Full transcript
0:00hi and welcome today we are going to be
0:03covering corporate
0:04strategy and with corporate strategy
0:07we're going to be moving on from
0:09discussing how a single business
0:12competes in an industry to how a
0:16corporation manages their entire
0:18portfolio of businesses all right so
0:21that they can build off of each other
0:24and gain from operating as a
0:28set so one of the main thingses we'll be
0:31hitting on in this lecture is
0:33diversification all right how
0:35diversification can build shareholder
0:37value um the idea of cross business
0:40strategic fit all right if you're
0:43diversifying ideally you should be
0:46diversifying into some industry that
0:48fits with your focal firm we'll also
0:52talk about some of the merits and risk
0:54of unrelated diversification yeah there
0:57really are more risks than merits but
0:58we'll discuss them
1:00we'll go over a couple tools for
1:02evaluating a diversification strategy
1:05and we'll talk about some options you
1:08have as a uh Diversified company that it
1:11can employ to improve its
1:15performance so when crafting a
1:17diversification strategy it deals with
1:20step one picking a new industry to enter
1:23all right step two well what are the
1:25opportunities within this industry you
1:28know how well are they going to fit all
1:30right so pursuing ones that fit with
1:33your uh current set of resources and
1:36businesses in your portfolio and then
1:38step three is
1:40post acquisition trying to find ways to
1:44fit those organizations together in such
1:48a way that the uh combined you know
1:51firms work better together than they
1:54would
1:56individually so a firm should consider
1:59diversifying
2:00when either of these two scenarios pop
2:03up one there's just limited growth
2:05opportunities in the current market all
2:08right the industry's already matured
2:10they kind of found all of the angles to
2:13uh you know improve their their current
2:16company and product and are looking for
2:18growth elsewhere so for example like
2:21tobacco okay Altria or Philip morus or
2:24whatever they're going by now um sells
2:28tobacco and they've kind of figured out
2:31all of the angles okay for how to pack
2:36cigarettes and give cigarettes to
2:37customers all right and give people
2:39cancer and whatever okay um they've sort
2:43of nailed that business down to be as
2:45efficient as possible in terms of
2:47getting that tobacco rolling it up
2:50packaging it I mean there's laws on how
2:52much they can advertise and all these
2:54other things so they've sort of
2:57rationalized that segment of their
2:59business business as far as they
3:00possibly can so what Philip Morris does
3:03now is they go and they acquire other
3:06businesses okay um or Altria or whatever
3:10they're calling themselves so they'll
3:12acquire other businesses with the extra
3:14cash that they have on hand um
3:17sometimes stockholders don't necessarily
3:20want a dividend for tax purposes and
3:22things like that and it just makes more
3:24sense to have that excess cash flow
3:26instead of it just sitting around as
3:27cash try to put it to work and some uh
3:31productive means and mergers and
3:33Acquisitions can be one of those at one
3:35point uh I believe they owned Nabisco so
3:39they were selling two really addictive
3:41products between cigarettes and Oreos uh
3:45was the joke that people would always
3:46make anyway the second scenario deals
3:50with changing industry conditions okay
3:53so there's other situations when you
3:55want to consider
3:57diversifying when you're running up
3:59against a situation where the industry
4:02is just changing there's disruptive
4:04technology um there's other substitute
4:07products those kinds of things are
4:09starting to make you obsolete all right
4:11so you can think about like cable
4:13networks
4:15uh they realize that okay cable TV is
4:20you know been losing a lot of ground to
4:22streaming channels and a lot of those
4:25networks have realized okay we need to
4:27make our own streaming Channel all right
4:29so you have Discovery makes disco Plus
4:32or whatever
4:34um Paramount's kind of gotten all the
4:37content from all of its different
4:39television channels and pulled it
4:41together on its parent on its streaming
4:43Channel and offers that but you can look
4:45at all of the different networks that
4:47are on cable and they're all sort of
4:50scrambling to find different ways to get
4:52their content uh available to customers
4:55through streaming uh as a way to sort of
4:58hedge their bets for when you know it
5:00seems like cable is slowly dying out all
5:02right it's being made obsolete to uh
5:06other platforms for watching television
5:08and
5:12programming there's some different
5:14strategic diversification possibilities
5:16one is you could expand into a business
5:20where the Technologies and products
5:22compl your current line of business okay
5:25so for example Amazon started off
5:28originally just selling books
5:30okay
5:32um and that was their whole thing is you
5:35know they were the world's largest
5:37bookstore uh they happen to be online
5:40though well one of the things and they
5:43still do sell a whole lot of books but
5:44one of the the things that Jeff basos
5:46started to realize with with selling
5:48books was you know there's some barriers
5:51to uh transporting books you know it's
5:54costly to transport them they clutter up
5:57people's houses different things like
5:58that with books um so he really was
6:01thinking like how can I make it more
6:03convenient for people to own books and
6:05read books um you know there's got to be
6:07some technology that can help us to uh
6:10deliver our core product in a way that's
6:13more convenient uh to the
6:15customer and they started working on
6:18building the original sorts of like
6:20Kindle readers so you could read books
6:22online through uh tablets um and so
6:27that's how they started diversifying
6:28into producing ing
6:30that that product that was very
6:33different from what Amazon had always
6:35done in the past which in the past
6:37Amazon had only just you know sold other
6:40stuff they weren't making anything
6:41themselves but then they Diversified
6:44into this uh line of business of
6:46producing these Kindle readers um where
6:49they were making something themselves
6:50all
6:52right other situations that where it
6:54makes sense is like finding Industries
6:57where you can just deploy current
7:00resource base so Honda for example uh
7:04we've discussed this before but they
7:06start out making motorcycles and cars
7:09and now they make a lot of other things
7:11but all of the other things that Honda
7:13makes are always based around Small
7:16Engines okay so Honda can make a really
7:18really good
7:20reliable uh powerful tiny engine all
7:23right and those they realize that can be
7:25used in a car it can be used in a
7:28motorcycle it can be used in a lawn
7:31mower all right it could be used in a
7:33generator there's a lot of different
7:35possibilities that they figured out for
7:38deploying that particular resource and
7:40capability they have in producing
7:43highquality Small
7:47Engines other situations uh
7:49opportunities for diversifying is if you
7:52can find ways to sort of share different
7:56resources and capabilities across
7:58businesses okay so you know you can look
8:01at like Fredo all right you need a fleet
8:05of trucks if you want to ship Pepsi you
8:08need a fleet Fleet of trucks if you want
8:09to ship Doritos all right you can sort
8:12of expand into those other lines of
8:14business and use that Fleet of trucks
8:17and share it between those two companies
8:19all right you could also share like
8:21marketing teams all right maybe it's
8:23similar to
8:24Market things like Pepsi just as it is
8:27to Market I all right a similar design
8:31team would would be really good at doing
8:33both all right but in any event the idea
8:37here is that you can bring down the
8:39internal cost by sharing different
8:42resources and capabilities between two
8:46different business units under the same
8:50Corporation another sort of economy of
8:53scope if you will and that's kind of
8:55what we're touching on
8:57here is some sometimes you can share a
9:00strong brand name all right onto other
9:04products okay so the idea is if you
9:07acquire somebody um and you already have
9:11a really strong brand name then perhaps
9:14your brand name and your loyalty and
9:17reputation will precede you and whatever
9:20company you just purchased will now be
9:23seen as being tied to you and it
9:26will have similar success
9:29okay
9:31so these are the sort of four strategic
9:35diversification
9:38possibilities now there's some different
9:40tests for whether or not it makes sense
9:43to
9:44diversify one really quick thing before
9:47we get into these tests you should only
9:49ever
9:50diversify
9:53if it seems like you are going to build
9:55shareholder value in such a way that the
9:58shareholders cannot capture this same
10:01particular value through portfolio
10:03investing all right so what I mean by
