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strategic initiatives and strengthen their competitiveness. Such cooperative strategies go beyond normal company-tocompany dealings but fall short of merger or full joint venture partnership.
Collaborative arrangements can help a company lower its costs and/or gain access to needed expertise and capabilities
Can produce a differentiation-based competitive advantage when it results in a better quality part Reduces risk of depending on suppliers of crucial raw materials / parts / components
Why Diversify?
To build shareholder value! Diversification is capable of building shareholder value if it passes three tests:
1. Industry Attractiveness Testthe industry presents good long-term profit opportunities 1. Cost of Entry Testthe cost of entering is not so high as to spoil the profit opportunities 2. Better-Off Testthe companys different businesses should perform better together than as stand-alone enterprises, such that company As diversification into business B produces a 1 + 1 = 3 effect for shareholders
Unrelated Diversification
Involves diversifying into businesses with no competitively valuable value chain match-ups or strategic fits with firms present business(es)
Basic approach Diversify into any industry where potential exists to realize good financial results While industry attractiveness and cost-of-entry tests are important, better-off test is secondary