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INTRODUCTION
Diversification is a strategy that takes a company into new markets with new
products or services. Companies may choose a diversification strategy for
different reasons.
Firstly, companies might wish to create and exploit economies of scope, in
which the company tries to utilize its exciting resources and capabilities in
other markets. This can oftentimes be the case if companies have under-
utilized resources or capabilities that cannot be easily disposed or closed.
Using a diversification strategy, companies may therefore be able to utilize
all its capabilities or resources, and able to attract new business from market
segments not catered to earlier.
Secondly, managerial skills found within the company may be successfully
used in other markets, where the dominant logic and managerial procedures
of management can be successfully transferred to other markets.
Thirdly, companies pursuing a diversification strategy may be able to cross-
subsidize one product with the surplus of another. This way, companies with
a very diverse portfolio of products catering to different markets may
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potentially grow in power, and be able to withstand a prolonged period of
price competition etc. When having subsidized one product for a substantial
period of time, the company might possibly be able to win a monopoly,
making it the only supplier in the respective market.
Fourthly, companies may also want to use a diversification strategy to
spread financial risk over different markets and products, so that the entire
success of the company is not reliant on one market or product only.
There may however be other reasons for companies to use a diversification
strategy than the four listed above, and companies may very well benefit
from a diversification strategy for other reasons.
However, it is important for companies to realize the possible danger of
diversifying its scope of operations to much. Companies might risk
neglecting its core capabilities and become too diversified, where too many
different products supplied to different markets might have negative effects
on products and services, where e.g. product quality or uniqueness might
suffer due to the shift in focus on different products and markets.
The diversification strategy can be split into two different types:
Related diversification
Unrelated diversification
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Please click the links above to read more.
I have noticed many concept pages for China as an investment. For
investors, however, India may be a better choice as there is less of a
correlation with the developed world. China was a good investment story
several years ago, but may be too much of a speculative bubble at this time.
If you are new to investing in emerging markets, I would wait until after the
2008 Beijing Olympics before getting into China and only then via a closed-
end fund such as the Templeton Dragon Fund (TDF) or others of similar
styles.
One way of getting a grasp of a country's level of domestic demand versus
export demand is using the Trade-to-GDP ratio. A low ratio indicates that
the local economy consumes a proportionally larger amount of goods and
services, whereas a high ratio indicates an economy that is more export-
driven.
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MUTUAL FUNDS VERSUS INDIVIDUAL
COMPANIES
When investing in emerging markets, the question is whether to go with a
closed-end or mutual fund, or to select individual companies that trade on
overseas markets. Closed-end funds are often the only way to get involved in
the newest of emerging markets (e.g., Vietnam) and trade on exchanges like
stocks (i.e., can be bought or sold during the day, may be shorted). The
disadvantage is that the price can differ from the Net Asset Value due to
demand-supply considerations. Buying at a discount to the NAV is not
always advisable since it may indicate a lack of liquidity or that the fund is
out-of-favour for good reasons.
Over the past several years Indian companies have become listed on U.S.
exchanges, usually asAmerican Depository Receipts (ADRs) and provide
albeit narrow exposure to the Indian market. For example, one can buy Tata
Motors (TTM), an ADR which gives exposure to the growing demand for
automobiles by Indian consumers. With recently announced plans to set up
production facilities in Thailand, TTM will also provide investors with
exposure to another emerging market. The growing worldwide reach of
Indian companies will also provide investors with one might call "back-
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investing". If Tata is successful with their plans to purchase the Land Rover
and Jaguar units from Ford, shareholders in TTM will gain additional
exposure to western, developed world markets. Infosys Technologies
Ltd (INFY) is an Indian company that is a play on the global outsourcing
movement. They also have plans to move into Southeast Asian countries
which will give shareholders further exposure to other emerging markets.
The India Fund (IFN) provides exposure to some of India's best companies
and passes through dividends, giving a very nice dividend yield, unlike most
U.S. mutual funds.
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INDIAN APPAREL AND TEXTILE INDUSTRY
HISTORY
The history of apparel and textiles in India dates back to the use of mordant
dyes and printing blocks around 3000 BC. The foundations of the India's
textile trade with other countries started as early as the second century BC.
A hoard of block printed and resist-dyed fabrics, primarily of Gujarati
origin, discovered in the tombs of Fostat, Egypt, are the proof of large scale
Indian export of cotton textiles to the Egypt in medieval periods.
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During the 13th century, Indian silk was used as barter for spices from the
western countries. Towards the end of the 17th century, the British East
India Company had begun exports of Indian silks and several other cotton
fabrics to other economies. These included the famous fine Muslin cloth of
Bengal, Orissa and Bihar. Painted and printed cottons or chintz was widely
practiced between India, Java, China and the Philippines, long before the
arrival of the Europeans.
The diversity of fibers found in the country, intricate weaving on its state-of-
art manual looms and its organic dyes has attracted buyers from all across
the world for centuries. Before the introduction of mechanized ways of
spinning in the early 19th century, all Indian silks and cottons were hand
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spun and hand woven, a highly popular fabric, called the khadi. Independent
India saw the development and building up of textile strength,
diversification of its product range, and its emergence, once again, as an
important player in the world industry.