10:06that is the only time you should ever
10:08engage in
10:10diversification entering into new lines
10:12of business is is if it seems
10:18like the your company will do better as
10:21a result of running those two businesses
10:24separately or or together then those two
10:28businesses could be run separately from
10:30each other all right and that they have
10:33to be managed in such a way where
10:36they're co-mingled and sharing
10:38resources
10:40otherwise uh it makes sense for you just
10:43to invest in the other company and not
10:45actually bring it under your own
10:48corporate umbrella
10:51okay so the test you can go through to
10:55to sort of think through this will it
10:57build shareholder value through
11:00diversification is one is it in an
11:03attractive industry all right so if
11:06you're looking to
11:07diversify one thing you want to ask
11:09yourself is okay is the company I'm
11:12looking at
11:14purchasing in an attractive industry and
11:16you can do this through Porters 5 forces
11:19of course all right so you want to make
11:20sure you're not buying companies and
11:23industries that are dying or
11:24unattractive all right the next question
11:27to ask yourself is well what's the cost
11:29of Entry um uh is the price of this
11:33company so high that there's not going
11:35to be any meat left on the bone for me
11:37or is there such high barriers to enter
11:40into this industry all right um through
11:43internal development
11:46that I'm going to have to be running
11:48this thing for 15 years before I start
11:50to break even okay those are the that's
11:53another question you might want to ask
11:55yourself that comes with sort of a a
11:58catch 22 because because if it's cheap
11:59to enter then you got to imagine that
12:02that's an industry that has a high
12:03threat of entry and we all know a high
12:07threat of Entry means that it's probably
12:08an unprofitable industry but
12:12um you know still something to consider
12:15I mean of course if you're not going to
12:17the profits aren't going to materialize
12:19Without You operating for many years
12:21then that's a waste of your time
12:25too and the next one which is perhaps
12:28the most important one is you know the
12:30better off test okay how much
12:33Synergy uh will be gained by
12:35diversifying into this industry how much
12:38better off will both of these companies
12:41be as a result of working together than
12:44they would be separately okay then they
12:47could be run separately under different
12:55ownership so the idea of synergy is
12:59essentially what we're referring to here
13:02is if there's Synergy it means you know
13:04you put business one with business 2 you
13:07know one and one doesn't equal just two
13:10one and one equals three all right when
13:14there's a Synergy you know the two
13:16things operate more efficiently and more
13:18effectively together than they would be
13:21separate all
13:23right
13:25so an example of this this is like
13:28another term for for economy of scope
13:30all right so like you run into examples
13:33of this in Industries where it's normal
13:37for one company to be involved in
13:39multiple lines of business okay so like
13:41banks for example at one point Banks
13:44just did Savings and Loans okay you had
13:47a savings account and they would also
13:49loan out money and how it worked is
13:51people would deposit money in a savings
13:53account and the bank would protect that
13:55money and whatever else so of course
13:57you'd like to put your money into a
14:00savings account they might give you a
14:01tiny bit of interest on it too so it's
14:04better than just keeping it under your
14:05mattress and what the bank would do is
14:08then they would loan that money out to
14:11uh other customers and they would loan
14:14that money out at an interest rate that
14:16was greater than they were giving people
14:18on their savings account and they'd make
14:20money on the
14:21Arbitrage
14:23okay um now they realized okay well if
14:27we're making loans we have to vet these
14:29people were loaning our money to uh to
14:31make sure they don't run off with it
14:33so you need a certain type of
14:36infrastructure to vet people to see if
14:39their credit is worthy and everything
14:41else all right for the
14:43loans also if you're going to be storing
14:46a great sums of money in a building you
14:48need a vault and all these different
14:50things to protect it well then you also
14:53need you know customer service and
14:55everything else to serve your customers
14:57as they come in and start making these
14:59transactions with you so you need this
15:02certain particular set of resources
15:05already just to do Ser Savings and Loans
15:08and what banks found out is okay well
15:10actually it's more
15:12efficient uh if we don't just do Savings
15:14and Loans if we expand into offering
15:17other products okay if maybe we start
15:21selling home mortgages
15:23okay you can use a lot of the same types
15:27of um resources can be repurposed to do
15:30home
15:31mortgages or a lot of uh the same
15:35resources can be repurposed to offer
15:38credit cards or do different things uh
15:41offer different other Financial products
15:43okay and this is sort of the case of
15:47synergy you know it's more efficient for
15:51One bank to offer credit cards do home
15:54mortgages Savings and Loans and you know
15:58sell life insurance and whatever else
16:00banks are up to um then it is for there
16:05to be multiple companies that specialize
16:08and do each of those because then they
16:09have to duplicate the infrastructure
16:11every time okay so that's the idea of
16:15synergy it's more efficient to bring
16:17multiple activities under one house
16:19because they can share resources and
16:21everything than it is for them to
16:23specialize and operate independently
16:26because then there there's a lot of
16:27things that are redundant
16:29okay and they're less efficient that
16:34way so you again you want to diversify
16:38when you believe there's some sort of
16:40synergy okay so diversification can take
16:45a few different uh approaches you can
16:48diversify into related
16:50businesses you can diversify into
16:52unrelated businesses and you can get
16:55into a mix of different type of
16:57businesses okay obvious right
17:00right so how do you diversify well
17:03there's a really just three ways okay to
17:07enter into a new industry all right you
17:09can make buy or Ally all right make buy
17:14or lie so what I mean well if let's say
17:18for
17:19example you wanted to enter into the
17:22coffee industry all right one way is you
17:25could make a new Cofe Coffee Company
17:28okay you could start up a new
17:30business the other way is you could buy
17:33up an existing Coffee Company all right
17:36you could engage in an
17:37acquisition and the Third Way is you
17:39could ally with somebody you could
17:42partner with a current coffee shop all
17:46right and work together with them and
17:49enter the industry that way so if you
17:52want to diversify into a new line of
17:54business or you want to start producing
17:56something new make buy or out those are
17:59the three ways you can enter into
18:02Industries or
18:03startup uh different product
18:09lines now each of them comes with their
18:11own advantages and disadvantages okay
18:15Acquisitions quick all right you avoid
18:18barriers well sort of you still have to
18:21pay the price and to buy an indust to
18:24buy a company in an industry with high
18:26barriers dentry the price is going to be
18:28high high so I
18:30mean there's that barrier but you don't
18:33have to deal with say the uh regulations
18:37or those other types of barriers you may
18:41encounter um and you might also access
18:44some compliment resources really quick
18:46too the disadvantages of course you know
18:49you're going to have to pay a premium
18:52all right for a successful firm unless
18:55you want to go shopping in The Bargain
18:57Bin for damaged goods
19:00you're often going to underestimate the
19:02cost okay this
19:05happens to the best of us all
19:09right um or you'll which is essentially
19:13the same thing overestimate the
19:15potential for this acquisition to add
19:18shareholder
19:21value so
19:24diversification uh by acquisition again
19:27you know quick entry
19:29access to complimentary resources and
19:32capabilities but let's try an imaginary
19:34acquisition and see how well it actually
19:36works
19:37out okay so let's pretend we're going to
19:40go acquire a business all
19:43right now people place a whole bunch of
19:46bids for this business all right and
19:48we're going to bid what we think is
19:49going to be uh we're going to bid about
19:53what we think it's worth to us
19:56okay so
19:58we we place our bid and this is the same
20:01process you go through if you're buying
20:02a house or anything else you know you
20:05look at the value of it you ask experts
20:08what they think it's worth but then
20:09ultimately you come up with your own bid
20:11based on what it's worth to you so you
