Aglagadan, Gian Kaye V.

2 – BSA4

Self‐Study Questions
1. An ice‐cream manufacturer is proposing to acquire a soup manufacturer
on the basis that, first, its sales and profits will be more seasonally
balanced and, second, from year to year, sales and profits will be less
affected by variations in weather. Will this risk spreading create value
for shareholders? Under what circumstances could this acquisition
create value for shareholders?
The process of acquiring a new firm is complicated and risky. The most
successful acquisitions have a systematic and disciplined approach,
with clear strategic objectives, thorough implementation plans, and a
focus on producing and capturing value. The following factors
determine whether the acquisition will add value:
A. Where actual economies can be obtained by merging the two
businesses. Thus, if staff can be redeployed between ice cream and
soup production, and if certain activities (e.g. distribution, HR,
accounts, and finance) can be integrated, the merger could enhance
the cash flows of each business.
B. Less variability does not produce value for owners as long as the
cash flows of the individual businesses are unaffected by the merger.
If the two businesses are public, shareholders can reduce their risk
by building portfolios of equities from various companies.
C. Less unpredictability does not produce value for the shareholders as
long as the cash flows of the individual businesses are unaffected by
the merger. If the two businesses are public, shareholders can
reduce their risk by building portfolios of equities from various
companies.
2. Tata Group is one of the India's largest companies, employing 424,000
people in many different industries, including steel, motor vehicles,
watches and jewelry, telecommunications, financial services,
management consulting, food products, tea, chemicals and fertilizers,
satellite TV, hotels, motor vehicles, energy, IT, and construction. Such
diversity far exceeds that of any North American or Western European
company. What are the conditions in India that might make such broad‐
based diversification both feasible and profitable?
Tata Group needs close functional linkages between its organizations -
they are simply excessively different. Goodbye Group adds esteem
through distributing investment funds and staff between its various
organizations, sending its top the board ability, and laying out and
growing new businesses. The fundamental condition for this to work is
that Tata should be more efficient in dealing with these cycles than are
outside business sectors. In the US and UK, conglomerate firms never
again enjoy any broad benefit in allocating investment reserves,
propelling business directors, or firing up new businesses - this
Aglagadan, Gian Kaye V.
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multitude of capacities are performed proficiently by the capital markets.
In India, capital business sectors are less proficient, investment is less
developed, and work markets for directors and other gifted
professionals are less created. In these conditions, not exclusively is
Tata ready to utilize internal data and complex dynamic frameworks to
allocate resources more actually than can outside business sectors, it
might likewise benefit from lower asset costs (specifically, a lower cost
of capital than smaller, more particular organizations).
Apart from financial and human resources, influence and commercial
ties are two more resources that Tata can use across its various
businesses. Political influence is extremely crucial in a highly regulated
country like India. Tata's size and diversification surely give it significant
clout within state and federal governments. Because of its international
network of ties, it is a favored joint venture partner for foreign
corporations looking to invest in India.
3. Giorgio Armani SpA is an Italian private company owned mainly by the
Armani family. Most of its clothing and accessories are produced and
marketed by the company (some are manufactured by outside
contractors). For other products, notably fragrances, cosmetics, and
eyewear, Armani licenses its brand names to other companies. Armani
is considering expanding into athletic clothing, hotels, and bridal shops.
Advise Armani on whether these new businesses should be developed
in‐house, by joint ventures, or by licensing the Armani brands to
specialist companies already within these fields.
The following are likely to be the most important factors to consider
when deciding between licensing, joint ventures, and totally owned
diversifications:
A. The transaction expenses associated with licensing Armani's brand:
If licensing contracts are simple to write and execute, licensing is a
practical and attractive method for tapping into these markets.
Licensing, on the other hand, may be problematic if there are
concerns of licensees oversupplying the market, delivering products
that are inconsistent with Armani's image and quality, or harming
Armani's brand in any other manner.
B. The possibilities for sharing or transferring Armani's other resources
and capabilities with/to the new businesses: Which of Armani's other
resources and capabilities can be used in the new business, aside
from its brand? Armani can presumably use its existing design,
manufacturing, marketing, and distribution capabilities in the case of
bridal garments and accessories. In which case, Armani will be able
to expand this business on its own. Armani may need access to the
technical capabilities needed to design items for many sports in the
case of athletic clothes and equipment, hence a joint venture may be
acceptable. In the case of hotel management, it is unclear whether
any of Armani's resources and talents (apart from its brand) are
Aglagadan, Gian Kaye V.
2 – BSA4
relevant to the design and operation of luxury hotels; thus, licensing
may be the best option.
4. General Electric, Berkshire Hathaway, and Richard Branson's Virgin
Group each comprise a wide range of different businesses that appear
to have few close technical or customer linkages? Are these examples
of unrelated diversification? For each of the three companies, can you
identify linkages among their businesses such that bringing them under
common ownership creates value?
If you were to ask each of us what industry Virgin is primarily involved in,
the first thought that comes to mind would undoubtedly differ. This is
attributable to the Virgin Group's participation in 'unrelated
diversification,' which is the sixth strategy in Ansoff's Matrix. Unrelated
diversification is joining a completely new industry with no significant
similarities to the firm's existing business or industries, and is
sometimes performed through a merger or purchase.
