate in situations where the reasons for poor performance are short term, the ailing businesses are in attractive industries and divesting the money-losers does not make long term strategic sense. Corporate retrenchment strategies involve radical surgery on the mix and percentage make up of the types of business in the portfolio restructuring involves both divestitures and new acquisitions.

 Multinational diversification strategies: A multinational corporation can gain competitive advantage by diversifying into global industries i. Having related technologies, and ii. Where the strategic fits produce economies of scope and the benefits of brand name transfer. A multinational company that diversifies into related global industries is wellpositioned to out compete both a one-business domestic company and a one-business

multinational company.