MGF 3684

Business Strategy
Week 7
 What you need to know today

1. Product Diversification Part 1 3. Yunna Baiyao Case

2. Geographic (International) 4. Captone Round 3 Debrief
Diversification

Concepts Case Studies MGF

3684

Concepts StratBusines
eg y s
Mgt

Take-aways Capstone
What we will be learning this week?
Housekeeping
Announcements

• Re-entry of Capstone’s Strategy

Statement Info
 Lesson 6 Conclusion

Resource Based View (RBV) Theory

see enterprise resources in the New Take-away Message
following perspectives:
During business level strategies:
1. Resources are tangible & intangible
in nature 1. Create distinctive resources to give
competitive advantage, ie you create and
2. Resources have performing
capabilities
offer strategically designed service oriented
products to your target markets/segments
3. Resources can be bundled to
become distinctive service oriented
products that possess the following
properties:
• Are rare
• Are not easily imitated
• Are no easily substitutable

RBV identifies the distinctive resources that are created &

deployed to markets by business level strategies
 And …. RBV meaning at a Corporate Level Strategy Formulation

Corporate Strategy -- What businesses to be in?

RBV identifies the distinctive resources
that define the core business lines of
Vertical scope: extent of vertical integration
the organisation Horizontal scope: extent of diversification
Geographic scope: extent of international diversification
Corporate Level Strategy
Formulation

Corporate Level Strategies are purposed to define the core-

business lines of an organisation. Hence RBV theory can be
Business Level Strategy used to define an enterprise’s
Formulation
• Business Unit Strategies 1. Vertical scope – Market/product mix – what products
for what target markets.
• Marketing Strategies
2. Horizontal scope – Diversity of product offerings across
RBV identifies the distinctive resources that are created & markets
deployed to markets by business level strategies

3. Geographic scope – what products across international

locations
OUR FOCUS TODAY
 S E C T I O N 1

Product
Diversification
Corporate Strategy

Earlier we discuss strategy concepts in a generic

context.

Now we shall focus on more specific corporate-

wide strategy management concepts that are
relevant for planning.

Earlier we looked at the internal resource

capability development as a competitive
positioning move within the organisation, to
respond to external opportunities & threats. The
many resource oriented theories we examine give
you some ideas of the internal environment
analysis options for formulating the right strategy
mix, starting from a corporate level.

In this lesson, we will discuss more product

diversification theories for guiding strategic
analysis and formulation work.
Product Diversification Theories

Product diversification is also known as:

• Industry diversification, or
• Corporate diversification

Using such theories as strategic analysis

methods help to answer the questions
indicated on the left.

These answers guide one to formulate the

appropriate strategies, among other
strategic analysis findings, such as product
configuration mix as per discussed last week
History of Product Diversification Theories

During the 1980 mergers and acquisition crazy

era and even now, post Covid recovery, firms are
rationalising their businesses, returning to a
narrow focus on core businesses.

The theme “least is good” is a dominating change

driver that is very much prevalent today.

The key reasons: Having less translates to not

just making management work more simpler to

1. Deal with fast and constantly changing

uncertainties, ie risks inside and outside the
organisation
2. Create and sustain stakeholders’ value add
Why Diversify Product Offers?
Refocusing on core businesses also needs
some product diversification strategies.
Why?

One common reason is about Growth.

However, the context of growth is not just

linked to growing profits but for other
interests.

The infamous Agency Theory claims

managers are agents of shareholders and
they want to grow their companies in their
own self interests. Today, such self serving
managers can implicate potential collusion,
fraudulent and even corruption risks.
Common Motives for Diversification

A second common reason for adopting product

diversification in determining fewer core business mix is
about spreading financial risk across different markets,
through a diversity of products.

The catch 22 is increasing operational risks, because

different products require different production setup and
operating requirements.

Using product diversification strategies to reduce

financial risk needs to include internal risk management
of operational risks brought about from different
products’ production requirements
Diversification and Corporate Governance

Governance refers to a system of behavioural and

practice rules or controls that steer people to be
ethical and socially responsible when pursuing
strategic goals.

When a firm has many core businesses and further

adopt product diversification, the many variations of
business and products can blur decision making and
action taking transparency and accountability, leading
to poor governance.

Shareholders who hold majority shares in a firm, can

mandate more management transparency and
accountability oversight controls, hence reducing poor
governance risks.

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Profitable Diversification

While product diversification strategies can foster and

sustain growth and mitigate market risks, there are other
inherent risks involved.

We discuss operational risks can surface from having

different production capabilities for different products.

Them there is the risk of poor governance as product

diversification, arising from too many variations in
management decision making and action taking.