In the case of Virgin, unconnected diversification has shown to be a
good profit-maximizing approach. Given the fast changing nature of the
music industry since the 1970s and the start of its activities as a record
mail order company and record store soon after, it's probable that the
company would no longer exist if it hadn't innovated in this way. With a
total of 35 subsidiary firms within the Virgin Group worldwide, today's
breadwinners in the UK are substantially different from those of the
1970s, contributing to the Virgin Group's total income of £15 billion in
2012.
The key to effective unrelated diversification is choosing a profitable
industry in which the company has internal competencies that can help
it acquire a competitive edge. Virgin Atlantic's introduction into the
market in the 1980s is an excellent example of this, as it came at a
period when excellent customer service was a rarity in the airline
business, which was plagued with cancelled flights, delays, and missing
baggage. Virgin's internal skill in providing exceptional customer service
throughout its existing family of firms provided an advantage that would
be difficult for competitors to match – and thus the possibility to charge
a premium.
The 'unrelated diversification' technique, on the other hand, is far from
foolproof, and there are several examples of it failing for Virgin. The
short rise and swift fall of Virgin Cola in the mid-1990s – following an
ambitious, but ultimately unsuccessful attempt to compete with
Coca-Cola and Pepsi – is perhaps the most well-known example.
Despite the ever-growing fizzy-drinks market, conditions were not
favorable for Virgin's arrival due to incumbent companies' ability to
prevent access to wider distribution and a backlash in advertising spend
– limiting Virgin Cola to just a 3% market share on its home soil before
quitting.
Aglagadan, Gian Kaye V.
2 – BSA4
Looking past the gamble of disappointment, I would likewise contend
that unrelated diversification makes further dangers as far as losing
brand strength, by blurring the conveyance of a solitary solid message.
Virgin used to have the image of being a defiant brand that reverberated
firmly with its young audiences through music and records - a way of life
in itself nearly - yet with Virgin Money and Virgin Trains, it doesn't have
that solitary message and association any longer. Today, the host of
sub-brands don't serenely fit together such that Virgin can characterize
itself as importance something, which goes quite far towards clarifying
why Virgin isn't a forerunner in any of its industries. In the aircraft,
broadband and exercise center enterprises to name a few, Virgin is
essentially another player and neglects to advance in the manner that a
leader generally does. All things considered, Virgin will in general take a
current assistance or product and undercut costs or offers a slight minor
departure from the plan of action.
"Business possibilities are like buses, there's always another coming
along," says Richard Branson, summarizing the Virgin Group's current
strategy. Essentially, Virgin is now looking at existing businesses to see
whether it can provide something better than existing corporations that
have become comfortable, such as trains, insurance, and banking.
Virgin has lost part of its enchantment, and as a result, the brand name
is remembered more for its credentials as a great worldwide business
that achieves efficiency and profitability when others fail, rather than for
something more compelling in people's imaginations.
With this in mind, one could say that Richard Branson is now striving to
recreate a more distinct image, such as through the attention produced
around the launch of Virgin Galactic, which hopes to launch the first
commercial spaceflight. Despite the fact that this industry is full of
uncertainty and now has no financial value, it brings with it good
associations of innovation for the Virgin brand. Because of the diverse
nature of the Virgin Group's business model, trying to reinforce a niche
differentiator of ‘rebellion' no longer works for such a broad target
audience, being considered the driving force in an infant industry with
strong media interest can reach out to all existing audiences;
demonstrating that the Virgin brand is always trying to push existing
boundaries of possibility.
The next ten years or so will be a critical moment for Virgin, and it will be
fascinating to see how things turn out. When someone says Virgin to us
in 2024, what will come to mind? Let's hope it's a lot clearer and more
consistent than it is right now.
5. Amazon has diversified from online retailing into cloud computing
services (Amazon Web Services), tablet computers (Amazon Fire), and
the production of movies and TV shows (Amazon Studios). What
synergies might justify these diversifications?
Aglagadan, Gian Kaye V.
2 – BSA4
During the maturity stage, companies might adopt a range of corrective
activities in order to restart their development cycle or at the very least
avoid going out of business.
Companies can avoid decline by focusing on product or service
positions and introducing innovative strategies of attracting and
maintaining clients as early as the maturity stage. Companies must also
seek to implement a diversification plan in order to stimulate fresh
growth.
As a business becomes older, it must pay more attention to external
variables that can cause it to fail. If a corporation fails to take the
initiative during its mature stage, it may have an even more difficult task
later on in trying to reverse its downward spiral. Furthermore, if
organizations anticipate maturation and apply policies to assist them
diversify during this period, the consequences of the maturity stage can
be reduced, and a new start-up or development cycle can be sparked
more easily.
Maturity and decline are often the result of businesses growing
accustomed to doing business in a certain way throughout its start-up
and growth periods, and then being unable to break these habits when
they no longer serve them well. When a business plan is effective,
corporations are hesitant to modify it until it is too late, or until it begins
to fail. Companies should maintain a marketing mentality to avoid losing
ground, which comprises analyzing client needs and wants and
attempting to meet them.