20:13go ahead and pay place that
20:16bid all right
20:19so what often happens is you fall victim
20:22to What's called the Winner's
20:24curse and how this how the Winner's
20:28curse works works is we develop our bids
20:30as I was saying based on the target
20:32values
20:34uh based on our own imperfect
20:37information about the
20:39target we all submit our bids based on
20:41our evaluations and what's going to
20:44happen is there's going to be some
20:46people who are bang on the money they
20:48really estimate the actual value of
20:52whatever this business is worth okay
20:54pretty accurately a lot of people will
20:56sort of be pretty close to guessing the
21:00actual value of the the business or
21:02whatever assets being purchased now
21:05there's going to be some people who way
21:07underbid the value of it all
21:10right and there's going to be some
21:13person out there who way over estimates
21:16the value of that firm all right one
21:19corporation's going to place a bid
21:21that's really really optimistic um and
21:25by optimistic I mean wrong and
21:27overestimate ating the value of this
21:31business and what happens is anytime you
21:34go through these bidding
21:36processes the only bid that matters is
21:39who's the most wrong in overvaluing The
21:42Firm all right all of the other bids are
21:45inconsequential if you don't get the
21:47business um if you weigh under bid
21:50that's inconsequential it doesn't matter
21:52the only person who's affected is the
21:55person who over bids and is the most
21:57optimistic in wrong in terms of
22:00overvaluing the firm so what happens
22:06is usually the shareholders of the firm
22:09that's being bid on the
22:11target take a huge b a huge you know
22:15windfall gain all right they get a lot
22:17of cash usually from that uh people buy
22:20up their stock or if it's like a
22:22independent firm you know the owners of
22:24that company uh get a huge payday and go
22:28their separate way but the acquir has
22:32usually over overpaid for this business
22:35and and uh what we say is they they won
22:38but they're cursed okay um yes they got
22:42the the business but also they probably
22:44overpaid in the process and that's often
22:47the problem with acquiring businesses as
22:50you run into this winner Winner's curse
22:53so again disadvantages well the cost of
22:56the acquisition you under estimate you
22:59know how difficult it's going to be to
23:01after you pay a hefty fee for it you
23:05underestimate how costly it'll be to
23:07integrate this business with your
23:09existing firm um and you know you
23:13overestimate how much potential
23:16shareholder value can be uh added by
23:20purchasing another
23:23company all right there's a handful of
23:26advantages with uh
23:29developing a new line of business in
23:31house rather than trying to acquire
23:34somebody one of them is it avoids all
23:37the uncertainties and pitfalls and
23:39everything that go into making an
23:40acquisition you don't have to worry
23:42about the Winner's curse you don't have
23:43to worry about trying to blend these
23:46multiple cultures
23:48together and sometimes they're just not
23:51businesses to acquire so again in that
23:54situation it can be helpful too if
23:55there's nobody to buy up it's a newer
23:58emerging industry it makes sense just to
24:01develop your own line all right so you
24:04can think about like early on with uh
24:07streaming platforms you know if you
24:09wanted to compete with Netflix it wasn't
24:10like it was all that easy just to buy up
24:12a competitor you kind of had to build
24:15your own streaming
24:17platform there's a number of different
24:20disadvantages also with corporate
24:21entrepreneurship as they call it it's
24:23kind of like when a corporation's an
24:25entrepreneur okay um
24:29one is you have to overcome barriers to
24:31entry all right so you know you're
24:34building up this thing from the ground
24:35up you're going to have to deal with all
24:37of those regulations um you're going to
24:41have to deal with building a proper uh
24:44plant that deals with economies of scale
24:47and everything else so you have barri
24:49your sturry to
24:51consider it also requires a whole lot in
24:54terms of like your your startup in terms
24:57of developing all those
24:59productive capacities and capabilities
25:02and everything you're starting from the
25:05very beginning so there's a whole lot of
25:08things you're going to have to do and
25:10that's very expensive and time
25:14consuming and then there's other times
25:16where you might just fall victim to
25:19people not wanting to change or wanting
25:21this company to move in this new
25:23Direction so there's a lot of different
25:26disadvantage of it also n n of these
25:28strategies are perfect of course there
25:31are some situations that tend to favor
25:34internal
25:35development so some of them are if it's
25:39a industry where you're not going to
25:41have to worry about incumbents trying to
25:44retaliate against you okay you don't
25:46have to deal with predatory pricing or
25:48anything like that all right these are
25:51typically Industries where there's uh
25:53sort of growing demand still at the time
25:56okay which uh often implies that it's a
25:59new industry or an emerging
26:01industry if you have a lot of time to
26:04develop okay internally developing
26:07launching your own new line of business
26:09that's always going to be the slowest
26:11approach so you need time if time's of
26:14the essence don't do
26:16it uh also if you have the skills in
26:19house that you think you could take on
26:22this endeavor um if you have some
26:24experience in doing you know tactics
26:27similar to this then that might make it
26:30more worth your while than
26:32not uh of course if the cost of Entry is
26:35going to be more expensive than
26:36internally developing I mean obvious
26:39right uh and then also there's times
26:43when you want to look at the um with
26:46Industries
26:47okay when you add a new firm into the
26:50industry what happens is that new firm
26:52brings its own Supply okay its own
26:56amount of goods there's now more Goods
26:58in this industry being P being produced
27:01because there's this new firm operating
27:03in there and when you throw in a new
27:07firm if it's a really large firm and it
27:09actually makes uh a meaningful
27:12contribution to the quantity being
27:15supplied within the industry then what
27:17can happen is it shifts Supply and when
27:19Supply shifts that has the effect of
27:22bringing down prices okay so there's
27:27some Industries out out
27:28there where um like let's say commercial
27:33aircrafts all right you basically have
27:36Boeing and Airbus okay um if you were to
27:41add a third commercial aircraft producer
27:45in there that was producing on the same
27:46scale as Boeing and air Airbus happen is
27:50this would dramatically decrease the
27:52price of commercial
27:53aircrafts um and it would probably make
27:56it uh unprofitable to even sell those
28:00things all right so if you were looking
28:02to enter into that industry you really
28:05wouldn't want to be launching a new line
28:08you wouldn't want to be developing you
28:10know a new business that's going to
28:11bring its Supply into that industry what
28:13would be the better way would be to
28:15acquire one of those two companies which
28:17would be astronomically expensive and
28:20that way you don't upset the balance of
28:22supply and
28:26demand so joint venture
28:28are of course you know the other option
28:31you have and these can be advantageous
28:33at times um if you're ever dealing with
28:37a situation where you're looking at you
28:40know pursuing an opportunity but it's
28:42too large complex difficult or risky for
28:46one firm to pursue Al loone then you
28:49know you can share the risk by bringing
28:51in some Partners okay so like when uh a
28:55lot of the major Network companies
28:57wanted to compete with um Netflix and
29:00launch streaming
29:02platforms they were looking at it like
29:05well this is a new industry okay we
29:08don't know if people are really going to
29:10be streaming content online and watching
29:12it that way or what's going to happen
29:14this was a long time ago okay well a
29:16long time ago was in like whatever 2007
29:20is um and they weren't exactly sure
29:24which way the industry was going to go a
29:25lot of those big networks wanted to
29:29um try to compete with Netflix in some
29:31way and launch a streaming uh Channel
29:34but they weren't exactly sure what was
29:35going to happen so what happened is all
29:38of them sort of banded together all
29:40right and formed the uh joint venture
29:43Hulu so Hulu is a combination of
29:47fox
29:49uh Disney NBC bunch of other media
29:53companies okay and what they figured is
29:56okay well we can all split up the risk
29:59by launching this separate entity from
30:01us all called Hulu will'll split up the
30:04profits that Hulu
30:06um produces and distributed amongst each
30:09other by uh ownership all right so