The Indian Textile Industry Overview
Today, the Indian apparel and textile industry employs around 35.0 million
people (and is the 2nd largest employer), yields 1/5th of the total export
earnings and contributes 4 % to the GDP thereby making it the largest
industrial sector of the economy. The sector aims to grow its revenue to US$
85bn, its export figures to US$ 50bn and employment to 12 million by the
year 2010 (Texmin 2005).
The Indian textiles industry that already has an overwhelming presence in
the economic life of the country, has been given a further boost with the
scrapping of quotas in global trade of textiles and clothing. In the post quota
period, the size of industry has expanded from US$ 37 billion in 2004-05 to
US$ 49 billion in 2006-07. During this period, while the domestic market
has grown from US$ 23 billion to US$ 30 billion, exports has increased
from around US$ 14 billion to US$ 19 billion.
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As a matter of fact, the apparel and textile is the largest foreign exchange
earning sector in the country. Being a direct employment provider to over 35
million people and and with continuing growth momentum, the role of this
sector in Indian economy is bound to increase.
Indian Exports of Apparel & Textile Facts & Figures
Exports increased from US$ 14 million (2004-05) to US$ 17 million
(2005-06) 21.77 % increase.
With continuing growth, the total exports has increased to US$
19.62 billion (2006-07).
Current share in world export of textiles 3.5 - 4 %.
Current share in world clothing export 3 %.
Major export market Europe (22% share in textiles & 43% share in
apparel).
Single largest buyer US ( 10% share in textiles and 32.65 share in
apparel).
Other major export markets include - UAE, Saudi Arabia, Canada,
Bangladesh, China, Turkey and Japan.
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Largest export segment Readymade Garments (45% share in textile
exports and 8.25 share in India's total exports).
Readymade garments sector has benefited significantly with the
termination of Multi-Fiber Arrangement (MFA in January 2005.
Exports of readymade garments are expected to touch US$ 14.5
billion with a cumulative annual growth rate of 18-20% (Apparel
export Promotion Council).
Product-wise Export Share
Commodities
2005-06
(Million US$)
Readymade Garments 6038.69
Cotton Textiles 3290.31
Man-made Textiles 1948.72
Wool & Woolen Textiles 66.57
Silk Textile 406.82
Total 11751.11
Add handicraft, Coir & Coir
Manufacturers and Jute
Total 13065.24
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SECTOR-WISE ANALYSIS
Readymade
garments
Accounts for around 45% of the countrys total textiles exports. The
amounted to US$ 7.75 billion (2005-06), recording an increase of 28.69
exports during
During the first quarter of 2006-07 the exports have amounted to US$ 2
recording an increase of 15.70% over the exports during the correspondin
2005-06.
Cotton textiles
including
handlooms
Cotton Textiles i.e. yarn, fabrics and made-ups (Mill made / Powerloom /
account for more than 2/3rd of our exports of all fibers/yarns/made-ups. The e
amounted to US$ 4.49 billion, recording a healthy increase of 26.78% over
2004-05.
During the first quarter of 2006-07 the cotton textiles including exports of
have amounted to US$ 1.25 billion, recording an increase of 25.70% over
during the corresponding period of 2005-06.
Man-made textiles
During 2005-06, man-made textile exports have amounted to US$ 2 bil
reflects a decline of 2.47% over the exports during the
During the first quarter of 2006-07, exports have amounted to US$ 0.52 bil
reflects an increase of 13.15% over the exports during the corresponding peri
06.
Silk textiles During 2005-06, the exports of silk textiles were amounted to US$ 0.69 billio
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an increase of 16.37% over the exports during
During the first quarter of 2006-07 the export figures were to US$ 0.165 bil
reflects an increase of 4.23% over the exports during the corresponding peri
06.
Woolen textiles
The woolen textile exports during 200405, were US$ 0.42 billion, recording
of 23.4% as compared to the corresponding period of
During the first quarter of 2006-07 the export of woolen textiles have amoun
0.114 billion that reflects an increase of 11.96% over the exports
corresponding period of 2005-2006.
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REMEDIAL MEASURES
The textile exporting community of the country is looking to reduce
dependency on the US market and is focusing towards the European market
for attaining further growth and to fight currency pressure. This is because of
the fact that even though the rupee strengthens itself to Rs. 39.54 against the
dollar, the Euro-rupee equation is comparatively at a higher exchange price
of Rs. 56.
While many exporters are in talks with European buyers to increase
revenues from the European market, keeping long-term interests in mind,
they are also hoping to ramp up domestic operations, improve production
and manufacturing efficiencies. For example, some companies are trying to
convince their existing clients in Europe to shift from paying in dollars to
Euros. Some companies are also pondering over market diversification with
more emphasis on Europe.
According to industry experts, these are only short-term benefits and will not
be beneficial to small and medium enterprises to cope up with the
appreciation of rupee.
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As per industry statistics, the European market cannot offer as much
volumes as the American market fetches. Secondly, there will always be a
resistance to the incremental prices, which exporters can enforce upon their
foreign clients. Hence, targeting the burgeoning domestic market, which has
significant growth potential should be the long-term strategy for the Indian
textile sector. Besides this, while some bigger companies have managed to
plug losses by hedging, it is time for the smaller companies too, to look at
this option, as the textile industry has had to grapple with issues such as job
cuts and profit losses this year.
