Asymmetries
An interesting asymmetry is capitalizing on a strength I have that goes directly against a competitors’ weakness. Asymmetries identify capabilities and resources that a firm has that a rival does not. Interesting Asymmetries are more important than others. Those are the foundation for a winning strategy. Those that might avoid direct competition, it’ll be difficult to mimic by a competitor.
Diversification
Deals with the question of where the firm should compete (horizontal expansion).
Why Firms Diversify?
External Reasons
They might have opportunities in new markets, or they might have advantages in current line of business they want to take to new markets.
Internal Reasons
Drive to better use of resources, or gain advantage by combining lines of business.
Corporate Scope deals with where and in what markets the firm should be competing in.
Some Technical Language..
- Single business: 95% of product sales in one market
- Dominant business: 70-95% in sales are from a single business or from a vertically integrated business
- Related business: companies that have diversified by adding lines of business tangibly related to core set of technologies, skills or strengths. 70% or more of the company sales are in businesses related to each other
- Unrelated business: often referred to as conglomerates; they do not have a core logic that relates lines of businesses together. No single business accounts for 70% of sales
- Related constrained diversification strategy: companies where there is clear connection, active sharing and transferring of skills and resources between business unites; no central core to the company
- The only reason to diversify: create value by exploiting linkages between different businesses which increase returns
- Economies of scope: firms can share and/or transfer resources and capabilities to other lines of business
- Economies of scale: centralize accounting, legal, etc. Into a single dept.
The ‘Better Off’ Test
- Do the firm’s resources and capabilities support the diversification?
- Will the firm’s resources and capabilities contribute to the competitive advantage of the new business
- Is the market into which the firm is planning to diversify competitively attractive?
- What is the cost of entering the new market?
- Can a defensible position be built in the new market?
- How does the new business unit relate and link to the firm’s existing business units?
- Can the firm efficiently manage the added coordination and complexity costs that the diversification moves adds to the business?
- What is the overall plan?
The first question strategists should ask is what is the firm trying to do? What do they want to do? From there, it’s important to identify the key sources of success (BTW – A lower price is not a sustainable competitive advantage.
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