30:13that's how Hulu works and sort of how it
30:15came about at the time it was a little
30:17bit too risky but all those companies
30:19realized oh we can share the risk by
30:21baning together and launching uh a joint
30:26venture there's some opportunities that
30:29might just require a really broad range
30:31of competencies okay that not any single
30:34firm has at the time and in those types
30:37of situations it makes sense to have two
30:41companies come together and start um and
30:46and work together okay because you have
30:48one company that's has one set of
30:50strengths another has a complimentary
30:53set of strengths they work together and
30:56they can
30:59um do a lot of things that they couldn't
31:01on their own and that would be very very
31:04difficult and costly for them to acquire
31:06those capabilities on their own and then
31:08in certain situations there's some
31:10countries that won't let you do business
31:12in their
31:14borders unless you are uh at least
31:19partnered with a domestic
31:21company all right so like I believe in
31:26China if you want to operate a company
31:29out of China as an American what you
31:32have to do is you have to partner with
31:35another company that's uh domestic to
31:39China and then if you have a partnership
31:42then you can operate there but you can't
31:45just start one as a foreigner over there
31:48um so in situations like that you'll
31:51have companies that will want to partner
31:54with uh domestic all right
32:00there's a number of different risk also
32:02with joint ventures too
32:08um you you're you're working with
32:10somebody that might not share your
32:12vision all right so you never really
32:14know how well people buy into the dream
32:17as much as you do all right you might
32:19have one particular idea as to what
32:21you're trying to do
32:24and trying to create and he might be
32:27talking to your Venture partner and they
32:30may seem to be a agreeing with it and go
32:32along with it but they have wildly
32:34different expectations for the
32:38objectives and level of value creation
32:40and what the end goal is than you and
32:43you sort of slowly figure this out as
32:45you work with them all right that can be
32:48sort of a unfortunate
32:51situation um so like I mean and you run
32:54into this and doing a lot of things when
32:56you collaborate with other people I can
32:58remember once when I was uh when I was
33:01in college buying a motorcycle with a
33:04buddy and saying like yeah we'll fix
33:06this thing up and you know we could
33:08share it or sell it or whatever I don't
33:11know but yeah let's buy this non-running
33:13motorcycle and fix it up because that's
33:15seemed like a fun idea and I remember
33:18the guy was like yeah we'll like really
33:20restore it and and same thing I was
33:22saying but once we start working on it
33:25he's trying to cut every corner it's
33:26like well it's only 10 temporary so you
33:28know who cares if it's a piece of junk
33:31and it's like yeah this was a bad really
33:33bad decision I ended up having to to buy
33:36him out of
33:37it um but anyways that's the same type
33:41of stuff you run into with launching
33:42these businesses you never really know
33:45what your partner's going to be like
33:46until you start really working with
33:48them so you have these disagreements
33:52conflicting objectives cultural clashes
33:55between the two partners um
33:58and it's hard to say what each company
34:00is expecting out of it and what how
34:03those cultures will will mesh together
34:05you know when you have lowcost people
34:07working with you know those who Target
34:10sort of the highend or
34:12whatever really hard to figure out how
34:14they're going to work together until you
34:16actually start doing it and it can sort
34:18of fall apart that way um and at times
34:22you know you have one partner like me
34:24with my motorcycle where you just get
34:25fed up and say oh I'll I'll buy you out
34:28and I'm done with this uh or somebody
34:30else tries to go their own way
34:33so there's a a lot of opportunities for
34:37failure with joint ventures
34:41too so for choosing your mode of Market
34:44entry there's a number of different
34:46questions you might ask yourself okay um
34:49one is do you have the resources and
34:52capabilities to do it on your own or do
34:54you need somebody all right the other is
34:58what types of barriers to entry are
35:00there um very low barriers to entry then
35:04might make sense to do it alone okay um
35:08another question is of course going to
35:09be
35:11speed
35:12how quick does this need to happen all
35:15right is it a passing
35:17opportunity um do you really need to
35:21gain access to this new line of business
35:23right away if so then acquiring
35:26somebody's going to make more sense or
35:27trying to partner with
35:29somebody and then of course lastly and
35:33maybe the first thing you should
35:34consider is just what's going to be the
35:35least costly mode of Entry uh given your
35:38objectives and the answer as far as
35:41which is going to be the least costly is
35:43probably going to depend on these prior
35:45three questions you know if you have the
35:48resources there's low barriers to entry
35:51and times not necessarily working
35:54against you then
35:57might be cheapest just to internally
36:00develop um rather than overcoming those
36:03barriers to entry and then on the flip
36:05side if all of those are turned against
36:07you then of course acquiring somebody or
36:09finding a partner is going to be
36:13faster so now we can talk about
36:15diversification in terms of like related
36:18and unrelated okay um so which path to
36:22pursue and related just means like are
36:27you buying companies or are you
36:29expanding into lines of business that
36:30are very similar to what you already do
36:33okay unrelated refers
36:36to getting into new lines of business
36:40that don't share very many underlying
36:43Resources with what you're doing right
36:46now okay so for example like related
36:49would be you know a car
36:53manufacturer starting to make commercial
36:56trucks or
36:59motorcycles
37:00okay still Transportation related you
37:04could see how the underlying resources
37:06that allow you to be a car manufacturer
37:08could be transferred to making
37:10commercial vehicles or uh motorcycles
37:14pretty easily right unrelated would be
37:18something
37:21like oh the kind of stuff like Yamaha
37:25gets into where they make motorcycle
37:28all right and stuff like that ATVs
37:30snowmobiles whatever but they also make
37:33musical instruments okay um you know the
37:39what's the overlap between those
37:41two I don't know I mean I guess they're
37:43both manufacturing a a
37:47uh you know mechanical type of durable
37:50good that needs to be made to certain
37:53specifications but really really
37:55different lines of business
38:00okay and sometimes you can do a little
38:02bit of related and unrelated okay
38:07so what really guides the decision as
38:10far as diversifying inter related
38:13businesses which usually makes more
38:16sense is strategic fit okay that's the
38:19big sort of word for this section you
38:22know how well can you transfer your
38:24specialized expertise and everything
38:27from your current line of business to
38:30another perspective line of business
38:33okay um so there's different ways you
38:38know you can share cost by combining
38:41different value chain related activities
38:44okay so you know maybe
38:46you're like Fredo you already have a set
38:49of trucks and everything for
38:52shipping your soft drinks around and you
38:55could also use that same set of trucks
38:57to ship ship around your
38:59um your your Doritos and that other
39:02stuff too okay you can see all those
39:05would the logistics could easily be
39:07shared all right maybe the marketing
39:09teams you know could also be shared or
39:12accounting there's different ways you
39:13can kind of share different pieces of
39:15the value chain just to save
39:19costs um other opportunities is like
39:23sharing a really well-known brand name
39:26okay so
39:28um you see this every now and then with
39:30companies that feel like they have a you
39:33know a prestigious name all right so
39:36you'll see like I don't
39:40know situations where maybe Alpha Romeo
39:43or Mercedes or somebody makes like a
39:46bicycle okay an actual bicycle all right
39:49and they feel like well you know people
39:51see our vehicles as being sort of
39:55Premium perhaps people will look at the
39:57things like bicycles through the same
39:59lens and be willing to pay that same
40:01premium for these these products all
40:06right or Swiss army knife okay um
40:10companies like wender everybody knows of
40:12those and knows oh yeah Swiss Army
40:14knives are really quality well they
40:16don't really make Swiss Army knives are
40:18probably sort of a small line of their
40:21business I mean now they make like
40:24suitcases and backpacks and other sorts
40:28of travel gear and their expectation is
40:31that well people will think oh this is