These risks can erode profitability. Porter recommended 3

risk management measures to reduce exposures to these
risks, these being:

1. The Attractiveness Test:

2. The Cost of Entry Test:
3. The Better-Off Test:
 Porter guidelines for profitable diversification

1. The Attractiveness Test: diversification should be The risks mitigation guidelines:

aiming for structurally attractive industries (or
potentially attractive industries).
1. Verify that the markets linked to the firm’s
2. The Cost of Entry Test: the cost of entering the new product diverfication strategies are
industry (e.g., acquisition premiums, start-up costs) profitable
must not offset future profits.
2. Know the cost of market entry per product,
3. The Better-Off Test: to manage profitability through transparent
Some form of (net) synergy must be present (1+1=3). and accountable information

Either the new unit must be better off because of its 3. Some sustainable value needs to be created
link with the corporation, or vice versa, or both. from having different products across the
Synergy… advantages for corporation’s business units core business lines
that they would not enjoy as independent businesses
(cost↓, WTP↑, unit sales↑) .
 Types of Diversification

Once a strategist decide on using product

Related Diversification diversification, the planning decision making needs
• Entry into a business in a new industry that has to consider how related are each product across the
commonalities with existing businesses: e.g., same core business lines and even value chains.
manufacturing process, distribution channel…
specifically, that allows for sharing of If analysing these inter-product & inter-business
resources/activities/capabilities. relations show positive value adds (synergy), then
• Different degrees of relatedness product diversification with the right mix of
interrelating products can yield positive results.
• Judging relatedness is tricky, “as much art as science”
Performing this strategic analysis and using the
• Examples: findings to make an appropriate decision is a craft
Ansell: condoms, industrial and medical gloves than an exact science.
Commonwealth Bank: banking and funds management
Unrelated products can also yield positive profits.
Unrelated (or “Conglomerate”) Diversification Hence analysing the degree of relationships
• Entry into a new industry that has no obvious between products is the focus of analysis when
commonalities with the existing businesses. formulating product diversification strategies
Creating Potential (Net) Synergies

Synergy (the capacity to create value add from

related or even unrelated products) can be
created by:

1. Restructuring / parenting
2. Exercising market power
3. Portfolio planning
4. Leveraging economies of scope (only from
related products)
 Creating Synergy through Product Diversification

Restructuring/Parenting
1. Identifying and acquiring poorly managed Restructuring to get rid of “waste” often linked to
companies, then inefficiencies (eg duplication) & ineffective
• Incentivising and empowering (or replacing) resources and capabilities (aging assets), often
management brought about by poor management
• Financial restructuring
• Selling off underperforming parts of the company… Restructuring to standardize enterprise functions,
called collectively as general management,
expanding the principle of “least is good” in
2. …plus providing general management streamlining management and underlying
resources/capabilities to the new business operational work
(“parenting”).

e.g., up-to-date IT, transparent financial

systems, incentive and other HR systems, …

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 Creating Synergy through Product Diversification

1. Restructuring/Parenting Continue….
When a firm restructure, what it
identifies as non-core business lines are
sold or disbanded. When this is actioned,
• Is regarded as a one-off opportunity to
there is no turning back.
create (net) synergy.
Product diversification decisions also
identify products that yield no or little
• Restructured business should be sold since
synergy value. They are cost burdens to
firm does not pass “better off” test on an
the firm and the decisions are likely to
ongoing basis (private equity approach)
dispose the business lines associated
with these “value-less” products.
 Creating Synergy through Product Diversification

2. Exercising Market Power

Play dirty tactics:
• Cross-subsidisation to drive out non-diversified
competitors in an industry. 1. Using your own business lines to cross
subsidiarise each other to disrupt
competitors with much business
• “Mutual forbearance” -- diversified competitors refrain
from aggressive competition in one industry, knowing diversification as you know their weaknesses
that it might affect other industries where they are of too much business and product
also facing each other. diversification

2. Collaborating with other competitors to

• Increased bargaining power against buyers/suppliers control mutually agreed targeted
that buy from or supply to the various businesses of competitors (oligopoly behaviours)
the diversified firm.
3. Manipulating buyer and supplier power
• All under increasing scrutiny from antitrust relationships
authorities!
Example of Synergy Driven Woolies
and Coles/Wesfarmers
What about Aldi? How
Woolies and Coles/Wesfarmers is this smaller player
 Groceries manoeuvring against
these oligopoly?
 Department stores (Kmart, Target, Big W…)
 Liquor retailing
 Petrol
 Clubs and pubs
 …

NB: In no other country in the world is there such

concentration of retailing power.
 Creating Synergy through Product Diversification

3. Portfolio Planning
1. Key tool for corporate management at the peak of
diversification trend

2. Simplistic recommendations re: which businesses to

retain, which ones to divest; which ones to invest in,
which ones to harvest.

3. Potential synergy source:

• superior access to internal information leads to better capital
allocation decisions within the firm
• cheaper cost of capital given relative independence from
external capital markets.
BCG Portfolio Matrix

Low Industry Growth High

High Relative Market Share Low 23

Industry Growth Rate [%]

24
Market Share [relative to largest competitor]
GE/McKinsey Portfolio Matrix

25
GE/McKinsey Portfolio Matrix

26
S E C T I O N 2

Tutorial
 Tutorial Discussion Scope

We will cover more about the following synergy creation methods:

1. Portfolio Planning
2. Leveraging Economies of Scope

3. Yunnan Case Study

4. Capstone
Week 8 is a Break
 Next Lesson
Case Study
Foster’s Group Case
What was the rationale for the acquisition?
Why did it fail?
Next Week’s Lesson

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