Competitive stratergy

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• Topic 6

School of Business and Tourism

• Bebo – a social networking site – was founded by Michael Birch and his wife Xochi Birch in January 2005 at their home in San Francisco

• It was acquired by AOL on March 13, 2008 for $850 million, with the Birch's combined 70% stake yielding a profit of $595 million from the deal

• In April 2010, AOL announced it was planning to sell or shut down Bebo

• Criterion Capital Partners purchased Bebo for an undisclosed sum which was reportedly under $10 million.

• Understand how business diversification can enhance shareholder value

• Gain an understanding of how related diversification strategies can help deliver competitive advantage

• Become aware of the merits and risks of corporate strategies keyed to unrelated diversification

• Gain command of the analytical tools for evaluating a company’s diversification strategy

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Diversification vs Strategy

• What is diversification?

Diversification vs Strategy

• What is diversification?

• A company is diversified

when it is in two or

more lines of business

that operate in diverse

market environments

Key Examples

• Woolworths Limited

• Largest retail company, food retailer and takeaway liquor retailer in Australia

• Largest hotel and poker machine operator in Australia

• http://en.wikipedia.org/wiki/Woolwo rths_Limited

• Also look at the Tata Group

• http://www.youtube.com/watch?v =zDAC6J0RXW4

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Key Examples cont….

• Wesfarmers

• Largest private employer in Australia, with almost 200,000 employees across the country (own Coles/New World, Liquorland & Bunnings to name just three)

• http://en.wikipedia.org/wiki/Wesfar mers

• It is faced with diminishing growth prospects

in its present business/industry – adding new

products to its firm/group

• Adding international markets – expanding

geographically

• Portfolio investment – investing in stocks and

securities

• Reduction of risk – a very important motive

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• Physical product and/or different markets – our main focus

• The main aim of crafting and implementing strategy is to seek a sustainable competitive advantage

• Which markets, which industry – industry attractiveness, link back to five forces

• Also need to work out how we can compete? Can the firm find competitive advantage?

brands or activities.

Coca-Cola Company offers more than 500 brands in over

200 countries, besides its WWhy should a firm diversify?

hy should a firm diversify?

namesake Coca-Cola beverage – mainly in soft drinks.

Difficult to find linkages sometimes. Let’s look at the Virgin

Group - http://en.wikipedia.org/wiki/Virgin_Group

• Different types – product or international

• Business groups – common ownership. You might find that the group is made up of what appears to be unrelated brands or activities.

• Coca-Cola Company offers more than 500 brands in over 200 countries, besides its namesake Coca- Cola beverage – mainly in soft drinks.

• Difficult to find linkages sometimes. Let’s look at the Virgin Group - http://en.wikipedia.org/wiki/Virgin_Group

• Volkswagen (Volkswagen Aktiengesellschaft) – financial services and manufacturing cars (Audi, Bentley, SEAT, Skoda, Lamborghini). Why are they in two different industries? Might they be looking to serve certain customers, who’s needs are not being fulfilled?

• Can tap into the financial side of the firm to help build competitive advantage in cars – capital resources

• How complex are the individual units? Does the groups members perform the same function?

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Diversification

• Organisational complexity

• Environmental complexity – for example,

location concentration might mean the

environment is somewhat more manageable.

• Cultural aspects?

• General Electric – many markets (great

variety), many different activities and

functions

Steps in Diversification

• We need to ask ourselves ‘how far do we go’. Will diversification continue to grow and improve our business?

• Success/performance vs diversification

• Lifecycle theory – in initial stages, as firms move into new markets and complexity , performance might diminish...as we are learning. Norms, cultural aspects. There is also a resource risk.

• But then things start to improve – learning effect; we are setting to engage the market, and we are learning from experience; economies of scale.

• But does this notion of increased performance over time hold fast for all firms? For all industries?

• What about the entry barriers? Ecommerce is one example.

• The Service industry might differ from manufacturing products and raw materials – human resources, technological consideration – many factor will affect impact of success.

Steps in Diversification cont…..

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Steps in Diversification cont…..

• Entering into completely unrelated products or services to your group

• Of course there are some risks – General Electric – started in Power Generation, now look where they are http://www.youtube.com/watch?v=t3qqyYD mOfs

• Declining profits or performance in one business, they might jump into a new venture – Ceradyne – http://video.foxbusiness.com/v/4663537/cer adyne-founder-on-diversification-potential- cuts-in-defense-spending/?playlist_id=87063

• Using resources more efficiently

• Financial synergies

• Might be time to dip out if things are getting difficult

• Back to the Virgin Group – would appear to be little linkage between businesses

• The synergies might relate to some broad skills, broad competencies say around human resources. Might be competencies based around business philosophy – learn how to do things better, spreading across the group

• But not all businesses choose to grow via unrelated businesses – Coca Cola is a great example – distribution channels, economies of scope and scale (same production), strong brand

• http://en.wikipedia.org/wiki/Coca-Cola_brands

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• Motives – reducing risk

• Competitive advantage – but remember, a lack

of cross-business strategic fit might mean

unrelated diversification offers very little

competitive advantage potential beyond what

each business can generate on its own

• Relatedness issues