Diversification Strategy

1960
1970
1980
•Maximization of shareholder wealth
•Core competences
•Dominant logic
•Dynamic capabilities
•Transaction cost analysis
•Real options
1990
2000
2006
•Financial analysis
•Diffusion of M form structures
•Creation of corporate planning depts.
•Economies of scope & synergy”
• Portfolio planning models
• Capital asset pricing model
Diversification among the US Fortune 500, 1949-74
70.2
63.5
53.7
53.9
39.9
37.0
29.8
36.5
46.3
46.1
60.1
63.0
1949
1954
1959
1964 1969
1974
Percentage of Specialized Companies (single-business, vertically-integrated and dominant-business) Percentage of Diversified Companies (related-business and unrelated business)
•Refocusing on core businesses
•Divesting diversified businesses
•Joint ventures and alliances
•Creating growth options through focused diversification
STRATEGY TOOLS & CONCEPTS
MANAGEMENT PRIORITIES
Quest for Growth
ቤተ መጻሕፍቲ ባይዱ
Addressing underperformance of widely-diversified firms
DEVELOPMENTS IN CORPORATE
STRATEGY
•Emergence of conglomerates
•Diversification by established companies into related sectors
Emphasis on “related’ & “concentric” diversification
Creating shareholder value
•Competitive advantage through speed & flexibility •Creating opportunities for future growth
70 60 50 40 30 20 10
0 1950 1960 1970 1983 1993
Single business
Dominant business Related business
Unrelated business
Diversification: The Evolution of Strategy and Management Thinking
--But, growth satisfies managers not shareholders.
--Growth strategies (esp. by acquisition), tend to destroy shareholder value
RISK SPREADING
--Diversification reduces variance of profit flows --But, doesn’t create value for shareholders—they can
Superior profit derives from two sources:
RATE OF PROFIT
> COST OF CAPITAL
INDUSTRY ATTRACTIVENESS
COMPETITIVE ADVANTAGE
Diversification decisions involve these same two issues: • How attractive is the sector to be entered? •Can the firm achieve a competitive advantage?
Note: During the 1980s and 1990s the trend reversed as large companies refocused upon their core businesses
Diversification among Large UK Corporations, 1950-93
• Competitive Advantage from Diversification • Diversification and Performance: Empirical Evidence • Relatedness in Diversification
The Basic Issues in Diversification Decisions
Motives for Diversification
GROWTH
--The desire to escape stagnant or declining industries a powerful motives for diversification (e.g. tobacco, oil, newspapers).
Diversification Strategy
OUTLINE
• Introduction: The Basic Issues • The Trend over Time • Motives for Diversification
- Growth and Risk Reduction - Shareholder Value: Porter’s Essential Tests