STRATEGY

Chapter 5 Expansion and diversification Most organization start with the limited resources, which mean they are constrained in the number of Different type of customer they can look after The range of product and services they can develop.

This forces them to focus their effort so that different elements of a firms value chain are setup to cater the needs of a particular segment. Once force is the fear of being dependent upon small set of customers or technologies, probably more important is the fact that good entrepreneurs will develop the value chain to serve the customers once they have found them and spot other ways to use their resources to generate profit. They may find that their customers have other unfulfilled needs which their organization is in the position to meet or they may encounter new customers who require a modified version of products or service. Meeting this need may lead the firm into completely different industries from those in which they were started. As a result over tine ambitious companies like Sony expand so that they have many different divisions with their own value chains. It is surprisingly easy for a firm to be lured into pursuing opportunities that appear attractive but infact are unprofitable, because the firm does not have the resources to manage them efficiently or effectively on the other hand being too focused may also has disadvantages. A firm which has too limited range can lose out to firms with products that meet range of customer needs more closely. Why Firms Diversify? To grow To more fully utilize existing resources and capabilities To escape from undesirable and unattractive Industry environment To make use of surplus cash flows

Diversity and diversification at Business Level: Existing Core Business

Business Level Diversification Variations In offerings New Customer Types New Geographic Market

Corporate level Diversification New Technologies New Suppliers New Competitors Different Success Factors Fig 1 There are number of ways in which a firm can increase its diversity, the simplest is by developing slightly different offering perhaps to target slightly different markets from those it serves at the moment or to meet more precisely the needs of a sub segment of existing customers. Example Includes:

Mc Donalds introduction of Bigger Big Mac, Targeted existing customers with above average appetites in order to increase their spend at Mc Donalds. H&M development of line of clothing for pregnant women Sonys Introduction of range of LCD Tvs and recently LED along with 3D

The extension to a firms offering typically does not involve any radical changes to the way the firm does business. However, taken to extremes they can make firm difficult to manage. Unilever , Anglo Dutch consumer goods conglomerate found itself in 1999 with 1600 brands of which just 400 power brands accounted for 90 % of sales. It decided that by disposing some of these and focusing its marketing research and personal it could raise its profit margin closer to that of leading competitors Business Level Vs Corporate level Diversification: Corporate level diversification comes about when a firm find itself involved in two or more separate Industry with different success factors. Eg, Sony cierge (real life application) which is a technology based service has a different success factors and different competitors from those its parents. Consideration in expansion and diversification/ Market and Competitive arguments for and Against Diversity: 1) Market and competitive factors Growth potential : Extent of market opportunity for business offering Control: Extent to which an organization need a presence in a sector to control its operating environment. Competition : Impact of competitors Legitimation : Extent to which the increased scope , scale or diversity gives the organization gives the greater legitimacy thus easier access to cheap resources Differentiation : Extent to which firm can respond to new changing customer needs Dependency and risk : Extent to which firm is dependent for its success on a particular product , technology , customer or market 2) Attention and knowledge factors Management Attention : Extent to which Senior managers give proper attention to a particular market , offering or Industry and understand success factors , Challenges Exploration : Learning how to do New things , Inventing new product and process along with innovative ways Experience / Exploitation : Learning how to refine particular process all the time to make it more efficient and effective 3) Efficiency factors Overhead cost: Cost associated with administering and coordinating organization activities. Economies of Scale : Benefits from overall size of organization & producing particular output in large quantities Economies of Scope and Synergies : Benefit from being able to share resources or link activities between different offerings, businesses and markets Potential Sources of relatedness between businesses in a portfolio: There are five sets of factors that may form the basis of competitive advantage in an industry and so be the source of inter-SBU relatedness : Customer factors , channel factors , Input Factors , Process factors, Market Knowledge factors. A firm may be able to use assets such as knowledge or reputation that have contributed to success in one business to build advantage in another- if they are relevant although such advantages may be short lived as competitors learn to replicate them. More , Importantly however , the competencies needed to build the success factors can also be transferred from one business to another where the basis of success is similar. These are likely to be less easy to copy and are potential sources of longer term advantage. See table below :

Category of success factors & eg. Customer Factors Brand Recognition , Customer Loyalty , Large Installed base of Products Channel Factors Established access to distribution channel : Distributor loyalty Input factors : Supplier loyalty : or preferential access to scarce skill and raw material Process factors : Proprietary technology : product or market specific , experience organizational system Market knowledge factors: Understanding of the Industry and the market

Assets giving short term Adv. If scarce

Competencies offering Possible longer term advantage Brand Building : CRM

Brands And reputation

Reputation with dealers : logistics assets Knowledge of where to find Inputs at the right price or quality : reputation : finance for purchase Patents and proprietary systems.

Dealer recruitment : negotiation with dealers and retailers Supplier negotiation and management

Technological and innovation competencies Data gathering : customer psychology

Accumulated information on : the goals and behaviors of competitors or customers , the price sensitivity of products

Accessing business level scope Decisions: M A N Y / B R O A D Best for : Economies of Scale Experience/Exploitation Best for : Economies of Scope Exploration Avoiding Dependency Pre-empting competition Some Potential Benefits Economy of Scale Responsiveness

M A R K E T S

Some potential benefits Avoiding Dependency Exploration Economies of Scope Pre-empting competition Main Risk Responsiveness

Main Risk Experience/ Exploitation Overhead Cost Best for : Responsiveness Some Benefits Learning economies of Scope Avoiding dependency Pre-empting competition Main Risk Few economies of scale or experience benefits

F E W / N A R R O W

Best for : Low overheads Responsiveness Some Benefits Experience

Main Risk Dependency Pre-emption by Competition Lack of exploration opportunities No economies of scale or scope FEW

MANY PRODUCTS

Fig 2 (Benefits and Risks of Different degrees of diversity) Accessing Corporate level diversification Decisions: Corporate level diversity in some ways is easier to access than business level diversity , since there are clear criteria that can be used to discriminate between effective and ineffective portfolio even if applying these criteria is far from simple in practice. According to porter to create shareholder value it must meet three tests : 1) The Attractiveness Test : Diversification must be directed towards actual or potentially attractive industries 2) The Cost of Entry Test : The cost of entry must not capitalize future profits 3) The Better-Off- test : either the new unit must gain competitive advantage from its link with the corporation or vice0versa ( I.e. Synergy must be present )