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 What are the managerial motives to diversify?

1- Spread the business risk across various industries 2-add shareholder value

Why would a company Diversify? Diversification must do more for a company than simply spread its business risk acroos various industries. In principle, diversification cannot be considered a success unless it results in added shareholder value.

When would it diversify? When there is opportunity for expanding into industry with related technology and product, or It can leverage existing competencies and capabilities, or in order to Diversifying into related business opens avenues for reducing cost, or It has powerful and well known brand names that can be transferred

What are the Modes of Entry for Diversification?

• 1- Acquiring of an existing business
• 2- Internal start-up
• 3- Joint ventures

What are the levels of Diversifications?

• - Related diversification
• - Unrelated diversification
• OR:
• - Dominant with 50-80 of core business
• - Narrowly diversified
• - Broadly diversified
• - Several unrelated groups of related businesses

Relationship between Related Diversification and integration, economies of scales, brand image and cross business collaborations?

Related diversification gives the business the opportunity to convert cross-business strategic fits into a competitive advantage over business rivals whose operations do not offer comparable strategic fit. The greatest the relatedness among sister businesses, the bigger the window for skills transfer, combining related value chain activities to achieve lower costs, leveraging use of a well-respected brand name and cross-business collaboration.

Why would a company do unrelated diversification?

Because any company or business that can be acquired on good financial terms and that has satisfactory growth and earning potential represents a good acquisition and a good business opportunity.

Merits and drawbacks of unrelated diversification

• 1- Business risk is scattered over a set of truly diverse industry
• 2- Company’s financial resources can be employed to maximum advantage by investing or diverting
• 3- Shareholder wealth can be enhanced by buying distressed business at low price
• 4- Profitability may be more stable in upswings and downswings because conditions in the industries are different.

Drawbacks

• - Demanding managerial requirements (time, resources, research)
• - Limited competitive advantage potential (limited to weakest link)

How can unrelated diversification created shareholder wealth?

• - Satisfying the attractiveness test – Diversifying into good business
• - Satisfying the cost-of-entry test – negotiating favorable acquisition prices
• - Satisfying the best-off test – Making sure new business perform at higher levels
• - Identifying when to shift resources out of business with low profits to business with above-average prospect for growth and profitability

How can you identify a company’s unrelated diversification strategy?

Having a clear fix on the company’s current corporate strategy sets the stage for evaluating how good the strategy is and proposing strategic moves to boost the company’s performance. By analyzing the company’s move to strengthen the position in existing business or building position in new industries or move to capture cross-business strategic fit.

How can you evaluate a company’s unrelated diversification strategy?

• 1- Assessing the attractiveness of the industries
• 2- Assessing the competitive strength of the company’s business units
• 3- Checking the competitive advantage potential of cross-business strategic fits
• 4- Checking whether the firm’s resources fit the requirements of its present business lineup
• 5- Ranking the performance prospects of the businesses from best to worst and determine priority for resource allocations
• 6- Crafting new strategic moves to improve overall corporate performance

What is meant by industry attractiveness and business strength?

To identify the industry attractiveness the company has to evaluate the market size and projected growth rates, the intensity of the competition in the industry, the opportunities and threats, the chances of strategic fits, the amount of resources required, the seasonal and cyclical factors of the industry, the social political and regulatory factors of the industry, the profitability of the industry and the business risk. With these different elements the company can create the attractiveness score for each of the industries where it is diversified into. The same is done to identify the strengths of each of the business units.

After a business diversifies what are the 4 main strategies?

• 1- Broaden a diversified company business base
• 2- Retrenching to a narrower diversification base
• 3- Restructuring company’s business line-up to adapt to environment
• 4- Multinational diversification strategy – more local or more countries.

 By Oren Gulasa; Notes from Strategy class with Dr. Caroline Cooper, J&W University, 2008.

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