OBJECTIVES
Why Diversification?
The two principal objectives of diversification are
improving core process execution, and/or
enhancing a business unit's structural position.
The fundamental role of diversification is for corporate managers to create
value for stockholders in ways stockholders cannot do better for
themselves1. The additional value is created through synergetic integration
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of a new business into the existing one thereby increasing its competitive
advantage.
FORMS AND MEANS OF DIVERSIFICATION
Diversification typically takes one of three forms:
Vertical integration along yourvalue chain
Horizontal diversification moving into new industry
Geographical diversification open up new markets
Means of achieving diversification include internal
development,acquisitions, strategic alliances, andjoint ventures. As each
route has its own set of issues, benefits, and limitations, various forms and
means of diversification can be mixed and matched to create a range of
options.
Description
This paper studies the nature and pattern of diversification in 252 private manufactur
the Indian corporate sector from 1995 to 2004. Using Rumelt's methodology of dive
found that Dominant Business (DB) is the most popular strategy among Indian
Unrelated Business (UB) is the least preferred one. Among the sub-categories, Domi
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(DC) and Related Constrained (RC) are the most favored strategies. Indian compan
pattern of diversification, the forward pattern being Single Business (SB) to DB an
Business (RB), and the backward pattern being UB to RB and RB to DB. Thus, Ind
not leave their core businesses even while diversifying which results in a comparativ
the diversification process.
Sustaining growth is a key challenge to business leaders in an enterprise. The busine
changing fast and to keep pace with the volatile business conditions and growin
business needs to pursue growth strategies. A growth strategy is one, which is marked
the level of objectives of a business, much higher than its past achievement level. T
indicator of a growth strategy is to raise the market share and or sales objectives sign
1980; Secchi and Boltazzi, 2005).
Every company passes through five stages in its life, namely, emergence, g
regeneration and decline (James, 1973). If a company wants to delay the last pha
growth strategies. Organizations that do not grow are pushed out of their business aren
and other new entrants. Many a time, the environment also offers favorable opportuni
government provides concessions and incentives for growth in industries in certain ar
government provides concessions to priority sector industries and those established in
These opportunities stimulate companies to grow and growth helps create economies o
scope, serves as a motivational force for managers,
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Keywords
Nature and Pattern of Diversification in the Indian Corporate Sector, Dominant B
leaders, growing competition, market share, growth strategies, joint ventures, licen
foreign markets, portfolio of products, administration, corporate sector, Indian co
policy,Industrial Classification, component businesses, DB strategy.
Motives to Diversify
In some instances, managers may be motivated to diversify their companies eve
incentives and a lack of resources should constrain any inclination toward diversific
motives for diversification include:
Reduction of managerial risk
Diversification may enable managers to reduce employment risk (the risks related to
jobs or a reduction in compensation) because by diversifying the company (by add
additional businesses) managers may be able to diversify their employment risk if pro
decline significantly as a result of the diversification.
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Desire for increased compensation
Diversification also may enable managers to increase their compensation because of p
between diversification, company size, and executive compensation.
This positive correlation may exist because diversification generally results in a
complexity and size of the overall company, and large companies are more difficul
consequence, managers of large companies generally are compensated more highly tha
small companies.
Managers may be motivated to increase overall company diversification even when
resources are absent. If this happens, internal and external governance mechanisms g
play to discourage diversification that is motivated solely by managerial self-interest. U
mechanisms are not perfect and may give incentives to managers to take strategic act
level of company diversification) that are counter-productive (resulting in lo
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performance). For example: Spin-off companies may not realize productivity gains.
are spun off may have unrecognized interdependent linkages with business units t
company.
Ultimately, the appropriate level of diversification should be determined by the market
company resources and capabilities. One signal that the company may be overd
operating diversified businesses reduces rather than improves the overall performance o
Therefore, diversification strategies can be used to enhance a company's strategic co
enable it to earn above-average returns. However, positive outcomes from diversifi
only when thecompany achieves the appropriate level of diversification, given its reso
and core competencies, and taking into account the external environmental opportunitie
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Reasons for Diversification
Companies may implement diversification strategies to enhance or increase the strateg
of the overall organization. If they are successful, the value of the company increa
created through either related or unrelated diversification if the strategies enable the
businesses to increase revenues and/ordecrease costs when implementing their respec
strategies.
Companies may also implement a diversification strategy to gain market powe
competitors. Companies may implement diversification strategies that are either value
devaluation of the company. They may attempt to diversify to neutralize a competitor
to reduce managers' employment risk (i.e., the risk of CEO being unemployed when a
company fails as compared to this risk when a single business fails but is only one p
company) or to increase managerial compensation because of the positive rela
diversification, company size, and compensation.
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Motives to enhance strategic competitiveness:
economies of scope (related diversification) through activity-sharing and the
transfer core competencies
market power motives (related diversification) by vertical integration or
blocking competitors through multipoint competitionfinancial economies motives (unrelated diversification) to improve efficiency
ofcapital allocationthrough an internal capital market or by restructuring the
portfolio of businesses
Motives that are value-neutral with respect to strategic competitiveness:
to avoid violations of antitrust regulations
to take advantage of tax incentives
to overcome low performance
to reduce the uncertainty offuture cash flows
to reduce overall company risk
to exploit tangible resources
to exploit intangible resources
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Failure to Diversify
What does it mean to diversify? It means to vary or spread risk. When onehired a broker or investment advisor and pays him an annual fee to managean account, a consumer should expect that his investments are diversified.Why is that so important? Its important because you want to spread yourrisk. Risk of what? Risk that the investments will lose value. What do I
mean by this?
