To Diversify or Not to Diversify?

To Diversify or Not to Diversify? Management Analysis Summer 2001

What is Diversification? • Entering new businesses beyond our core business • Related or unrelated to the core business? • Achieve strategic fit • Financial objectives • Combination - hybrid • Strategic objective – create shareholder value

Six Questions to Ask • What does the company do better than its competitors? • What strategic assets do we need in order to succeed in the new market? • Can we catch up to or leap frog competitors at their own game? • Will diversification break up strategic assets that need to be kept together?

Six Questions to Ask • Will we simply be a player in the new market or will we emerge a winner? • What can our company learn by diversifying, and are we sufficiently organized to learn it?

Nature of Strategic Assets • Don’t confuse identifying strategic assets with defining the business • What does the company do better than its competitors? • How can we add value to the acquired firm or in a new market? • How and where can we make the best use of our strategic assets?

Needed Strategic Assets? • Avoid the fatal error • Don’t assume that having some necessary assets is sufficient • Must have all the necessary strategic assets • Know when to hold and when to fold • Know when your bundle of strategic assets can compete effectively with others in the market

Catch Up or Leap Frog? • If we are missing key strategic assets, can we • Buy them • Develop them internally • Make them unnecessary by changing the rules of competition • Can we catch up or leap frog at a reasonable cost?

Break Up Strategic Assets? • Will diversification break up strategic assets that need to be kept together? • Are strategic assets transportable to the new industry? • Is there synergy that exists between competencies? • Creates risk of unbundling competencies and applying them in different combinations in new markets

Can We Emerge a Winner? • Play to win • Need to pass the acid test • Create something unique • Create something rare • Create something that is hard to imitate • Create something that is non substitutable

What Can We Learn? • What can we learn by entering a new business? • Will the skills we learn serve as a stepping stone to help us enter other businesses? • Is the organization doing all it can to transfer relevant information and competencies from one business to another? • Must have processes that facilitate and promote learning across functions and businesses

Corporate Strategy – The Quest for Parenting Advantage Management Analysis Spring 2001

Critical Questions • What businesses should this company, rather than rival companies, own and why? • What organizational structure, management processes, and philosophy will foster superior performance from its businesses?

The Parenting Framework • Parent companies can justify themselves economically only if their influence on businesses in the portfolio CREATES, rather than DESTROYS value • Create value by parenting effectively • Best parent companies create more value than any of their rivals would if they owned the same businesses – Parenting Advantage

Parenting Framework • Differs from core competence conceptualization of diversification • Businesses are related if they have common technical or operating know-how • Parenting framework focuses on the competencies of the parent (not the business units) • What value is created from the relationship between the parent and its businesses?

Assessing Fit • Examine critical success factors of all of the businesses in the portfolio • Identify parenting opportunities – potential for improvement within a business • List major challenges and identify if they contain a parenting opportunity • Document most important influences the parent has on businesses • Do these influences reveal new parenting opportunities? • Examine influences that different parent companies have on similar businesses • Do these influences reveal new parenting opportunities?

Size and age Management Business definition Predictable errors Linkages Common capabilities Special expertise External relations Major decisions Major changes Ten Places to Look

Assessing Fit • Examine characteristics of the parent • Determine how closely the parent fits with the businesses in the portfolio • Mental maps that guide decisions • Corporate structure, management systems and processes • Centralized functions, services and resources • Nature, skills, and experience of managers in the parent organization • Extent of decentralization via delegation of authority and responsibility to business unit managers

Assessing Fit • Does the parent have characteristics that fit the parenting opportunities in the business? • Can the parent exploit the upside potential of the relationship? • Is there a misfit between the parent’s characteristics and the business’ critical success factors? • What is the potential downside of the relationship?

Assessing Fit • Impact on results – examine parent company’s track record with different kinds of businesses • Success and failure analysis • Categorize decisions by type and evaluate • Key appointments • Major capital expenditures • New product launches • Acquisitions • Identify types of situations in which the parent company’s influence is positive or negative

Assessing Fit • Impact on results • Performance analysis • Review performance of each business in comparison to competitors • Is each business performing better or worse than it would as a stand-alone business?

Making Changes to Improve Fit • Summarize assessments in matrix • How well do the parent’s characteristics fit the business’ parenting opportunities? • What is the extent of any misfit between the parent’s characteristics and the business’ critical success factors?

Parenting-Fit Matrix Low Ballast Heartland Edge of Heartland Misfit between critical success factors and parenting characteristics Alien Territory Value Trap High Low High Fit between parenting opportunities and parenting characteristics

To Diversify or Not to Diversify?