DIVERSIFICATION AND SHAREHOLDER VALUE
RELATED DIVERSIFICATION
A strategy-driven approach to creating shareholder value
UNRELATED DIVERSIFICATION
A finance-driven approach to creating shareholder value
What Is Related Diversification?
Involves diversifying into businesses whose value chains possess
competitively valuable “strategic fits” with the value chain(s) of the present
business(es)
Capturing the “strategic fits” makes related diversification a 2 + 2 = 5
phenomenon
CONCEPT: STRATEGIC FIT
Exists when different businesses have sufficiently related value chains that
permit:
Transferring skills & expertise from one business to another
Combining performance of related activities so as to reduce costs
Presence of strategic fit in a diversified firm's portfolio, along with
corporate management's skill in capturing benefits of the
interrelationships
Makes related diversification capable of being a 2 + 2 = 5 phenomenon
1 – MARKET-RELATED FIT
[Link] sales force to call on customers
[Link] related products together
[Link] of same brand names
[Link] delivery & shipping
[Link] after-sale service & repair work
[Link] order processing & billing
[Link] promotional tie-ins
2 – OPERATING FIT
Arise when different businesses present opportunities for cost-sharing or
skills transfer
Procurement of purchased inputs
R&D/technology
Manufacture & assembly
Administrative support functions
Marketing & distribution
3 – MANAGEMENT FIT
Emerge when different business units have comparable types of:
Entrepreneurial
Administrative or Operating problems
Allow accumulated managerial know-how in one business to be useful in
managing another business
Attractiveness of Related Diversification
What makes related diversification attractive is the opportunity to turn
strategic fit into competitive advantage!
Related Diversification
and Competitive Advantage
Competitive advantage can result from related diversification if
opportunities exist to:
Transfer expertise/capabilities/technology
Combine related activities into a single operation and reduce costs
Leverage use of firm’s brand name reputation
Conduct related value chain activities in a collaborative fashion to
create valuable competitive capabilities
Benefits of Related Diversification
1. Preserves unity in its business activities
2. Reap competitive advantage benefits of
Skills transfer
Lower costs
Common brand name usage
Spread investor risks over a broader base (Rubbish!)
Achieve consolidated performance greater than the sum
of what individual businesses can earn operating
independently
Concept: Economies of Scope
Arise from ability to eliminate costs by operating two or more
businesses under same corporate umbrella
Exist when it is less costly for two or more businesses to operate
under centralized management than to function independently
Cost saving opportunities can stem from interrelationships anywhere
along businesses’ value chains
What Is Unrelated Diversification?
Involves diversifying into businesses with:
No strategic fit
No meaningful value chain relationships
No unifying strategic theme
Approach is to venture into “any business in which we think we can
make a profit”
Firms pursuing unrelated diversification are often referred to as
conglomerates
Can Work if:
Attractive Acquisition Targets
Companies with undervalued assets – Capital gains may be realized
Companies in financial distress – May be purchased at bargain prices
and turned around
Companies with bright prospects but limited capital
However, these only works if you buy, fix, and then sell!
Drawbacks of Unrelated Diversification
Difficulties of competently managing many diverse businesses
There are no strategic fits which can be leveraged into competitive
advantage
Consolidated performance of unrelated businesses tends to be no
better than sum of individual businesses on their own (and it may be
worse)
Promise of greater sales-profit stability over business cycles seldom
realized
Competitive Advantage Avenues for a DMNC via Related
Diversification
Transfer of expertise in a core technology to other businesses
Collaborative and strategically coordinated R&D benefiting all the
related businesses
Ability to use same distributors and retail dealers on a worldwide
basis
Ability to leverage an established brand name
Use financial and organizational resources to cross-subsidize a
competitive assault against rivals
Remember that there are only two rules for making capital investment:
1. Will it expand market share?
2. Will it strengthen the core competence?
If yes, then invest. Any manager that needs a formula or calculator to
answer the questions is an idiot!