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Lets assume that you give a broker $500,000 and you tell him that this is
your nest egg to retire on in 10 years. You tell the broker that you cannot
afford to lose the money because after you receive your social security
check, this money is all you have in the world. If the broker invested all of
your money is high risk stocks and securities, you could certainly stand to
gain a lot of money.
But what could also happen? Right ! You could LOSE a lot of money. How
would you feel if your $500,000 investment dropped down to $250,000
during that 10 year period? Im sure not well. The point is, an account
should be diversified (or placed into many different investments).
Investing in a high risk security is not necessarily negligent so long as its a
very small part of this hypothetical persons strategy. High risk investments
should usually be balanced with low risk investments. This is so that your
particular account wont plummet if the market drops in a major way.
Diversification can happens in many ways. Examples include:
A good mix of stocks and bonds
Diversification of funds within a mutual fund
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Diversification of funds within a variable annuity
Diversification of stocks withing a certain sector
Failing to diversify can result of major losses of your account. If you prefer
to have all of your eggs in one basket and feel that this is a good strategy for
you, then you would not have a diversification claim. However, if you desire
to preserve your capital and obtain small income, then you should ensure
that your account is diversified.
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Diversification via Acquisition: Creating Value
During the past 25 years an increasing proportion of U.S. companies have
seen wisdom in pursuing a strategy of diversification. Between 1950 and
1970, for example, single-business companies comprising theFortune 500
declined from 30% to 8% of the total. Acquisition has become a standard
approach to diversification.
In recent years the productivity of capital of many multibusiness companies
has lagged behind the economy. Nevertheless, diversification through
acquisition remains popular; between 1970 and 1975, acquired assets of
large manufacturing and mining companies averaged slightly more than
11 % of total new investment in those companies, and most of that activity
was diversifying acquisition.1 In the past few years the pace of activity has
been slower than in the hectic 19671969 period, but the combination of
high corporate liquidity, depressed stock prices, and slow economic growth
has meant that for many companies acquisitions are among the most
attractive investment alternatives. Since mid-1977, hardly a week has gone
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by without at least one major acquisition being announced by a diversifying
corporation.
In light of this continuing interest and the apparent economic risks in
following such a strategy, we present a review of the theory of corporate
diversification. We begin by discussing seven common misconceptions
about diversification through acquisition. We then turn to the basic question
facing companies wanting to adopt the strategy: How can a company create
value for its shareholders through diversification?
Our consideration of value creation leads to an examination of the potential
benefits of the alternatives availablerelated-business diversification and
unrelated-business diversification. Businesses are related if they (a) serve
similar markets and use similar distribution systems, (b) employ similar
production technologies, or (c) exploit similar science-based research.2
Common Misconceptions
There are seven common misconceptions about diversification through
acquisition that we can usefully highlight in the context of recent history.
They relate to the economic rationale of this strategy and to the management
of a successful diversification program.
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1. Acquisitive diversifiers generate larger returns (through increased
earnings and capital appreciation) for their shareholders than
nondiversifiers do. This notion gained a certain currency during the 1960s,
in part because of the enormous emphasis that securities analysts and
corporate executives placed on growth in earnings per share (EPS).
Acquisitive diversifiers that did not collapse at once from ingesting too
many businesses often sustained high levels of EPS growth.
However, once it became apparent that a large proportion of this growth was
an accounting mirage and that capital productivity was a better indicator of
managements performance and a businesss economic strength, the market
value of many acquisitive companies plunged.
Many widely diversified companies have had low capital productivity in
recent years. Exhibit I shows the performance of a sample originally selected
by the Federal Trade Commission in 1969 as representative of companies
pursuing strategies of diversification and not classifiable in standard
industrial categories. While the average return on equity of the sample was
20% higher than the average of theFortune 500 in 1967, it was
18% below theFortune average in 1975. Even the surge in profits in 1976
and 1977 and the impact of nonoperating, accounting profits in several
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corporations failed to bring the sample average up to theFortune average.
What is even more telling than the return on equity figures is that the
samples return on assets was 20% or more below theFortune500 average
throughout the ten-year period.
Incentives for Diversification
However, not all companies diversify to increase the value of the overall
company. Some attempts at diversification are implemented to prevent the
value ofthe company from decreasing.
Low Performance
When companies are able to earn above-average or superior returns in a
single business, they have little incentive to diversify. However, low
performance may provide an incentive for diversification, as a low-
performing company may become more risk seeking in an effort to improve
overall companyperformance. On the other hand, it has been shown that
lower returns are related to greater (not lower) levels of diversification.
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In response to low returns (or poor performance), companies often choose to
seek greater levels of diversification. At some point, however, poor
performance slows the pace of diversification, often resulting in
restructuring divestitures of businesses to lower the level of company
diversification.