40:33the knife I had in Boy Scouts and I
40:35could really count on it now I can count
40:37on some of their other gear for when I'm
40:39traveling and you know it's not going to
40:42break down on me I'll have all these
40:47multifunctions in other situations you
40:50might have uh a case where you know you
40:53can engage in Cross business
40:56collaboration share uh knowledges and
40:59resources okay
41:02so you know what you could have is like
41:06Honda where they make motorcycles and
41:09cars okay um what they learn in like
41:14motorcycle racing uh or or automobile
41:18racing okay that other line of business
41:20that they're also sort of Quasi involved
41:23in their idea is well we can transfer
41:25some of what we've learned from the race
41:27track into making our everyday vehicles
41:30to make them more robust or higher
41:35performance and in terms of
41:38diversification often you might be
41:40pursuing resources or capabilities um
41:44and looking at these resources and
41:45capabilities is something that you can
41:47meld into your own portfolio of
41:49businesses all right and you can kind of
41:51categorize it into two different groups
41:55one would be generalized res resources
41:57and these are things that can be used in
42:00a whole bunch of different Industries so
42:03things like
42:05trucks all right uh accounting
42:08departments can be used in a lot of
42:09different Industries with um you know
42:12maybe the game changes a little bit
42:13industry by industry but in a lot of
42:16cases it's it's skills that can be
42:20shared different things like that um
42:24those General resources these are things
42:26that can be you know leveraged in
42:28related or unrelated
42:31diversification now often what happens
42:33is if you're pursuing those General
42:35resources things like that usually those
42:38are more expensive to acquire because
42:41everybody sees value in them right
42:44away all right everybody sees value in
42:47them right away and usually
42:49they they are fairly expensive um to
42:53purchase and and prices on them get bit
42:56up a lot quicker all
42:58right specialized resources are
43:01resources that have a very specific
43:03application and can be used to only in
43:06only certain industries or certain types
43:09of businesses okay so they're not
43:10valuable to everybody
43:13necessarily and these are often more
43:16attractive um to find situations to
43:19acquire companies with specialized
43:21resources because they might be uniquely
43:23valuable to you all right you don't have
43:25to deal with the same level level of
43:27competition you know people looking to
43:29buy up these
43:31things as you would in regards to
43:34generalized
43:35resources okay it's kind of like if you
43:39were
43:41to oh I don't
43:44know let's say you're you were to go
43:47online and start looking
43:49[Music]
43:52for something that everybody is looking
43:55for would be interested in using you
43:56know
43:57a brand new iPhone all right that's just
43:59been barely used that somebody has for
44:01sale all right something like that going
44:03to be fairly expensive all right you're
44:06probably not going to get a deal on the
44:08used Market trying to buy up something
44:10like that but on the used Market if
44:12you're trying to buy something like I
44:15don't know
44:17antique ham radio operating equipment
44:21okay and you're a ham radio Enthusiast
44:23and you really like that stuff um and
44:25somebody in your neighborhood selling it
44:28you'll probably get a deal it's probably
44:30uniquely valuable to you that's a kind
44:32of eccentric enough of a hobby to where
44:35you could probably buy something that
44:36would make you really happy and you
44:37would get a deal on it okay more so than
44:41things like if somebody in your
44:42neighborhood was selling a very lightly
44:44used brand uh brand new model of iPhone
44:48okay um there specific versus
44:52generalized resources okay so spe
44:55specialized resources
44:58uh in terms of pursuing different
45:01diversification those are usually where
45:04you might find your deals okay so like
45:06if you're a Cosmetics company you know
45:09R&D centers buying up things like that
45:12that often uh makes a little bit more
45:15sense
45:17because they'll be uniquely valuable to
45:20you as an acquirer versus everybody else
45:23you're not competing with the field
45:30so the word we're sort of dancing around
45:32here again is is uh economies of scope
45:35all right and economies of scope of
45:37course are when it's more efficient to
45:41operate two businesses under the same
45:43roof rather than it is for those
45:45businesses to specialize and operate
45:47separately why would it be more
45:50efficient to operate two businesses
45:52under the same roof rather than
45:53separately well because they're sharing
45:57uh different components uh or they're
45:59sharing different departments
46:03okay um or one of them has a you know
46:07sort of byproduct that's usable for the
46:09other company those are some of the
46:11reasons you get economies of
46:14scope all right so when you can transfer
46:17skills between those two lines of
46:20business so like you know racing okay do
46:23you want to enter into the competitive
46:25racing industry
46:27um well it's usually more efficient to
46:30enter into a competitive racing industry
46:32if you're already an automobile
46:35manufacturer because one you can use
46:37what you know is just an already
46:39automobile manufacturer to make a race
46:41car all right um and then in terms of
46:46operating that race car and tuning it
46:48and everything you can take what you
46:50learn from the track and share it back
46:52to your street cars okay and they get
46:54better and better and more efficient and
46:57effective and robust and higher
46:59performance and everything
47:01else other situations maybe you can
47:04combine two value chain activities you
47:07can say well I'm running two businesses
47:08but how about we just have one HR
47:10department that serves both of
47:13those sometimes you can leverage the
47:15brand name all right as we've discussed
47:19earlier
47:22um and then you know again there can be
47:25knowledge sharing of course always
47:27between two lines of
47:30business so an economy of scope again
47:33this is occurs when it's cheaper for you
47:37to operate in two lines of business for
47:41one firm to operate two lines a business
47:43then it would be for two firms to
47:46operate separately all right that there
47:49and
47:51specialize economies of scale which you
47:53might confuse with economies of scope is
47:56different economy of scale is when it
47:58gets increasingly more efficient as you
48:02become a larger and larger business all
48:04right economies of scope means you get
48:07more efficient as you operate more lines
48:10of
48:18business okay so moving on here um you
48:22know again the only reason you should
48:26ever
48:27diversify is because you're going to
48:29create more shareholder value um through
48:35diversifying
48:37then your uh stockholders could create
48:40on their own through portfolio investing
48:43okay so what that means is there's some
48:46way that bringing these multiple lines
48:48of business Under One Roof um there's an
48:52economy of scope that makes it more
48:54efficient or more effective for those
48:56both to be Under One Roof and being
48:59managed together then they would be
49:03operating separately and specializing on
49:06their own all
49:09right usually uh you're going to create
49:12more shareholder value through related
49:16diversification okay I mean there's some
49:20situations where you see like okay well
49:22what about Berkshire halfway all right
49:25so I mean maybe there's there's some
49:27Oddball situations where you have
49:29someone like Warren Buffett running um
49:32and keeping an eye on all these
49:33different lines of business okay um but
49:36that's sort of the exception rather than
49:37the
49:38rule
49:41um again you know you're looking for
49:45shareholder value and usually this
49:47implies that there needs to be something
49:51being done you know in terms of
49:52management taking some sort of internal
49:54actions to realize these gains of you
49:58know combining these two lines of
50:00business
50:03together now in other situations you can
50:05have unrelated diversification and there
50:10although unrelated diversification
50:13generally
50:14um I mean seriously it often destroys
50:17shareholder value uh there there's some
50:20different Logics for why you might do it
50:23and we can talk about some of these
50:27uh in certain situations you know people
50:30could be asking themselves these
50:32questions and trying to decide whether
50:35or not unrelated diversification makes
50:37sense okay you know one is can
50:42it meet or exceed our targets for
50:47profitability and return on investment
50:49all right another question you might be
50:51asking is well is this in an industry
50:53that's very
50:54attractive and then number three is is
50:56well is it a big enough of a deal that
