Diversification Strategy.pptVIP

Diversification Strategy Introduction: The Basic Issues The Trend over Time Motives for Diversification - Growth and Risk Reduction - Shareholder Value: Porter’s Essential Tests Competitive Advantage from Diversification Diversification and Performance: Empirical Evidence Relatedness in Diversification Diversification among the US Fortune 500, 1949-74 Percentage of Specialized Companies (single-business, vertically-integrated and dominant-business) Percentage of Diversified Companies (related-business and unrelated business) Note: During the 1980s and 1990s the trend reversed as large companies refocused upon their core businesses Diversification: The Evolution of Strategy and Management Thinking Motives for Diversification GROWTH --The desire to escape stagnant or declining industries a powerful motives for diversification (e.g. tobacco, oil, newspapers). --But, growth satisfies managers not shareholders. --Growth strategies (esp. by acquisition), tend to destroy shareholder value Diversification and Shareholder Value: Porter’s Three Essential Tests If diversification is to create shareholder value, it must meet three tests: 1. The Attractiveness Test: diversification must be directed towards attractive industries (or have the potential to become attractive). 2. The Cost of Entry Test : the cost of entry must not capitalize all future profits. 3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa. (i.e. some form of “synergy” must be present) Competitive Advantage from Diversification Relatedness in Diversification Economies of scope in diversification derive from two types of relatedness: Operational Relatedness-- synergies from sharing resources across businesses (common distribution facilities, brands, joint RD) Strategic Relatedness-- synergies at the corporate level deriving from the ability to apply com