Growth Strategies: Ansoff’s
Product/Market Expansion Grid
Current
products
1. MarketCurrent
penetration
markets
strategy
New 2. Marketdevelopment
markets
strategy
New
products
3. Productdevelopment
strategy
(Diversification
strategy)
WHY FIRMS DIVERSIFY
1. A firm’s objectives can be no longer be met within the scope of the present
business portfolio.
•
Market Saturation, General Decline in Demand, Competitive Pressure on
Product line, or Obsolescence may reduce immediate or long term profitability. A
typical symptom would be a drop in the rate of return on reinvestments.
2. Even if attractive expansion opportunities are still available and past objectives are
being met, a firm may diversify because the retained cash exceeds the total expansion
needs of the present portfolio.
3. Even if current objectives are being met, a firm may diversify when diversification
opportunities promise greater profitability than expansion opportunities.
•
When diversification opportunities are sufficiently attractive to offset their
inherently lower synergy.
•
When firm’s R&D produces outstanding diversification by-products.
•
When Synergy is not considered important by firms and Synergy advantages
of expansion over diversification are not considered important. This is typically the
case in conglomerate firms.
4. Firms may suffer from the ‘grass is greener on the other side’
syndrome.
•
Lacking reliable information about diversification alternatives, such
firms tend to plunge rather than probe diversification alternatives. A much less
costly approach is to buy reliable information before plunging.
LEVELS OF DIVERSIFICATION
Low Levels of Diversification
• Single Business: More than 95% of revenue comes from a single business
• Dominant Business: Between 70% to 95% of revenue comes from a single
business
Moderate to High Levels of Diversification
• Related Constrained: Less than 70 % revenues come from the dominant
business. All businesses share product, technological and market linkages.
• Related Linked (mixed related and unrelated): Less than 70 % revenues come
from the dominant business. There are only limited links between the
businesses.
Very High Levels of Diversification
• Unrelated: Less than 70 % revenues come from the dominant business. There
are no links between businesses.
FUNDAMENTAL ROLE OF DIVERSIFICATION
The fundamental role of diversification is for Corporate
Managers to create value for stockholders in ways that
stockholders cannot do better for themselves.
DIVERSIFICATION: A CORPORATE STRATEGY
Diversification: The fundamental role of diversification is for Corporate
Managers to create value for stockholders in ways stockholders cannot do for
themselves.
Forms of Diversification
Vertical
Acquisition
Strategic
Alliances
Internal
Growth
Horizontal
Global
VALUE CREATION THROUGH DIVERSIFICATION
(ACQUISITION)
Company A
Revenues
150
Operating Costs
118
Earnings
32
Cash
55
Other Assets (Book Value) 185
Total Assets
240
Price Per Share
48
Number Of Shares
10.0
Market Value
480
Figures in Rs. Crores except price per share
Company B
20
16
4
2.5
17
19.5
16
2.5
40
Merged
172
(+2)
132
(-2)
40
(+4)
VALUE CREATION THROUGH DIVERSIFICATION (ACQUISITION)
Economic Gain (Increased Earnings) of the Acquisition
= Rs. 4 Crores
Assuming that
•
It is a permanent gain. It is a perpetuity.
•
The cost of capital is
Then, Present Value of Economic Gain is
= 20 %
= Rs.4/.2 Crores
= Rs. 20 Crores
Total Market Value of the Firms:
(Say, company A paid Rs. 47.5 Crores to acquire Company B)
Market Value of Co. A (Before Acquisition)
= Rs.480 Crores
Market Value of Co. B
= Rs. 40 Crores
Present Value of Gains
= Rs. 20 Crores
Cash paid to acquire
= Rs. 47.5 Crores
Post Merger Market Value
= Rs.492.5 Crores
VALUE CREATION THROUGH DIVERSIFICATION (ACQUISITION)
Cash Purchase
Exchange of Shares
Earnings
40
40
Cash
10
57.5
Other Assets (Book Value)
202
202
Total Assets
212
259.5
Price per Share
49.25
49.85
Number of shares
10.0
10.8333
Market Value
492.5
540
Figures in Rs. Crores except Price per Share
COST AND BENEFIT SHARING BETWEEN THE COMPANIES
•
First Case: All cash Deal
Benefits to the Shareholders of Company B
Gains
= Receipts - Market Value
= Rs. 47.5 Crores - Rs. 40 Crores
= Rs. 7.5 Crores
Benefits for the shareholders of Company A
Gains
= Market Value Post merger - Market Value Pre Merger
= Rs 492.5 Crores - Rs. 480 Crores
= Rs 12.5 Crores
Total Economic Gain = Rs 20 Crores.
