Strategy and competitive advantage in diversified companies

The design of the corporate strategy for a diversified company consists of four elements:

1. Take the necessary measures to enter new businesses. The first concern when diversifying is what new industries should be entered and whether it should be done by starting a new business from the base or acquiring a company in which the target industry is already.

2. Initiate actions to improve the combined performance of the businesses towards which the company has diversified. As positions are created in chosen industries, corporate strategy design focuses on two ways to consolidate the competitive positions and business profits in which the company has invested in the long term. Typically, rapid growth strategies are sought in the most promising businesses of a diversified company, efforts are made to change the position of businesses that are weak, but with potential, and those that are no longer attractive or are not eliminated are eliminated. they conform to the long-range plans of the strategic vision of the company's management.

3. Find ways to capture synergy between related business units and turn it into a competitive advantage. When a company diversifies into businesses with related technologies, similar activities in the value chain, the same distribution channels, common customers or some other synergistic relationship, they acquire the potential of a competitive advantage that is not available to a company that diversifies towards unrelated businesses. Related diversification offers opportunities to transfer skills and share experience and facilities, thus reducing overall costs, consolidating the competitiveness of some of the company's products, improving the capabilities of business units, all of which can represent a source of competitive advantage.

4. Establish investment priorities and channel corporate resources towards the most attractive business units. Management must 1) decide on the priorities for capital investment in the company's different businesses, 2) channel resources to areas where the potential for profit is high and 3) eliminate business units that chronically underperform. or that they are in industries that are becoming less attractive.

When to diversify

The decision of when to diversify depends partially on the growth opportunities of a company in its current industry and in part on the opportunities available to use its resources, its experience and its capabilities in other market segments.

The conditions that make diversification attractive

When the growth opportunities in the business that serves as the company's mainstay begin to diminish, diversification is the most viable option to revitalize the company's prospects. Diversification should also be considered when a company has core competencies, competitive capabilities, and adequate resource strengths to successfully compete in other industries.

The decision to diversify into new businesses raises the following question:

What kind of diversification and to what degree?

Why is rushing diversification not necessarily a good strategy?

Companies that focus on a single business can be successful for many decades without having to resort to diversification. McDonald's, Delta Airlines, Coca Cola, Domino's Pizza, Apple Computer, Walt-Mart, Federal express, timex, Campbell Soup, Xerox, Gerber and Polaroid.

Concentrating on a single line of business has important advantages. Make clear "who we are and what we do". Energies are directed on a business trajectory. All forces are devoted to expanding into geographic markets. Good ideas are more likely to emerge on how to optimize production technology. All company managers can have direct contact with the core business and a deep understanding of field operations.

Diversification need not become a strategic priority until a company begins to lack attractive growth opportunities in its core business. Concentration in a single business has important organizational, administrative and strategic advantages.

The risks of concentrating on one business. Of course, the greatest risk of concentrating on one business is putting all the expectations of a company in one industry.

Factors that signal when the time has come to diversify. Judgments about when to diversify should be made on a case-by-case basis, based on a company's own situation, that is, the potential for growth remaining in its current business, the attractiveness of opportunities to transfer its skills and capabilities to new business segments, of any cost saving opportunities that can be exploited by belonging to closely related businesses, of whether you have the resources to support a diversification effort and if you have the administrative breadth and depth to operate in a business of multiple businesses.

Creating shareholder value: the main justification for diversifying

In order to create shareholder value, a diversified company must enter businesses that, under common management, can perform better than they could as separate companies.

Three tests to judge a diversification measure

1. The attractiveness test. The industry chosen for diversification must be attractive enough to consistently produce good returns on investment.

2. Proof of income cost. The cost of entering the target industry should not be so high that it erodes the potential for good profits. However, a dead end situation may prevail here. The more attractive the industry is, the more expensive it can be to enter it.

3. Proof of being in a better position. The company that is diversifying must offer a potential of competitive advantage to the new business in which it enters, or it must add a potential of competitive advantage to the current business of the company. The best position test involves examining potential new businesses to determine if they have competitively valuable adjustments in the value chain with the company's existing businesses, that is, adjustments that offer opportunities to reduce costs, transfer capabilities, or technology. From one business to another, create valuable new skills, or leverage existing resources.