50:59it's going to significantly contribute
51:01to the parent company's bottom
51:04line there are some rationals again for
51:08divver unrelated diversification one is
51:11like some people think okay well I can
51:14diversify Buy app other companies or
51:17whatever in other lines of business and
51:18I
51:19can do this because I can my company can
51:23provide really good corporate parenting
51:26to these others okay so we can buy up
51:28some companies and through management
51:30leadership and everything our expertise
51:33we can use those to make those companies
51:36operate better more efficient more
51:39effective than they were operating
51:41before they came under our ownership
51:44okay things like Berkshire hathway does
51:46all
51:48right um and they think you know this
51:50generalized sort of business knowledge
51:53is going to make these companies work
51:54better than they did on they wrong all
51:57right now there's also what we call
52:00Financial economies of scope that's the
52:02second rationale all right how Financial
52:06economies of scope work
52:08is
52:10um sometimes what will happen is you can
52:13have
52:15a a portfolio of companies okay and the
52:20corporate
52:21parent will distribute funds to
52:25companies within that port portfolio and
52:28the idea is that that corporate parent
52:30has a better knowledge about those
52:32companies that are contained within the
52:34that portfolio um how they're managed
52:37what their needs are um those kinds of
52:40questions and that they can provide
52:43those companies funding at in a way
52:46that's more efficient than those
52:48companies could do if they were on their
52:50own trying to get loans from Banks or
52:53wherever or trying to issue stock
52:56ownership trying to raise money that way
53:00um and that you know they the corporate
53:04parent can loan them money or do
53:06whatever they need to do and that that
53:09would be cheaper for those companies
53:11than it would be if they were to take
53:13out traditional loans and be having to
53:15pay back whatever interest rates the
53:16bank gives them or that they you know
53:20might not get what they're actually
53:22worth if they were to try to sell um
53:25issues stock or sell ownership in some
53:28other ways and that it's more efficient
53:30for sort of the uh corporate parent to
53:33serve as this internal Capital Market
53:36Distributing funds to those
53:38companies there's other things else that
53:41they can do if one of those companies
53:43does want to take out debt and they're
53:45part of a uh corporate portfolio rather
53:48than a single business they can take out
53:50a lot more debt than a similar company
53:53that's not tied to a corporate parent
53:55it's kind of like having your your
53:56corporate parent is your co-signer all
53:58right so like if you were going to issue
54:00a loan out to a a beer company okay um a
54:05craft beer company and one's an
54:06independent company owned by no one and
54:09the other is Goose Island all right
54:11owned by I think it's
54:13Budweiser um clearly you're going to
54:17offer a better rate and everything to
54:19Goose Island because you know well if
54:22even if they go bankrupt or whatever uh
54:25another huge your company that owns them
54:27is going to be on the hook that isn't
54:28going to go bankrupt uh whereas that
54:31smaller company yeah if they go Belly Up
54:34it might be pretty hard to get your
54:35money
54:39back and then there's other rationals
54:42that include like uh restructuring uh
54:45undervalued companies so uh this is like
54:49corporate takeovers that kind of stuff
54:51um if you're familiar with t- Boon
54:54Pickins uh who's was a big
54:56contributor to like Oklahoma State
54:59football program uh he was a corporate
55:02Raider and what he used to do is he
55:05would buy up troubled
55:07companies fire a whole bunch of the
55:09management put his own people in charge
55:13um and when the companies were being
55:16managed a little bit better and a little
55:18bit more effective he would sell them
55:19off um and try to turn them around
55:23really quickly kind of like what people
55:25do flipping houses but he is trying to
55:26like flip
55:28businesses uh so you can also do that
55:32type of work and that's another
55:33rationale for you can build uh you know
55:36shareholder value through unrelated
55:41diversification you can kind of look at
55:43the uh attractiveness test cost of Entry
55:47test and better off test and match it up
55:50to some of these different uh ways you
55:54can make money through unrelated
55:56diversifications like the attractiveness
55:58test
55:59is well um do we think we can diversify
56:05into a business that's producing you
56:07know consistently good earnings and
56:09return on investment you know is there
56:11any any companies out there that are
56:14churning out enough profits that it
56:16would make sense for us to buy them up
56:18uh cost of Entry test well a lot of the
56:21time people that like to engage in
56:24diversification buy up compan companies
56:27think that well they're really really
56:29really good negotiators and they're
56:30going to get a favorable price and their
56:34skills um are going to let them get it
56:38at at a price that anybody else wouldn't
56:41have and and you know because they
56:42bought it it's proof that they got it at
56:44a good price is sort of what they're
56:45thinking um but anyway cost of Entry
56:48test is well okay if you actually are
56:49able to negotiate favorable acquisition
56:52prices then you know maybe that that
56:54would fit too
56:57and then the better off test is you know
56:59um will we be better off as a result of
57:02buying up this company or making this
57:04move well you could do that through
57:08uh providing you know managerial
57:12oversight the internal Capital Market
57:15how you're able to distribute resources
57:17to those companies um if they need to be
57:19restructured all of those different
57:21things could perhaps make shareholders
57:23better off uh as a result of you buying
57:26up these businesses even if they are
57:29unrelated there's a lot of drawbacks to
57:32unrelated
57:33diversification um it requires a lot of
57:37managerial requirements I mean if you're
57:40buying up companies that are failures or
57:43that seem troubled to turn them around
57:47um or to to properly manage them so that
57:51you can set them right back on the on
57:52the proper course is going to be very
57:55difficult and entail a lot of managerial
57:59requirements
58:01um if they're unrelated to you then you
58:05know what sort
58:09of significant resources do you have
58:12that you bring to the table are you
58:13really going to let them have this you
58:16know sustained competitive Advantage I
58:19mean because of your resources you're
58:21able to share with a a business that's
58:24well outside of your um wheelhouse or
58:27doesn't have similar a similar resource
58:29base to you so there's a limited
58:31competitive Advantage uh potential
58:36there um again monitoring maintaining
58:41parenting that's something that's
58:43difficult and that that's you're going
58:45to spend a lot of time doing that and
58:47you're probably not going to have uh the
58:50the fit between your businesses again
58:52they don't they don't fit together very
58:53well when you when you do this kind of
58:55stuff
58:56there's a lot of really poor rationals
58:58for unrelated
59:00diversification one is trying to reduce
59:02business investment Risk by saying well
59:04if we diversify and we spread the risk
59:07into different areas then it's less
59:10likely that this business is going to go
59:13under um because you know any one of
59:17those segments might go under but
59:19there's still all of the others and they
59:21might you
59:22know be counter cyclical to each other
59:26or whatever so that the likelihood of
59:28the hole all going under at once isn't
59:31very likely um that's a poor rationale
59:36because yes that's true to an extent but
59:39shareholders would much rather build
59:42their own portfolios okay they don't
59:44want you to do that for them they all
59:45have their own unique risk tolerances
59:48and what they would rather do is buy
59:51stock in a single company where that
59:55operates in one line of business and
59:57then depending on their risk preference
1:00:00pick whatever else to bundle into that
1:00:03portfolio
1:00:06Okay uh other situations is sometimes
1:00:10companies might want to just pursue
1:00:11growth for the sake of growth okay and
1:00:13by growth I mean revenue growth not
1:00:16profit growth uh profit growth is what
1:00:19you want um and should be shooting for
1:00:21but Revenue growth um you know just
1:00:24managing a larger and larger stream of
1:00:27income um that's not necessarily what
1:00:30you're targeting a lot of the time that
1:00:33companies start pursuing growth for the
1:00:35sake of its own sake I guess is uh
1:00:40because at one point CEOs were paid
1:00:43based on how large of a revenue stream
1:00:45they managed so what they would do is
