Analysis of economies of scope & “synergy” Value based management Capital asset pricing model Portfolio planning models Core competences Transaction cost analysis. Developme[r]
(1)Diversification Strategy
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
(2)RATE OF PROFIT
> COST OF CAPITAL
INDUSTRY ATTRACTIVENESS
COMPETITIVE ADVANTAGE
The Basic Issues in Diversification Decisions The Basic Issues in Diversification Decisions
Superior profit derives from two sources:
Diversification decisions involve these same two issues: • How attractive is the sector to be entered?
(3)Diversification among the US Fortune 500, 1949-74
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
1949 1954 1959 1964 1969 1974
70.2 63.5 53.7 53.9 39.9 37.0
(4)0 10 20 30 40 50 60 70
1950 1960 1970 1983 1993
Single business Dominant
business
Related business Unrelated
business
Diversification among Large UK Corporations, 1950-93
(5)COMPANY DEVELOPMENTS MANAGEMENT GOALS STRATEGY TOOLS & CONCEPTS
1950 1960 1970 1980
1990 Financial problems of conglomerates Refocusing on shareholder value
Rise of conglomerates Related diversification
by industrial firms
Emphasis on“related’ & “concentric” diversification Refocusing on core businesses Divestment Diffusion of M form structures
Analysis of economies of scope & “synergy” Value based management Capital asset pricing model Portfolio planning models Core competences Transaction cost analysis
Development of corporate planning systems
Diversification: The Evolution of Management Thinking and Management Practice
Thinking and Management Practice
Joint ventures, Alliance, corporate venturing Competitive advantage through Speed, flexibility, and capability
Dynamic capability Quest for Growth
Financial Analysis
(6)Motives for Diversification 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
RISK Diversification reduces variance of profit flows
SPREADING But, doesn’t create value for shareholders—they can hold diversified portfolios of securities.
Capital Asset Pricing Model shows that diversification lowers unsystematic risk not systematic risk.
(7)Diversification and Shareholder Value: Porter’s Three Essential Tests
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)