Once a company achieves diversification, what are the post-diversification strategies that it can employ to improve the performance of its business portfolio?
A diversified company must periodically reexamine its business portfolio to determine both the present attractiveness of the businesses into which it has diversified and the future long-term potential of the firm with its current portfolio. If a firm determines that it can do more to enhance the performance of its business portfolio, then it has several options at its disposal, as illustrated in Figure 1.
Figure 1 Strategy Options
Acquisitions and Partnerships
A firm may opt to improve the performance of its business portfolio by entering new businesses through mergers, acquisitions, or partnerships. Regardless of the entry mode chosen (i.e., acquisition of existing company, internal startup, or joint venture), such an option is most appropriate when the following conditions exist:
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The firm has a strong competitive position, but market growth is weak. |
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The new businesses are positioned in industries with solid long-term prospects. |
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The firm can easily transfer existing competencies to the new businesses. |
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There are potential cost savings associated with entering new lines of business. |
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The new businesses are competitively strong and represent good strategic and resource fits. |
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The value of the combined firm is greater than the sum of its individual business units. |
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The new businesses will provide the parent company with economies of scale and scope. |
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The new businesses will strengthen the firm’s competitive advantage. |
Divestiture
Instead of entering new lines of business, a firm may decide to improve its current business portfolio by exiting existing lines of business. Such a strategy is most appropriate when the following conditions exist:
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Both the firm’s competitive position and market growth are weak. |
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The firm’s lines of business are positioned in industries with poor long-term prospects. |
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The firm cannot easily transfer existing competencies to the businesses. |
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There are no cost savings or synergies associated with the lines of business. |
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The businesses are competitively weak and represent poor strategic and resource fits. |
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The value of the combined firm is less than the sum of its individual business units. |
Restructuring
If the long-term competitive position of a diversified firm is still relatively strong but certain lines of business are not performing up to expectations, then the firm may decide to turn the situation around through restructuring. Such a strategy is most appropriate when the following conditions exist:
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The reasons for poor performance are short-term. |
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The underperforming lines of businesses are in attractive industries. |
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Divesting lines of business will not strengthen the parent firm’s competitive position. |
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There are as yet unrealized cost savings or synergies associated with the lines of business. |
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The businesses may still prove to be a good strategic and resource fit. |
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Restructuring will improve the long-term prospects of the core business. |
Become a Multinational Enterprise (MNE)
Alternately, a firm may decide to improve its business portfolio by internationalizing its diversification strategy and becoming a global player. Such a strategy is most appropriate when the following conditions exist:
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The firm can easily transfer its core competencies to businesses located in other parts of the world. |
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The firm can obtain global economies of scale and scope. |
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The domestic market is mature and offers few prospects for significant growth. |
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International diversification will ameliorate the firm’s exposure to market conditions in the home country. |
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There are strong resource and strategic fits to be found overseas. |
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The firm’s lines of business are themselves becoming increasingly global in scope. |
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There are few attractive businesses to acquire at home. |