AsFigure 5.5 illustrates, companies exhibiting low performance in their
dominant businesses often implement related-
constrained diversification strategies which, to some point, result in
increased performance. In search of even higher performance, related-
diversified companies may continue to diversify, but elect to acquire
unrelated businesses. Because the company's core competencies do not
create value in unrelated businesses, company performance decreases.
Uncertain Future Cash Flows
Companiesalso may implement diversification strategies when their
products reach maturity (in the product life cycle) or are threatened by
external factors that the company cannot overcome.
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Thus, companies may view diversification as a survival strategy. For
example tobacco companies like ITC are diversifying because of future
demand uncertainty that resulted from attacks on smoking and the ban on
events sponsorships.
Uncertainty can also be derived from supply sources as well as demand
conditions.
Company Risk Reduction
As you will recall from the discussion earlier in this chapter, companies that
diversify in pursuit of economies of scope take advantage of linkages
between primary value-creating activities to realize synergy from sharing.
Synergy exists when the value created by business units working together
exceeds the value the units create when working independently. However,
these linkages--and the interrelatedness or interdependencies that result--
produce joint profitability between business units and the flexibility of the
company to respond may be adversely affected, increasing the risk of failure.
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To eliminate this risk, companies may do one of two things: (1) operate in
more certain environments to reduce the level of technological change and
choose not to pursue potentially profitable, yet unproven product lines or (2)
constrain or reduce the level of activity-sharing, thus foregoing the potential
benefits of synergy
However, these decisions could lead to further diversification to diversify
into industries where more certainty exists or to additional, but unrelated
diversification
Business-Level Strategies
There are four generic strategies that are used to help organizations establish
a competitive advantage over industry rivals. Firms may also choose to
compete across a broad market or a focused market. We also briefly discuss
a fifth business level strategy called an integrated strategy.
1. Cost Leadership Organizations compete for a wide customer based on
price. Price is based on internal efficiency in order to have a margin that will
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sustain above average returns and cost to the customer so that customers will
purchase your product/service. Works well when product/service is
standardized, can have generic goods that are acceptable to many customers,
and can offer the lowest price. Continuous efforts to lower costs relative to
competitors is necessary in order to successfully be a cost leader. This can
include:
Building state of art efficient facilities (may make it costly for
competition to imitate)
Maintain tight control over production and overhead costs
Minimize cost of sales, R&D, and service.
Porter's 5 Forces Model
Earlier we discussed Porter's Model. A cost leadership strategy may help to
remain profitable even with: rivalry, new entrants, suppliers' power,
substitute products, and buyers' power.
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Rivalry Competitors are likely to avoid a price war, since the low
cost firm will continue to earn profits after competitors compete away
their profits (Airlines).
Customers Powerful customers that force firms to produce
goods/service at lower profits may exit the market rather than earn
below average profits leaving the low cost organization in a monopoly
positions. Buyers then loose much of their buying power.
Suppliers Cost leaders are able to absorb greater price increases
before it must raise price to customers.
Entrants Low cost leaders create barriers to market entry through its
continuous focus on efficiency and reducing costs.
Substitutes Low cost leaders are more likely to lower costs to entice
customers to stay with their product, invest to develop substitutes,
purchase patents.
How to Obtain a Cost Advantage?
Determine and Control Cost
Reconfigure the Value Chain as Needed
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Risks
Technology
Imitation
Tunnel Vision
Value Chain A framework that firms can use to identify and evaluate the
ways in which their resources and capabilities can add value. The value of
the analysis lays in being able to break the organization's operations or
activities into primary (such as operations, marketing & sales, and service)
and support ( staff activities including human resources management &
procurement) activities. Analyzing the firm's value-chain helps to assess
your organizations to what you perceive your competitors value-chain,
uncover ways to cut costs, and find ways add value to customer transactions
that will provide a competitive advantage.
2. Differentiation - Value is provided to customers through unique features
and characteristics of an organization's products rather than by the lowest
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price. This is done through high quality, features, high customer service,
rapid product innovation, advanced technological features, image
management, etc. (Some companies that follow this strategy: Rolex, Intel,
Ralph Lauren)
Create Value by:
Lowering Buyers' Costs Higher quality means less breakdowns,
quicker response to problems.
Raising Buyers' Performance Buyer may improve performance,
have higher level of enjoyment.
Sustainability Creating barriers by perceptions of uniqueness and
reputation, creating high switching costs through differentiation and
uniqueness.
Risks of Using a Differentiation Strategy
Uniqueness
Imitation
Loss of Value
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Porter's Five Forces Model Effective differentiators can remain
profitable even when the five forces appear unattractive.
Rivalry Brand loyalty means that customers will be less sensitive to
price increases, as long as the firm can satisfy the needs of its
customers (audiofiles).
Suppliers Because differentiators charge a premium price they can
more afford to absorb higher costs and customers are willing to pay
extra too.
Entrants Loyalty provides a difficult barrier to overcome.
Substitutes (trans. 4-26) Once again brand loyalty helps combat
substitute products.
3. Focused Low Cost- Organizations not only compete on price, but also
select a small segment of the market to provide goods and services to. For
example a company that sells only to the U.S. government.
4. Focused Differentiation - Organizations not only compete based on
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differientation, but also select a small segment of the market to provide
goods and services.