BENEFIT SHARING BETWEEN STOCKHOLDERS OF THE COMPANIES
•
Second Case: Acquisition financed by stock.
Company A has issued 1 share to stockholders of Co. B for every 3 shares held
by them.
Number of Additional Shares issued
= 2.5 Crores/3 = 83,33,333
Value of shares of Co. B
= Rs 49.85 * 83,33,333
= Rs 41.5 Crores
Gains Captured by Shareholders of Co. B
= Rs 41.5 Crores - Rs. 40 Crores
= Rs 1.5 Crores
Gains of Shareholders of Co. A
= Economic Gain - Cost
= Rs. 20 Crores - Rs. 1.5 Crores
= Rs. 18.5 Crores.
VERTICAL INTEGRATION
Benefits:
• Building Barriers to Entry.
• Reduced Transaction Costs.
Note: Tapered Integration.
Limits:
• MES
• Responsibility for Technology Up-gradation and Innovation in all businesses.
• Integration of Cultures
Questions for Deciding when to Vertically Integrate:
• Are our existing suppliers or Customers meeting the Consumers needs?
• Can you “own” the business without really buying it?
• Is it giving any structural advantage? How volatile is the competitive environment
HORIZONTAL DIVERSIFICATION
Horizontal Diversification entails moving into more than one industry. It
can be
•Related Diversification
•Unrelated Diversification or Conglomerate Diversification
The case for Conglomerates
•Corporate managers have capability to spot low valued stocks.
•Corporations may be able to borrow money at Lower interest rates and pay
lower per share brokerage.
The case against Conglomerates
•Conglomerate discounts. Resulting in Corporate Raiders.
•Takeover Premiums.
Discounting worldwide competition represents a serious mistake for
several reasons:
•Research has shown that early entrants into a new internationalised market not
only gain greater market shares but also outlast the late entrants. This implies that
the firms should not only enter the international scene but should attempt to get
there early.
•The trend towards worldwide market makes it difficult to predict where the
competition may spring from. The case of TCS, Mumbai becoming a serious
competitor in the world software programming industry.
•Foreign investments would keep growing as foreign firms buy up domestic
businesses.
•The greatest growth opportunities exist overseas in developed and developing
nations. For instance, the European Union of twelve countries now represents the
largest market in the world. Countries such as China, Mexico are economies
growing at a faster pace than others. These could be markets of opportunities.
Advantages of Global Diversification:
•
Locational Economies.
•
Achieve economies of scale through greater volumes using international
sales opportunities.
•
To compete effectively in domestic markets, the corporations must be
willing to fight the international players in their home turf. Case of Michelin
tyres and Fuji Xerox.
EVALUATING REASONS TO DIVERSIFY
Least Power to
Create Value
Reducing
Risk
Not
recommended
as Reason to
Diversify
Most Power to
Create Value
Maintaini
ng Growth
Balancing
Cash
Flow
Sharing
Infrastruct
ure
Increasing
Market
Power
Capitalizi
ng on Core
Competen
ce
Recommended
as Reason to
Diversify
BOSTON CONSULTING GROUP GROWTH SHARE MATRIX
A Typical Product Portfolio Chart of a Comparatively strong and diversified company
Market growth rate
PRODUCT SALES
20%18%16%14%12%10%8%6%4%2%0
?
