Chapter 9 - Diversification: strategies for managing a group of businesses. After completing this unit, you should be able to: Understand when and how business diversification can enhance shareholder value, gain an understanding of how related diversification strategies can produce cross-business strategic fits capable of delivering competitive advantage, become aware of the merits and risks of corporate strategies keyed to unrelated diversification,. | Diversification: Strategies for Managing a Group of Businesses Screen graphics created by: Jana F. Kuzmicki, . Troy University-Florida Region Diversification and Corporate Strategy A company is diversified when it is in two or more lines of business that operate in diverse market environments Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business A diversified company needs a multi-industry, multi-business strategy A strategic action plan must be developed for several different businesses competing in diverse industry environments It is faced with diminishing growth prospects in present business It has opportunities to expand into industries whose technologies and products complement its present business It can leverage existing competencies and capabilities by expanding into businesses where these resource strengths are key success factors It can reduce costs by diversifying into closely related businesses It has a powerful brand name it can transfer to products of other businesses to increase sales and profits of these businesses When Should a Firm Diversify? Why Diversify? To build shareholder value! Diversification is capable of building shareholder value if it passes three tests Industry Attractiveness Test — the industry presents good long-term profit opportunities Cost of Entry Test — the cost of entering is not so high as to spoil the profit opportunities Better-Off Test — the company’s different businesses should perform better together than as stand-alone enterprises, such that company A’s diversification into business B produces a 1 + 1 = 3 effect for shareholders 1 + 1 = 3 Strategies for Entering New Businesses Acquire existing company Internal start-up Joint ventures/strategic partnerships Acquisition of an Existing Company Most popular approach to diversification Advantages Quicker entry into target market Easier to hurdle certain entry barriers Acquiring technological know-how | Diversification: Strategies for Managing a Group of Businesses Screen graphics created by: Jana F. Kuzmicki, . Troy University-Florida Region Diversification and Corporate Strategy A company is diversified when it is in two or more lines of business that operate in diverse market environments Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business A diversified company needs a multi-industry, multi-business strategy A strategic action plan must be developed for several different businesses competing in diverse industry environments It is faced with diminishing growth prospects in present business It has opportunities to expand into industries whose technologies and products complement its present business It can leverage existing competencies and capabilities by expanding into businesses where these resource strengths are key success factors It can reduce costs by diversifying into closely related businesses It .