Focused Strategies - Strategies that seek to serve the needs of a particular
customer segment (e.g., federal gov't).
Companies that use focused strategies may be able serve the smaller
segment (e.g. business travelers) better than competitors who have a wider
base of customers. This is especially true when special needs make it
difficult for industry-wide competitors to serve the needs of this group of
customers. By serving a segment that was previously poorly segmented an
organization has unique capability to serve niche.
Risks of Using Focused Strategies:
Maybe out focused by competitors (even smaller segment)
Segment may become of interest to broad market firm(s)
5. Using an Integrated Low-Cost/Differentiation Strategy
This new strategy may become more popular as global competition
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increases. Firms that use this strategy may see improvement in their ability
to:
Adaptability to environmental changes.
Learn new skills and technologies
More effectively leverage core competencies across business units and
products lines which should enable the firm to produce produces with
differentiated features at lower costs.
Thus the customer realizes value based both on product features and a low
price. Southwest airlines is one example of a company that does uses this
strategy.
However, organizations that choose this strategy must be careful not to:
becoming stuck in the middle i.e., not being able to manage successfully the
five competitive forces and not achieve strategic competitiveness. Must be
capable of consistently reducing costs while adding differentiated features.
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Core Competence
A core competence is the result of a specific set of skills or production
techniques that deliver value to the customer. Such competences enable an
organization to access a wide variety of markets. Executives should estimate
the future challenges and opportunities of the business in order to stay on top
of the game in varying situationsIn 1990 with their article titled "The Core
Competence of the Corporation", Prahalad and Hamel illustrated that core
competencies lead to the development of core products which further can be
used to build many products for end users. Core competencies are developed
through the process of continuous improvements over the period of time. To
succeed in an emerging global market it is more important and required to
build core competencies rather than vertical integration.NEC utilized its
portfolio of core competencies to dominate the semiconductor,
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telecommunications and consumer electronics market. It is important to
identify core competencies because it is difficult to retain those
competencies in a price war and cost cutting environment. The author used
the example of how to integrate core competences using strategic
architecture in view of changing market requirements and evolving
technologies. Management must realize that stakeholders to core
competences are an asset which can be utilized to integrate and build the
competencies.[ Competence building is an outcome of strategic architecture
which must be enforced by top management in order to exploit its full
capacity
In Competing for the Future, the authors Prahalad and Hamel show how
executives can develop the industry foresight necessary to adapt to industry
changes, discover ways of controlling resources that will enable the
company to attain goals despite any constraints. Executives should develop a
point of view on which core competencies can be built for the future to
revitalize the process of new business creation. The key to future industry
leadership is to develop an independent point of view about tomorrow's
opportunities and build capabilities that exploit them.[ In order to be
competitive an organization needs tangible resources but intangible
resources like core competences are difficult and challenging to achieve. It is
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even critical to manage and enhance the competences with reference to
industry changes and their future. For example, Microsoft has expertise in
many IT based innovations where for a variety of reasons it is difficult for
competitors to replicate Microsoft's core competences.
In a race to achieve cost cutting, quality and productivity most of the
executives do not spend their time to develop a corporate view of the future
because this exercise demands high intellectual energy and commitment.
The difficult questions may challenge their own ability to view the future
opportunities but an attempt to find their answers will lead towards
organizational benefits.
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Economic diversification
Reimagining the future
Two articles on attempts to move into high-tech; first, New York City
THAT city will, in the course of time, become the granary of the world, the
emporium of commerce, the seat of manufactures, the focus of great monied
operations, predicted DeWitt Clinton, governor of New York in 1824. He
was speaking about the effects of the Erie Canal, which connected the Great
Lakes to the Hudson River. Originally derided as Clinton's folly, the canal
helped to open up the west, allowing New York to benefit enormously from
an explosion of trade. Within 15 years of the opening, New York was the
busiest port in America, moving more than Boston, Baltimore and New
Orleans combined. The plan to open an applied sciences university campus
in New York City, reckons Seth Pinsky, who heads New York's Economic
Development Corporation, is an Erie Canal moment.
The city's embrace of high-tech has already begun. Tech clusters have
emerged in Manhattan's Flatiron District and Brooklyn's Dumbo, home to
firms like STELLAService and Etsy. Venture-capital firms and angel
investors have been looking at New York more seriously than they once did.
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Henry Blodget, of Business Insider, notes the financing ecosystem has also
gotten very well developed, from late-stage private equity right down to
angel investing. Some $1.2 billion was invested by venture-capital firms in
New York in 2010. The Big Apple even overtook Massachusetts in venture-
capital funding for internet and tech start-ups, making it second only to
Silicon Valley. And in the third quarter of last year, it surpassed it in venture
capital in all categories. Between 2005 and 2010 employment in New York's
high-tech sector grew by nearly 30%. Google alone has about 1,200
engineers in the city.
In this section
On to New Hampshire
Less of a drag
Unintended issues
Holder v states
Reimagining the future
Rolling the dice
Rick Santorums ride
Reprints
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Related topics
Business
New York City
Private equity
Venture capital
Industries
Much of this growth has been organic, but there has been some help from
City Hall. Since 2002 the city has set up more than 40 projects to help the
biotech sector and helped create a network of incubators supporting start-ups
in that area. It also established a $22m municipal entrepreneurial fund, the
first of its kind outside Silicon Valley. A year ago Michael Bloomberg, a
tech entrepreneur before he became New York's mayor, called on
universities to pitch plans to develop and operate a new tech campus in New
York in exchange for access to city-owned land and up to $100m in public
money.
