Diversification _ JV _ M_A

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Diversified Company

A Company is said to be ‘diversified’ when it is in two or more lines of business. Diversification NEED NOT become a
strategic priority until the firm gets signals of running out of growth opportunities in its core business.

Risk of Single Business

        All eggs in one basket

        Changing customer needs, technology innovation, new substitutes affect market

        Market becomes unattractive       Firm’s future prospects dim quickly

        No ‘fall back’ mechanism available.

Benefits of Diversification

        Extra legs to stand on

        Cost reduction due to integration with upstream / downstream value chains

        Variety kills monotony; breeds innovation

        Gets options ready for future business.

When does diversification make sense?

                                   Competitive        Position

                                   Strong             Weak

        Market        Rapid        Need        not    Do not diversify now
                                   diversify now

        Growth        Slow         Top priority:      Diversify,

                                   Diversify          if possible

Decision to diversify depends on

        Growth potential of current business

        Attractiveness of the opportunity to transfer existing competencies to new business

        Availability of adequate financial & organizational resources

        Managerial expertise to cope with complexity of operating multi-business firm
Types of Corporate Strategies

    •   Integration Strategies

    •   Intensive Strategies

    •   Diversification Strategies

    •   Defensive Strategies

Integration Strategies

               Amul extended its fresh milk business to production of cheese, ice cream, health drink, paneer etc

               Arvind Ltd, producer of denim jeans, commenced organic cotton farming in Akola

               Kingfisher Airlines recently acquired Deccan

Integration Strategies

        Forward integration & Backward integration are jointly called Vertical Integration (VI)

        Horizontal integration is also called Lateral integration.

Vertical Integration Strategies

        Forward integration: towards end-user

        Backward integration: into source of supply

        VI extends Firm’s competitive scope in same industry

        VI makes Firm fully / partially integrated

        VI appeals only if it strengthens Firm’s competitiveness significantly.

Forward Integration

        Also called ‘downstream integration’

        Either go a step ahead to make Value-Added products from current end-product

        Or decide to distribute current end-product

        Adopt FI when market for VA goods becomes lucrative or when

        Current distribution channels are inefficient.
Intensive Strategies

                             ICICI Bank will open 300 more branches. It has 600 branches now.

Market Development           Jet Airways is cultivating new international sectors

Product                      Dabur recently developed sugar-free ‘Chyawan Prakash’ for calorie-
Development                  conscious consumers

Diversification Strategies

Concentric                   Microsoft launched personal computers that double as entertainment
Diversification              centers

Conglomerate                 Godrej sets up fresh food retail stores after success of ‘Real Good’
Diversification              chicken & other consumer products

                             The Times Group launches FM radio Mirchi and Times Now TV

Defensive Strategies

Retrenchment                 Pfizer retrenched surplus employees after restructuring its operations

                             ICI India divests its entire stake in its wholly owned subsidiary Quest India
                             to Givaudan Group

Liquidation                  Svadeshi Mills to be liquidated due to unviable textile operations
Diversification is a form of growth marketing strategy for a company. It seeks to increase profitability
through greater sales volume obtained from new products and new markets. Diversification can occur
either at the business unit or at the corporate level. At the business unit level, it is most likely to
expand into a new segment of an industry in which the business is already in. At the corporate level, it
is generally and its also very interesting entering a promising business outside of the scope of the
existing business unit.

Diversification is part of the four main marketing strategies defined by the Product/Market Ansoff

Ansoff pointed out that a diversification strategy stands apart from the other three strategies. The first
three strategies are usually pursued with the same technical, financial, and merchandising resources
used for the original product line, whereas diversification usually requires a company to acquire new
skills, new techniques and new facilities. Therefore, diversification is meant to be the riskiest of the
four strategies to pursue for a firm.

Note: The notion of diversification depends on the subjective interpretation of “new” market and
“new” product, which should reflect the perceptions of customers rather than managers. Indeed,
products tend to create or stimulate new markets; new markets promote product innovation.