1:00:46just try to grow the revenue stream by
1:00:49engaging in a lot of diversification and
1:00:52it would get
1:00:54unrelated um again the seeking to
1:00:57stabilize
1:00:59uh counter cyclical swings well um we
1:01:04discuss this with the first point here
1:01:06and then also dealing with managerial
1:01:09motives uh again sometimes the people
1:01:11that run corporations or whatever might
1:01:15get a kick out of buying companies okay
1:01:17you get a rush out of it you feel like
1:01:19it's uh you're really mve you're a real
1:01:22mover and Shaker in the industry and
1:01:24that you're taking these calculated risk
1:01:27and you know it's it's it's a big deal
1:01:30when you do acquire somebody and um you
1:01:33know you can have just managers who have
1:01:36their own sort of they're feeding their
1:01:38egos by getting into mergers and
1:01:41Acquisitions and of course you never
1:01:43want to be operating a business to feed
1:01:46your ego in that
1:01:50way now there's a lot of different types
1:01:53of ways you can get into related or
1:01:55related
1:01:57diversification uh we'll discuss more on
1:02:00the following slide but you know you can
1:02:02be dominant business narrowly
1:02:04Diversified broadly Diversified multi-
1:02:08bus okay so there's different sort of
1:02:10degrees you can
1:02:13diversify so here for example like a a
1:02:16dominant business Enterprise is one
1:02:18where you know most of the uh income for
1:02:22that company is coming from one single
1:02:26business unit okay one line of business
1:02:28so something like Harley-Davidson where
1:02:31and maybe they do a few other things but
1:02:32most of their money is coming from
1:02:34selling
1:02:35motorcycles all right that's would be
1:02:37like a dominant business
1:02:38Enterprise now you have others where
1:02:41it's narrowly Diversified
1:02:44so maybe you know there's a little bit
1:02:48of unrelated diversification in there
1:02:51but not a whole lot okay most of the
1:02:53money is coming from you know uh a
1:02:57couple lines of business at most all
1:02:59right so you can look at something like
1:03:02Yamaha okay where yeah they make ATVs
1:03:07motorcycles that kind of stuff they also
1:03:09make like musical
1:03:12instruments um and I think they might
1:03:15even make some Electronics but still
1:03:17it's a small grouping of things yeah
1:03:19it's unrelated but it's getting to but
1:03:21it's not a very big group of things when
1:03:25you start getting into broadly
1:03:26Diversified or multi- business firms
1:03:28you're looking at conglomerates okay
1:03:30things like Berkshire hathway all right
1:03:32look up Berkshire hathway okay it's a
1:03:34it's a conglomerate you'll see that they
1:03:37own operate in a whole slew of different
1:03:41lines of business okay from you know
1:03:44we're talking about insurance to you
1:03:47know food and beverage
1:03:50to uh I think at one point they were
1:03:53making like like RVS and campers and
1:03:56stuff they own owned a company that was
1:03:57involved in that um so very wide uh
1:04:02lines of
1:04:05business so now to evaluate the
1:04:09uh firm's
1:04:11Diversified uh present lineup there's a
1:04:13number of steps that you can follow all
1:04:16right the first step for evaluating the
1:04:19strategy of a diversified firm entails
1:04:22assessing all of the industries that
1:04:24you've Diversified into all right and
1:04:26seeing if those are attractive
1:04:27Industries using something kind of like
1:04:29quarters five forces to measure how
1:04:32attractive the industries are the next
1:04:34step is
1:04:36to assess the competitive strengths of
1:04:39of the firms in each of their industry
1:04:42Industries okay um kind of like what you
1:04:44would do with like the competitive
1:04:46strengths assessment and I'll show you
1:04:47an example of all of this uh in a later
1:04:51slide here so I'll just kind of brush
1:04:52over it right now
1:04:55third step you want to evaluate and see
1:04:58how well you could possibly fit these
1:05:01businesses together could they share
1:05:03certain types of resources and pieces of
1:05:05their value chain with one another if
1:05:07they can that's always better because it
1:05:09helps you reduce
1:05:12redundancy then you want to check and
1:05:14see how well they fit with your firm's
1:05:17resources what your resource base has
1:05:20you know and if this is
1:05:22uh if if these businesses just
1:05:24strategically fit with what you are
1:05:26capable of doing and and really good at
1:05:30doing and then after that you want to go
1:05:33ahead and rank all of your prospects
1:05:36and from best to worst in terms of where
1:05:39you want to spend your money and
1:05:40allocate your resources and time and
1:05:42budget and then step six is crafting
1:05:45moves to improve the corporate
1:05:47performance okay so this might entail
1:05:49funneling money into some of the
1:05:52businesses that are growing it might
1:05:54entail divesting of some of of them that
1:05:56seem like they could be a dead end
1:05:59or um you know different strategies such
1:06:03as
1:06:06that so for evaluating the
1:06:09attractiveness of the industry
1:06:12um of the industries that you're
1:06:15operating in uh you have a handful of
1:06:19questions you're going to be asking
1:06:20yourself you know how attractive are
1:06:22these these industries all right um does
1:06:26the industry represent a good Market
1:06:28okay uh which of these are Industries
1:06:32are most attractive and which of these
1:06:33are least attractive in relation to one
1:06:35another all
1:06:38right so some things you might put in in
1:06:42terms
1:06:43of calculating the industry
1:06:46attractiveness scores are here's a
1:06:48number of variables that would make
1:06:50sense okay you know the the the market
1:06:52size and projected growth rate um
1:06:56what the competition's like in that
1:06:58industry emerging threats and
1:07:00opportunities okay
1:07:03uh presence of cross industry fit
1:07:06because it's not like we're just
1:07:08evaluating the industry like you with
1:07:10Porter's five forces it's um there's a
1:07:13little bit more to it than that because
1:07:14it's you're trying to fit it into your
1:07:17Diversified portfolio of firms okay so
1:07:20you want to take into consideration
1:07:22cross industry strategic fit
1:07:26um resource requirements does it fit
1:07:29with what you have right now uh you
1:07:32could also include some of the elements
1:07:34of the pestl industry profitability okay
1:07:38so you kind of some of these these
1:07:42pieces necessitate you to do calculate
1:07:44Porter's five forces for each of them
1:07:48um but that's probably something you're
1:07:50you're doing or very aware of at least
1:07:52all those forces if you are running a
1:07:59corporation so again calculating the
1:08:01attractiveness from the multi-business
1:08:04persp perspective um you're looking
1:08:08for cross industry fit you know how well
1:08:12do these industry value chains match up
1:08:15to one another where can there can they
1:08:17be can pieces be shared all right and
1:08:21also the resource requirements are these
1:08:24resources that you already have or are
1:08:27able to
1:08:32collect so then what you do in the next
1:08:35step is essentially you create one of
1:08:38those weighted industry uh scores kind
1:08:41of like what you did with the
1:08:42competitive strengths assessment so it's
1:08:44going to look something like
1:08:46this you can see in
1:08:49pink on the very left there's all of the
1:08:52variables we came up with and in Orange
1:08:56there's your importance weights and you
1:08:58come up with those all on your own again
1:09:00you know what you think the importance
1:09:02of each of those variables is or
1:09:05aspects and then in gray green and red
1:09:13you can see
1:09:14where we've gone through and actually
1:09:17calculate and actually um given a
1:09:20assigned a score to each of these
1:09:22companies okay so first line uh of the
1:09:26gray you can see is business a and
1:09:29Industry a and what you want to do in
1:09:32the The First Column is come up with how
1:09:35you would score that business for each
1:09:36of those C each of those variables we
1:09:38came up with okay so on a scale of 1 to
1:09:4010 how would you say it ranks all right
1:09:43this is kind of subjective okay uh same
1:09:46with like the cons competitive strengths
1:09:49assessment okay um you can think about
1:09:52all the data you've seen and everything
1:09:54else where would you score them on a
1:09:56scale of 1 to 10 and that's where all of
1:09:59those numbers in the First Column come
1:10:01from the numbers in the second gray
1:10:04column come from multiplying that score
1:10:07by the colum by the numbers in the
1:10:10orange column which are your weights so
1:10:12you multiply your actual score by the
1:10:14weights this gives you a weighted score
1:10:17you add up all of those weighted scores
1:10:20and then if you look at the very bottom
1:10:23of the second gray column you'll see
1:10:24it's weighted score all right