New York received seven proposals from 17 top institutions, including
Stanford University which did so much to create Silicon Valley. Almost
6,000 companies, including Google, Hewlett-Packard and LinkedIn, trace
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their beginnings to Stanford. But Stanford withdrew from the competition
last month, days before the mayor announced the winning proposal, which
came from Cornell, an Ivy League university, and its partner Technion, an
Israeli technology institute. The latter is considered to be one of the driving
forces in Israel's tech industry. It helped turn Israel from a country of
orchards to one of semiconductors. Some 4,000 start-up companies are
located around its campus.
The two bodies have plans to build a $2 billion 2m square feet (610,000
square metres) campus on Roosevelt Island, one subway stop from mid-
town. Cornell and Technion hope to have a temporary facility up and
running as soon as this autumn and complete their permanent home by 2017.
The bid had huge support from Cornell alumni, including a $350m gift from
Charles Feeney, who made his fortune through the Duty Free Shopping
Group. That is one of the largest donations in the history of American higher
education.
According to the city's analysis, over the next 30 years the campus will
generate more than $7.5 billion in economic activity, with 600 companies
spinning out of the new school directly; these are projected to create 30,000
jobs. Some 20,000 construction jobs will also be created, not to mention
about $1.4 billion in extra tax revenue. And it should help quench the never-
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ending demand for qualified engineers. The mayor has not ruled out naming
additional winners. And some of the losing plans will go forward regardless.
So New York could soon have several applied sciences campuses. Look out,
Silicon Valley.
CONCLUSIONS AND RECOMMENDATIONS
The consultation recognized that crop diversification is one of the best
options to increase farm income leading to food, nutrition and ecological
security as well as poverty alleviation in the region. Therefore, greater
attention should be paid to crop diversification by the governments of the
region. Crop diversification could be approached in two complementary and
interactive ways; a) horizontal diversification through expanding the crop
base by substituting or adding more crops into the cropping systems as
commonly practiced by many countries of the region; and b) through vertical
diversification in which downstream activities are undertaken to add value,
indicating the stage of industrialization of the crops and their economic
returns. Vertical diversification is complementary to horizontal
diversification, and the opportunities should be exploited for product
diversification and value addition to achieve highest economic returns.
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Efforts have been made by different countries to identify high specialty
crops, new crops, off-season varieties and production systems, and novel
varieties of crops with comparative advantage, mainly fruits, vegetables and
ornamentals, to open up new opportunities for farmers. It was noted that the
promotion of multipurpose species would also be useful for diversification
of agro-processing on small scale at local/national level for productivity
enhancement and expanded employment opportunities.
Rice is the most important crop in Asia. However, in marginal areas, rice-
based cropping systems have relatively low returns. Improving the current
cropping systems to enhance their sustainability to the extent possible, and
shifting marginal areas out of rice into other more profitable crops is seen as
a solution. Alternatively, flexible cropping systems for upland farmers that
feature production of more income elastic goods like horticultural products
are a means of diversifying their income sources.
Concerns have been expressed regarding the policies of some countries to
reduce the extent of land under major perennial crops and rice; and
subsequent repercussions of these will have a long-term bearing. It was
noted that such crop replacements unless carefully analyzed might have
adverse effects on the food and industrial product supply in the region.
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The need for improved seed and other planting material seed industries to
supply quality seed and other planting materials which is so vital for crop
diversification. Steps should be taken to maintain effective national and sub-
regional seed security in the region through regional collaboration.
The high post-harvest losses of crop produce particularly in horticultural
crops which annually account for 20-40 percent in most countries, if
prevented, could increase yield by similar amounts. It was recommended
that efforts should be made to minimize such losses. The development of
links with the food industry for product diversification and value addition to
meet the demands of the changing society was recommended.
Serious concern was expressed of the soil fertility depletion, due to
continued intensive cropping over long periods of time, which needs to be
corrected. The use of organic manures as replenishments through direct
application or crop rotations and insertion of green manure crops and other
food legumes in the cropping systems was recommended.
Due to the impending labour shortages for agriculture, the need for
mechanization of field and post-harvest operations was noted. Need for
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mechanization of agricultural operations and assessment of the machinery
use by the agricultural sector of countries of the region was emphasized. In
view of limited land, water and labour supply, the need for adoption of
emerging agricultural technologies such as protected agriculture, organic
farming, Integrated Plant Nutrient System (IPNS) and Integrated Pest
Management (IPM) was emphasized. Efficient input supply systems through
micro-irrigation and fertigation should be encouraged.
The role of the private sector in the development of modern agro-
enterprises to infuse capital and technology into diversified cropping
systems for effective commercialization for long term sustainability was
advocated.
The importance of diversification to value-added export oriented crops was
emphasized. In that context, the need to study marketing opportunities and
product standards required by importing countries, as well as price
fluctuations, competitiveness etc., prior to embarking on diversification, was
highlighted. Furthermore, the availability of market information was
considered essential for identifying promising external markets. In general,
there is no point in diversifying into a crop for which market potential is
limited.