The different types of diversification strategies
The strategies of diversification can include internal development of new products or markets,
acquisition of a firm, alliance with a complementary company, licensing of new technologies, and
distributing or importing a products line manufactured by another firm. Generally, the final strategy
involves a combination of these options. This combination is determined in function of available
opportunities and consistency with the objectives and the resources of the company.

There are three types of diversification: concentric, horizontal and conglomerate:

Concentric diversification

This means that there is a technological similarity between the industries, which means that the firm is
able to leverage its technical know-how to gain some advantage. For example, a company that
manufactures industrial adhesives might decide to diversify into adhesives to be sold via retailers. The
technology would be the same but the marketing effort would need to change. It also seems to
increase its market share to launch a new product which helps the particular company to earn profit.

Horizontal diversification

The company adds new products or services that are technologically or commercially unrelated (but
not always) to current products, but which may appeal to current customers. In a competitive
environment, this form of diversification is desirable if the present customers are loyal to the current
products and if the new products have a good quality and are well promoted and priced. Moreover,
the new products are marketed to the same economic environment as the existing products, which
may lead to rigidity and instability. In other words, this strategy tends to increase the firm’s
dependence on certain market segments. For example company was making note books earlier now
they are also entering into pen market through its new product.

Conglomerate diversification (or lateral diversification)

The company markets new products or services that have no technological or commercial synergies
with current products, but which may appeal to new groups of customers. The conglomerate
diversification has very little relationship with the firm’s current business. Therefore, the main reasons
of adopting such a strategy are first to improve the profitability and the flexibility of the company, and
second to get a better reception in capital markets as the company gets bigger. Even if this strategy is
very risky, it could also, if successful, provide increased growth and profitability.

Diversification is the riskiest of the four strategies presented in the Ansoff matrix and requires the
most careful investigation. Going into an unknown market with an unfamiliar product offering means a
lack of experience in the new skills and techniques required. Therefore, the company puts itself in a
great uncertainty. Moreover, diversification might necessitate significant expanding of human and
financial resources, which may detracts focus, commitment and sustained investments in the core
industries. Therefore a firm should choose this option only when the current product or current
market orientation does not offer further opportunities for growth. In order to measure the chances of
success, different tests can be done:

   • The attractiveness test: the industry that has been chosen has to be either attractive or capable
     of being made attractive.
   • The cost-of-entry test: the cost of entry must not capitalize all future profits.
   • The better-off test: the new unit must either gain competitive advantage from its link with the
     corporation or vice versa.

Because of the high risks explained above, many attempts of companies to diversify led to failure.
However, there are a few good examples of successful diversification:

   • Virgin Media moved from music producing to travels and mobile phones
   • Walt Disney moved from producing animated movies to theme parks and vacation properties
   • Canon diversified from a camera-making company into producing whole new range of office
A joint venture (often abbreviated JV) is an entity formed between two or more parties to undertake
economic activity together. The parties agree to create a new entity by both contributing equity, and
they then share in the revenues, expenses, and control of the enterprise. The venture can be for one
specific project only, or a continuing business relationship such as the Fuji Xerox joint venture. This is
in contrast to a strategic alliance, which involves no equity stake by the participants, and is a much less
rigid arrangement.

The phrase generally refers to the purpose of the entity and not to a type of entity. Therefore, a joint
venture may be a corporation, limited liability company, partnership or other legal structure,
depending on a number of considerations such as tax and tort liability.

When are joint ventures used?
Joint ventures are not uncommon in the oil and gas industry, and are often cooperations
between a local and foreign company (about 3/4 are international). A joint venture is often
seen as a very viable business alternative in this sector, as the companies can complement their
skill sets while it offers the foreign company a geographic presence. Studies show a failure rate
of 30-61%, and that 60% failed to start or faded away within 5 years. (Osborn, 2003) It is also
known that joint ventures in low-developed countries show a greater instability, and that JVs
involving government partners have higher incidence of failure (private firms seem to be better
equipped to supply key skills, marketing networks etc.) Furthermore, JVs have shown to fail
miserably under highly volatile demand and rapid changes in product technology.