Diversification strategies

Once the decision has been made to diversify, a choice must be made between doing it to related or unrelated businesses, or some combination of both. Businesses are linked when there are competitively valuable relationships between the activities of their value chains and they are not when there are no common similarities in their respective value chains.

We can better understand the strategic aspects that corporate managers face in creating and managing a business group, if we consider six strategies related to diversification.

1. Strategies for entering new industries; acquisition, startup and joint ventures. Entering new businesses can take any of three forms: acquisition, internal startup, and joint ventures.

Acquisition of an existing business. It is the most popular and fastest way to diversify. An obstacle to entering attractive industries through acquisition is the difficulty of finding a suitable company at a price that satisfies the income cost test. Internal start. It involves the creation of a new company under the corporate structure, so that it competes in the desired industry. Forming a company for entry into a new industry is most attractive when: 1) there is time to drive business from the ground up; 2) existing companies are likely to be slow or ineffective in their response to a new member's efforts to open the market; 3) internal income has lower costs than the average acquisition income;4) the company already internally owns most or all of the capacities necessary to compete effectively; 5) the addition of new production capacity will not cause an adverse impact on the supply-demand balance in the industry; 6) The target industry is made up of many relatively small companies, so the entering company does not need to compete head-on against larger and more powerful rivals. Joint ventures. They are useful in gaining access to a new business, in at least three types of situations: 1) it is a good way of doing something that a single organization cannot solve economically or is risky;2) they are convenient when the union of the resources and competences of two or more organizations produces an organization with greater resources and competitive assets to be a powerful contender in the market; 3) Joint ventures with foreign partners are sometimes the only, or the best, way to overcome import quotas, tariffs, national political interests, and cultural obstacles.

2. Related diversification strategies. It involves diversification into businesses whose value chains have competitively valuable “strategic adjustments” with those of the company's current business. The strategic fit between different businesses exists as long as their value chains are similar enough that they offer opportunities to share experiences, exert greater leverage in negotiations with common suppliers, jointly manufacture parts and components, share a common sales force, use the same distribution facilities… etc. What makes related diversification attractive is the opportunity to turn strategic adjustments into competitive advantages.Strategic adjustments between related businesses offer the potential for competitive advantage from a) lower costs b) efficient transfer of key capabilities, technological expertise, or managerial knowledge from one business to another; c) the ability to share a common trademark, and / or d) an improvement in resource strengths and competitive capabilities. Focus economies arise from the ability to eliminate costs by operating two or more businesses under the same corporate structure; Cost savings opportunities can arise from correlations anywhere across business value chains.c) the ability to share a common trademark, and / or d) an improvement in resource strengths and competitive capabilities. Focus economies arise from the ability to eliminate costs by operating two or more businesses under the same corporate structure; Cost savings opportunities can arise from correlations anywhere across business value chains.c) the ability to share a common trademark, and / or d) an improvement in resource strengths and competitive capabilities. Focus economies arise from the ability to eliminate costs by operating two or more businesses under the same corporate structure; Cost savings opportunities can arise from correlations anywhere across business value chains.

Technological adjustments. Share common technology Operation settings. Combine activities or transfer skills / abilities in sourcing materials, in research and development, in improving production processes, in manufacturing components, etc. Distribution and customer-related adjustments. When the value chains of different businesses overlap in such a way that the products are used by the same customers, they are delivered through common distributions and retailers. Administrative adjustments. When different business units have similar business, administrative or operational problems, allowing administrative knowledge in one line of business to be transferred to another.

3. Unrelated diversification strategy. An unrelated diversification strategy involves doing it to any industries and businesses that offer attractive financial gain; the exploitation of strategic adjustment relationships is secondary. It takes a lot of time and effort to research and find candidates for an acquisition, using criteria such as:

Whether the business can meet the corporate objectives of profitability and return on investment. If the new business will require capital investments to replace fixed assets, fund expansion and provide working capital. If the business is located in an industrial with potential for significant growth. If the business is large enough to make a significant contribution to the parent company's line. There is potential for union difficulties or adverse government regulations when it comes to product safety or the environment. the industry is too vulnerable to a recession, inflation, high interest rates, or changes in government policy.