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Individual countries have developed policies, strategies and implementing
mechanisms for crop diversification. These include infrastructure
development (transport, communication and markets), pricing policies,
subsidies, insurance schemes, tax, tariff etc., in order to minimize risks and
safeguard the interests of agricultural entrepreneurs. As the strategies
adopted by different countries are innovative and diverse, sharing of such
information will benefit the other countries to stabilize and sustain their crop
diversification initiatives.
The governments role in recognizing farmers participation in the total
process of crop diversification, provision of information on new crop
varieties, technologies to be used, potential yields, marketing avenues and
incomes to be realized was essential for the development of successful crop
diversification programmes. The need for skill development and capacity
building and documentation of required information through the production
of field manuals, extension leaflets etc., for use by the entrepreneurs was
also considered essential.
Significant changes are taking place in domestic and international demand
for crop products due to improvement in income, better standard of living,
and changing life styles and preference patterns such as improved
horticultural and livestock products. Trade liberalization and development of
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transport and communication infrastructure have opened more avenues for
trade and have improved access to new and distant markets. This has created
new opportunities for crop diversification in various countries.
The role of FAO as facilitator in the development efforts of crop
diversification undertaken by different countries, through holding of
seminars and workshops, skills development programmes, information
sharing, facilitating germplasm exchanges etc., was recognized. The need for
the development of an information database on crop diversification for use
by policy makers, farmers, consumers, and other stakeholders was an
essential requisite for crop diversification. It was recommended that efforts
should be made to compile this database. To facilitate all the above-
mentioned activities the establishment of a Network on Crop Diversification
for the Region was recommended.
Recognizing crop diversification as an element of poverty alleviation,
income generation, equity and natural resource conservation, and to enhance
this, a well designed mechanism has to be developed through the
participation of international organizations and local governments to
strengthen the initiative undertaken by this region.
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Competitive Strategy Why Diversify? PepsiCo Case Study
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Why Diversify?
Why consider diversifying your business? What is diversification? Why do
businesses do it? Are there different types of diversification and have any
been really successful? This article will give answers to these questions and
much more!
Firstly what is Diversification? It is a corporate strategyto increase market
penetration and thereby increasing sales and gaining market share.
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Many organisations consider diversification for a range of reasons. Some
valid reasons are:
Not having all of your eggs in one basket
If the industry becomes unattractive
Diminishing market opportunities & stagnating sales
When you spot an industry whose technologies & products complement
the present business
When you can leverage existing competencies & capabilities by
expanding into businesses whose same resource strengths are key
success factors & valuablecompetitive assets
Opens new avenues for reducing costs
Transference of a brand name to drive sales & profits
Competitive pressures
Diminishing growth prospects in the present business
Expand into industries whose technologies & products complement
present business (Dell printers)
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Leverage existing competencies & capabilities by expanding into
businesses where these resource strengths are key success factors
Reduce costs by diversifying into closely related businesses economies
of scope & shared value chain
Powerful brand name can be transferred to products of other businesses
There are two types of diversification:
Related diversification
possess competitively valuable cross-business value chain matchups
horizontal integration
Unrelated diversification
have dissimilar value chains, containing no competitively useful cross-
business relationships can share support activities HR etc
There is also the concept of strategic fit. Without a strategic fit is highly
unlikely that a diversification will work:
strategic fit exists whenever one or more activities comprising the value
chains of different businesses are sufficiently similar as to present
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opportunities for transferring, combining, exploiting & business
collaboration
PepsiCo Case Study
A few years ago PepsiCo diversified. This is an interesting case study of
what can be achieved with a related diversification that has a strategic fit and
some future opportunities forPepsiCo.
PepsiCo has used the related diversification corporate strategy as their basic
approach to new businesses and acquisitions with a focus on beverages and
consumer foods. Wherever possible PepsiCo has found related activities
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within the value chain between the various beverage and snack food brands
to reduce costs and increase profits. Some of the elements of the value chain
that are shared include:
Marketing
Processing
Research and development
This has enabled PepsiCo to find a good strategic fit in most of the
businesses they have acquired. In turn this has lead to a good resource fit
with all businesses generating free cash flow and a minimum margin of 15%
+ across all units.
A key advantage for PepsiCo is that customers across the globe have similar
tastes and this has assisted the company in implementing global strategies
and being able to execute marketing and distribution similarly in all regions.
An opportunity exists for PepsiCo in the good-for-you and better-for-you
markets that they are just starting to implement across their products. This
change in consumer tastes worldwide provides an opportunity for PepsiCo to
acquire a health food company similarly to Sanitarium in Australia.
Sanitarium would fit into the PepsiCo model of being a consumer foods
company with a focus on ready to eat breakfast cereals and well as being a
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horizontal integration into the value chain as a related diversification. The
added advantage is that Sanitatium would give PepsiCo more credibility in
the GFU/BFU market and enable the company to take leadership on this
issue.
If you are considering diversification, hopefully these points will start you
on the right direction!
Diversifications
Amazon Price: $9.45
List Price: $15.95
Diversifications
Amazon Price: $2.99
Diversifications
Amazon Price: $27.14
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