10x
4x
2x 1.5x
1x
.5x .4x .3x .2x .1x
Relative market share
BOSTON CONSULTING GROUP GROWTH-SHARE MATRIX
HIGH
CASH
USE
(Growth
Rate)
LOW
Modest
+ or Cash
Flow
Large Negative
Cash Flow
Large Positive
Cash Flow
Modest
+ or Cash
Flow
HIGH
LOW
CASH GENERATION (Market Share)
?
BOSTON CONSULTING GROUP GROWTH SHARE MATRIX
Market growth rate
SUCCESS SEQUENCE
20%18%16%14%12%10%8%6%4%2%0
?
10x
4x
2x 1.5x
1x
.5x .4x .3x .2x .1x
Relative market share
BOSTON CONSULTING GROUP GROWTH SHARE MATRIX
Market growth rate
DISASTER SEQUENCE
20%18%16%14%12%10%8%6%4%2%0
?
10x
4x
2x 1.5x
1x
.5x .4x .3x .2x .1x
Relative market share
BOSTON CONSULTING GROUP GROWTH SHARE MATRIX
Strategy for Cash Cows:
The goal is to do just enough to
DEFEND a cash cow’s market
position so it can efficiently generate
cash to reallocate to business
investments elsewhere!
BOSTON CONSULTING GROUP GROWTH SHARE MATRIX
Strategy for Dogs:
• Harvest
• Divest or spin off
• Liquidate or close down
BOSTON CONSULTING GROUP GROWTH SHARE MATRIX
Strategy for Stars:
• Offer excellent profit & growth opportunities
• Vary as to whether they are
– Self-sustaining or
– Require infusions of investment funds from
corporate parent
BOSTON CONSULTING GROUP GROWTH SHARE MATRIX
Strategy for Question Marks or Problem Child:
• Rapid industry market growth makes businesses
attractive, but low relative share positions raise
questions about future potential.
• Cash needs are high & internal cash generation is
low, making them cash hogs.
Market Life Cycle Competitive Strength Matrix
Introduction
Growth
Maturity
Decline
Push
High
Competitive
Strength
Medium
Low
Caution
Danger
General Electric’s Industry AttractivenessBusiness Strength Matrix
Business Strength
Industry
Attractiveness
• Market Share
• Core Competencies
• Profit Margin vs Competitors
• Ability to Match Price/Service
• Market Size
• Growth Rate
High
• Profit Margin
• Competition Intensity
• Seasonality
Medium
• Cyclicality
• Technology & Capital
• Social Impact
• Regulation
Low
• Environment
• Opportunities & Threats
• Barriers to Exit/Entry
Strong
Average
• Relative Costs
• Knowledge
• Technological Ability
• Management Caliber
Weak
TRANSACTION COSTS AS A BASIS FOR
DIVERSIFICATION
HIGH COST OF TRANSACTIONS
COSTS OF FINDING BUYERS
AND SELLERS
FEAR OF OPPORTUNISM
COSTLY TO WRITE A
CONTRACT
COSTLY TO ENFORCE A
CONTRACT
ASYMMETRIC
INFORMATION BETWEEN
BUYERS AND SELLERS
LONG TERM CONTRACT
UNDER DYNAMIC
CONDITIONS
RELATIONSHIP SPECIFIC
INVESTMENTS
UNCLEAR PROPERTY
RIGHTS
CONGLOMERATES AS ALTERNATIVE TO MARKETS
DEVELOPED
DEVELOPING
Equity focused
Under-developed weak
equity market &
Nationalized Banks
Monitoring
•by disclosure rules
•Market for corporate
control
FACTOR
MARKET
DEVELOPED
Many B
Schools and
Consulting
firms offering
talent
Certified skills
enhancing
mobility
DEVELOPING
Few of these
CAPITAL
MARKET
FIRM
Weak Monitoring
PRODUCT
MARKET
CONTRACT
DEVELOPED
ENFORCEMENT
DEVELOPED DEVELOPING Reliable
enforcement
Predictable Unpredictable of liability laws
GOVT REGULATIONS
Efficient
Low.
Relatively
free of
Corruption
Not So
DEVELOPING
Limited
enforcement
of liability laws
Little
dissemination dissemination
of Information of Information
Activist
Consumers
Few Activist
Consumers