Companies with unrelated diversification strategies focus on identifying acquisition candidates that offer profit opportunities, due to their “special situation”. There are three types of businesses that may have this appeal:

Companies whose assets are priced at less than their real value, Companies that are in financial trouble, Companies that have bright growth prospects but little investment capital.

The two main disadvantages of unrelated diversification are the difficulties of competently managing several different businesses and not counting the additional competitive advantage that strategic adjustment provides.

4. Divestment and liquidation strategies. It is necessary to consider eliminating a business when corporate strategists conclude that it has no longer adjusted or is no longer an attractive investment. Divestment can take either of two forms: The parent may change the line of business as a financially and administratively independent company, in which it may or may not retain partial ownership. Or, the parent can sell the unit immediately, in which case a buyer needs to be found. The liquidation alternative is the most unpleasant and painful especially for a single business company, where the organization ceases to exist. In the case of multiple industries, it is less traumatic for the company to liquidate one of its lines of business.

5. Strategies for change of corporate position, economy and portfolio restructuring. They come into play when the management of a diversified company must improve the condition of a struggling portfolio of businesses. Poor performance may be due to large losses in one or more business units that harm the overall performance of the company, etc.

Corporate position change strategies focus on efforts to make the businesses of a diversified company that are losing money profitable again, rather than get rid of them. The corporate economics strategy involves narrowing the scope of diversification to a smaller number of businesses. The economy is usually carried out when the corporate administration concludes that the company is in too much business and needs to reduce its base. Sometimes diversified companies save because they cannot make certain businesses profitable after several frustrating years of trying, or because they lack the funds to support the investment needs of their subsidiaries.Portfolio restructuring strategies involve radical surgery on the mix and the percentage of business types in the portfolio. The restructuring can be motivated by any of these conditions:

i. When a strategy review reveals that the company's long-term performance prospects are no longer attractive, because the portfolio contains too many slow-growing, declining, or weakly competing business units.

ii. When one or more of the company's core businesses fall victim to difficult times.

iii. When a new CEO takes office and decides to change the direction of the company.

iv. When “cutting edge” technologies or products emerge and a complete portfolio reorganization is needed to create a position in a potentially large new industry.

v. When the company has a unique opportunity to make such a large acquisition, it must sell multiple existing business units to finance the new acquisition.

saw. When the main businesses in the portfolio become less and less attractive, forcing a complete reorganization of the portfolio, in order to produce satisfactory long-term corporate performance.

vii. When changes in the markets and in the technologies of certain businesses advance in such different directions that it is better to divide the company into separate parts, instead of continuing under the same corporate structure.

6. Multifunctional diversification strategies. The characteristics that distinguish a multifunctional diversification strategy are the diversity of the businesses and the diversity of the national markets. Taking advantage of opportunities for strategic coordination between businesses and countries provides a route to gain a sustainable competitive advantage, which is not open to a company that only competes in one country or business. A multifunctional corporation can gain a competitive advantage by diversifying into global industries that have related technologies or value chain relationships that produce economies of focus.

Honda's competitive advantage

Experience in gasoline engine technology

At first glance, anyone looking at Honda's product line - automobiles, motorcycles, lawn mowers, power generators, outboards, motor sleds, snowplows, and garden cultivators - might conclude that the company has sought a unrelated diversification. But at the base of the obvious diversity of its products there is something in common: the technology of gasoline engines.

Honda's strategy involves transferring the company's expertise in gasoline engine technology to other additional products, exploiting its low-cost, high-quality manufacturing capabilities, employing all brand-name products. from well-known and respected Honda promoting multiple products in the same promo (one jokingly questioned consumers: "How can you store six Honda in a two-car garage? And then it showed a garage in where you could see a car, a motorcycle, a motor sled, a lawn mower, a power generator and an outboard motor, all made by Honda).The relationship in the value chains of Honda products in its line of business provides the company with a competitive advantage in the form of economies of focus, productive opportunities to transfer its technology and capabilities from one business to another, and the economic employment of a common trademark.

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