Reasons for forming a joint venture
Internal reasons

   1.   Build on company's strengths
   2.   Spreading costs and risks
   3.   Improving access to financial resources
   4.   Economies of scale and advantages of size
   5.   Access to new technologies and customers
   6.   Access to innovative managerial practices
Competitive goals

   1.   Influencing structural evolution of the industry
   2.   Pre-empting competition
   3.   Defensive response to blurring industry boundaries
   4.   Creation of stronger competitive units
   5.   Speed to market
   6.   Improved agility

Strategic goals

   1. Synergies
   2. Transfer of technology/skills
   3. Diversification


   •    Sony Ericsson (Sony + Ericsson)
   •    The Nokia Siemens Networks (Nokia + Siemens AG)
   •    Sony BMG Music Entertainment Sony Music Entertainment (part of Sony) + Bertelsmann
        Music Group (part of Bertelsmann)
   •    Mittal- Arcelor
   •    TATA- Corus.
Corporate Strategies in M&A:

      Gain market share
      Economies of scale
      Enter new markets
      Acquire technologies
      Strategic Benefit
      Complementary resource
      Tax shields
      Utilisation of surplus funds
      Managerial Effectiveness
      Integrate vertically

The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate
strategy, corporate finance and management dealing with the buying, selling and combining of
different companies that can aid, finance, or help a growing company in a given industry grow
rapidly without having to create another business entity.

An acquisition, also known as a takeover or a buyout, is the buying of one company (the
‘target’) by another. An acquisition may be friendly or hostile. In the former case, the
companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be
bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a
purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire
management control of a larger or longer established company and keep its name for the
combined entity. This is known as a reverse takeover. Another type of acquisition is reverse
merger, a deal that enables a private company to get publicly listed in a short time period. A
reverse merger occurs when a private company that has strong prospects and is eager to raise
financing buys a publicly listed shell company, usually one with no business and limited assets.
Achieving acquisition success has proven to be very difficult, while various studies have showed
that 50% of acquisitions were unsuccessful. The acquisition process is very complex, with many
dimensions influencing its outcome. This model provides a good overview of all dimensions of
the acquisition process.
In business or economics a merger is a combination of two companies into one larger
company. Such actions are commonly voluntary and involve stock swap or cash payment to the
target. Stock swap is often used as it allows the shareholders of the two companies to share
the risk involved in the deal. A merger can resemble a takeover but result in a new company
name (often combining the names of the original companies) and in new branding; in some
cases, terming the combination a "merger" rather than an acquisition is done purely for
political or marketing reasons.

Motives behind M&A
The dominant rationale used to explain M&A activity is that acquiring firms seek improved
financial performance. The following motives are considered to improve financial performance:

   •   Synergy: This refers to the fact that the combined company can often reduce its fixed
       costs by removing duplicate departments or operations, lowering the costs of the
       company relative to the same revenue stream, thus increasing profit margins.
   •   Increased revenue or market share: This assumes that the buyer will be absorbing a
       major competitor and thus increase its market power (by capturing increased market
       share) to set prices.
   •   Cross-selling: For example, a bank buying a stock broker could then sell its banking
       products to the stock broker's customers, while the broker can sign up the bank's
       customers for brokerage accounts. Or, a manufacturer can acquire and sell
       complementary products.
   •   Economy of scale: For example, managerial economies such as the increased
       opportunity of managerial specialization. Another example are purchasing economies
       due to increased order size and associated bulk-buying discounts.
   •   Taxation: A profitable company can buy a loss maker to use the target's loss as their
       advantage by reducing their tax liability. In the United States and many other countries,
       rules are in place to limit the ability of profitable companies to "shop" for loss making
       companies, limiting the tax motive of an acquiring company.
   •   Geographical or other diversification: This is designed to smooth the earnings results of
       a company, which over the long term smoothens the stock price of a company, giving
       conservative investors more confidence in investing in the company. However, this does
       not always deliver value to shareholders (see below).
   •   Resource transfer: Resources are unevenly distributed across firms (Barney, 1991) and
       the interaction of target and acquiring firm resources can create value through either
       overcoming information asymmetry or by combining scarce resources.

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