1:10:288.35 okay and you do that for all of
1:10:31your businesses so you can see the same
1:10:33thing was done for the green columns the
1:10:35same thing was done for the red columns
1:10:38um and in going through this you can see
1:10:40that business a and Industry a uh looks
1:10:44like that has the best fit for your
1:10:48portfolio um right now or that's the the
1:10:51the most attractive industry at very
1:10:54least to be in
1:10:56and you can see that uh industry B is
1:11:00the least attractive okay red falls in
1:11:03the
1:11:04middle you follow a very similar process
1:11:07now for evaluating the unit competitive
1:11:12strength okay so the strength of the
1:11:14individual companies follows a very
1:11:16similar practice to what we just did all
1:11:19right where you come up with your
1:11:20variables maybe something like market
1:11:22share cost relative to the compet
1:11:26competition um brand image and
1:11:29reputation you know you come up with
1:11:30these different variables okay that give
1:11:33you sort of there a generalized measure
1:11:37of how successful your company is within
1:11:41its respective
1:11:42industry so then you calculate one of
1:11:44those matrixes and that's on the next
1:11:48slide so here's the Matrix okay for the
1:11:53competitive strengths of each of these
1:11:57businesses in their respective industry
1:11:59so again in the first line of column the
1:12:02first column in pink you can see those
1:12:04are all the variables we came up with
1:12:07the orange is the importance weights we
1:12:09came up
1:12:10with and then the pairs of columns in
1:12:14gray green and blue are going to be the
1:12:18scores for the businesses themselves the
1:12:20scores and weighted scores so First
1:12:24Column uh in the first gray column you
1:12:27can see there's those strengths ratings
1:12:29on a scale of 1 to 10 where you you know
1:12:32sort of think through it okay how much
1:12:34market share does this company have on a
1:12:36scale of 1 to 10 looks like whoever was
1:12:39scoring this said it has a lot and gave
1:12:41them a 10 10 out of 10 okay and you go
1:12:45down the list and go through that same
1:12:47process then to get your weighted score
1:12:50you just do the same thing you multiply
1:12:52the strength rating by the orange column
1:12:56the that corresponds to it so that
1:12:58importance weight which is 0.15 in this
1:13:01case you multiply those two numbers
1:13:04together that gives you a weighted score
1:13:07so the weighted score for relative
1:13:09market share for business a and Industry
1:13:12a is
1:13:141.5 then after you've done that for all
1:13:17of those variables you add up all of
1:13:20your uh weighted scores and that gives
1:13:23you an overall weight weighted score
1:13:26which you can see that in the second
1:13:28gray column at the very bottom there's
1:13:30the overall weighted score of
1:13:337.85 and then you go through the exact
1:13:36same process with your other
1:13:38businesses now again you can see
1:13:41business a and Industry a looks like
1:13:43that's the most uh competitively strong
1:13:47company in its respective industry
1:13:50compared to other businesses in this
1:13:52corporation's portfolio
1:13:56so now here's where you bring together
1:13:58those two matrixes that you had made all
1:14:02right you bring them together here um to
1:14:05create this nine cell industry
1:14:08attractiveness competitive strength
1:14:10Matrix and how it works is on your y AIS
1:14:14you have you know a scale from 1 to 10
1:14:17that displays industry
1:14:20attractiveness on your X AIS you have a
1:14:24scale from 1 to 10 that it displays
1:14:27competitive strength/
1:14:29market position and what you do is based
1:14:32on those weighted scores you received go
1:14:36going through the other two tasks is you
1:14:38plot each of these businesses in their
1:14:41respective Industries okay and again you
1:14:44can go through this process and you see
1:14:46right away that um business a in
1:14:49Industry a is you know your most
1:14:53succcessful
1:14:55uh business in your portfolio and
1:14:58business B and Industry B is kind of a
1:15:01problem child C is pretty strong I mean
1:15:06it's it's it's pretty good in its
1:15:08industry um so you know the next step is
1:15:11okay well we need to
1:15:18determine so step five we get into
1:15:22ranking business units and a deing a
1:15:25priority for resource allocation so
1:15:28things you might want to consider when
1:15:30you're ranking these businesses is okay
1:15:32well what's their growth prospects look
1:15:34like in terms of sales and profits okay
1:15:37how much are they contributing to the
1:15:39company's earnings overall um what's
1:15:42their Roi are they do they have
1:15:44favorable
1:15:46um financial ratios and everything and
1:15:49investment prospects okay and the idea
1:15:52is that you want to steer resources to
1:15:55business units with the strongest profit
1:15:57and growth
1:15:59prospects um and also where they have
1:16:02solid strategic and resource fit all
1:16:05right and I and you don't want to steer
1:16:08money toward businesses that have
1:16:09already matured and they're in
1:16:11industries that aren't growing okay
1:16:13sometimes that happens like I I've
1:16:15mentioned before Philip Morris um they
1:16:18found that they've kind of Tapped Out
1:16:20The Tobacco industry okay that's uh
1:16:24that's a line of their business that is
1:16:25generating excess profits it doesn't
1:16:28make sense at this point for them to
1:16:30invest any more into it because the
1:16:32industry is matured they sort of figured
1:16:34out all the operations and everything to
1:16:37make uh cigarettes or whatever as
1:16:40efficiently as
1:16:41possible so now they're sort of a
1:16:44corporation they buy up other little
1:16:46businesses and figure out okay how can
1:16:48we pump money into them that we've
1:16:50earned from selling tobacco or or
1:16:54cigarettes and everything uh to these
1:16:58other business units that have you know
1:17:00strong growth prospects and everything
1:17:04else so what are your options afterward
1:17:07you've already Diversified and you're
1:17:10trying to craft some strategic moves to
1:17:13improve your performance well you
1:17:15basically have four options one do
1:17:18nothing just stick with the current
1:17:19business lineup two you can try to
1:17:23broaden your diversification add on some
1:17:25new
1:17:26businesses three you can devest and
1:17:29retrench okay so get rid of those ones
1:17:32that don't fit or tangential to your
1:17:35resource base and everything or that are
1:17:37just poor
1:17:38performing and then four you can just
1:17:41reshuffle the deck okay maybe get rid of
1:17:44some but add on additional businesses
1:17:47but just
1:17:53reshuffle all right so so why would you
1:17:55want to pursue any of these given
1:17:58strategies well there's a number of
1:18:00reasons one you might want to stick with
1:18:02the existing lineup if what you're doing
1:18:06is currently working really well um
1:18:09don't fix what's not broken if you like
1:18:12what you have then you can just stick
1:18:13with the existing lineup if it's working
1:18:15with you you don't really feel ready to
1:18:19start taking risk and expanding outward
1:18:22all of what you have seem to be doing
1:18:24pretty well stick with what you have you
1:18:27might broaden your diversification base
1:18:31if you're in a position where you feel
1:18:35like everything you have is sort of
1:18:37Tapped Out you've found all of the
1:18:40efficiencies and everything and rather
1:18:42than funling more money back into those
1:18:45businesses or just taking the the
1:18:47profits you feel like they could be put
1:18:49to better use by diversifying into
1:18:52another line of business
1:18:55now in other cases you might want to
1:18:57devest of some businesses and retrench
1:18:59to narrow your diversification base and
1:19:02you might do this if you are involved in
1:19:05some lines of business that just aren't
1:19:07working okay you're in some clearly
1:19:10unprofitable
1:19:12positions where you have poorly
1:19:14performing firms in poor markets things
1:19:17like that then you want to you
1:19:21know find some addition by subtracting
1:19:24all right shed the dead L the dead
1:19:26weight and strengthen your position and
1:19:29then lastly you might be in a situation
1:19:32where you want to restructure you have
1:19:35some businesses that are clearly working
1:19:38and you have the funds to further
1:19:41diversify but you also have some things
1:19:43that aren't working for you either you
1:19:45have some of that dead weight so in that
1:19:47case you might want to sort of reshuffle
1:19:49the deck and
1:19:51restructure by divesting of some of them
1:19:56and then using the funds you get from
1:19:59that investment to purchase other lines
1:20:02of business or pursue other lines of
1:20:04business and again reshuffle the deck
1:20:07get rid of some take on some other new
1:20:09lines of
1:20:11business but anyway that's what I have
1:20:13to say for this particular lecture