Analysis of economies of scope & “synergy” Value based management Capital asset pricing model Portfolio planning models Core competences Transaction cost analysis. Developme[r]
Trang 1Diversification 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
OUTLINE
Trang 2RATE OF PROFIT
> COST OF CAPITAL
INDUSTRY ATTRACTIVENESS
COMPETITIVE ADVANTAGE
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?
•Can the firm achieve a competitive advantage?
Trang 3Diversification 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)
companies refocused upon their core businesses
1949 1954 1959 1964 1969 1974
70.2 63.5 53.7 53.9 39.9 37.0
29.8 36.5 46.3 46.1 60.1 63.0
Trang 410
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
Diversification among Large UK
Corporations, 1950-93
Trang 5COMPANY
DEVELOPMENTS
MANAGEMENT
GOALS
STRATEGY TOOLS
& CONCEPTS
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
Dominant logic
Trang 6Motives 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.
PROFIT For diversification to create shareholder value, then
bringing together of different businesses under common ownership & must somehow increase their profitability.
Trang 7Diversification 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)
Additional source of value from diversification: Option value