Industry Attractiveness Test — the industry should be attractive and has the potential to become attractive. 2. Cost of Entry Test — the cost of entering is not so high as to spoil the profit opportunities 3. Better-Off Test — the company’s different businesses should perform better together than as stand-alone enterprises , such that company A’s diversification into business B produces a 1 + 1 = 3 effect for shareholders ( Synergy )
It is faced with diminishing growth prospects in present business It has opportunities to expand into industries whose technologies and products complement its present business It can leverage existing competencies and capabilities by expanding into businesses where these resource strengths are key success factors It can reduce costs by diversifying into closely related businesses It has a powerful brand name it can transfer to products of other businesses to increase sales and profits of these businesses When When Should a Firm Diversify? Should a Firm Diversify?
How to increase Profitability through Diversification Diversification 1. Transferring competencies among existing businesses 2. Leveraging competencies to create new businesses 3. Sharing resources to realize economies of scope 4. Using product bundling 5. Managing rivalry by using diversification as a means in one or more industries 6. Exploiting general organizational competencies that enhance performance within all business units A diversified company can create value by:
Transferring Competencies Transferring Competencies The competencies transferred must involve activities that are important for establishing competitive advantage For strategy to work, the distinctive competency being For strategy to work, the distinctive competency being transferred must have real strategic value. transferred must have real strategic value. Profitability increases when it: Profitability increases when it: 1) 1) Lowers cost structure of one or more business units Lowers cost structure of one or more business units 2) 2) Enables one or more business units to better differentiate Enables one or more business units to better differentiate products products Taking a distinctive competency developed in one industry and implanting it in an EXISTING business unit in another industry
Transfer of Competencies at Philip Morris Transfer of Competencies at Philip Morris
The difference between leveraging and transferring competencies is that an entirely NEW business is created Companies use R&D competencies to create new business opportunities in diverse areas Taking a distinctive competency developed by a business in one industry and leveraging it to create a NEW business unit in a different industry Leveraging Competencies Leveraging Competencies
Precision Mechanics Fine Optics Micro- Electronics 35mm SLR camera Compact fashion camera EOS autofocus camera Digital camera Video still camera Plain-paper copier Color copier Color laser copier Laser copier Basic fax Laser fax Mask aligners
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- Fall '19