Growth Strategies: Ansoff s Product/Market Expansion Grid

1
Growth Strategies Ansoffs Product/Market
Expansion Grid
Current products
New products
1. Market- penetration strategy
3. Product- development strategy
Current markets
(Diversification strategy)
2. Market- development strategy
New markets
2
WHY FIRMS DIVERSIFY

• 1. A firms objectives can be no longer be met
  within the scope of the present business
  portfolio.
• Market Saturation, General Decline in Demand,
  Competitive Pressure on Product line, or
  Obsolescence may reduce immediate or long term
  profitability. A typical symptom would be a drop
  in the rate of return on reinvestments.
• 2. Even if attractive expansion opportunities are
  still available and past objectives are being
  met, a firm may diversify because the retained
  cash exceeds the total expansion needs of the
  present portfolio.
• 3. Even if current objectives are being met, a
  firm may diversify when diversification
  opportunities promise greater profitability than
  expansion opportunities.
• When diversification opportunities are
  sufficiently attractive to offset their
  inherently lower synergy.
• When firms RD produces outstanding
  diversification by-products.
• When Synergy is not considered important by
  firms and Synergy advantages of expansion over
  diversification are not considered important.
  This is typically the case in conglomerate firms.

3

• 4. Firms may suffer from the grass is greener on
  the other side syndrome.
• Lacking reliable information about
  diversification alternatives, such firms tend to
  plunge rather than probe diversification
  alternatives. A much less costly approach is to
  buy reliable information before plunging.

4
LEVELS OF DIVERSIFICATION

• Low Levels of Diversification
• Single Business More than 95 of revenue comes
  from a single business
• Dominant Business Between 70 to 95 of revenue
  comes from a single business
• Moderate to High Levels of Diversification
• Related Constrained Less than 70 revenues
  come from the dominant business. All businesses
  share product, technological and market linkages.
• Related Linked (mixed related and unrelated)
  Less than 70 revenues come from the dominant
  business. There are only limited links between
  the businesses.
• Very High Levels of Diversification
• Unrelated Less than 70 revenues come from the
  dominant business. There are no links between
  businesses.

5
FUNDAMENTAL ROLE OF DIVERSIFICATION
The fundamental role of diversification is for
Corporate Managers to create value for
stockholders in ways that stockholders cannot do
better for themselves.
6
DIVERSIFICATION A CORPORATE STRATEGY
Diversification The fundamental role of
diversification is for Corporate Managers to
create value for stockholders in ways
stockholders cannot do for themselves.
Forms of Diversification
Vertical
Horizontal
Global
Acquisition
Strategic Alliances
Internal Growth
7
VALUE CREATION THROUGH DIVERSIFICATION
(ACQUISITION)
Figures in Rs. Crores except price per share
8
VALUE CREATION THROUGH DIVERSIFICATION
(ACQUISITION)

• Economic Gain (Increased Earnings) of the
  Acquisition Rs. 4 Crores
• Assuming that
• It is a permanent gain. It is a perpetuity.
• The cost of capital is 20
• Then, Present Value of Economic Gain is
  Rs.4/.2 Crores
• Rs. 20 Crores

Total Market Value of the Firms (Say, company A
paid Rs. 47.5 Crores to acquire Company B) Market
Value of Co. A (Before Acquisition) Rs.480
Crores Market Value of Co. B Rs. 40
Crores Present Value of Gains Rs. 20
Crores Cash paid to acquire Rs. 47.5
Crores Post Merger Market Value Rs.492.5
Crores
9
VALUE CREATION THROUGH DIVERSIFICATION
(ACQUISITION)
Figures in Rs. Crores except Price per Share
10
COST AND BENEFIT SHARING BETWEEN THE COMPANIES

• First Case All cash Deal
• Benefits to the Shareholders of Company B
• Gains Receipts - Market Value
• Rs. 47.5 Crores - Rs. 40 Crores
• Rs. 7.5 Crores
• Benefits for the shareholders of Company A
• Gains Market Value Post merger - Market Value
  Pre Merger Rs 492.5 Crores - Rs. 480 Crores
• Rs 12.5 Crores
• Total Economic Gain Rs 20 Crores.

11
BENEFIT SHARING BETWEEN STOCKHOLDERS OF THE
COMPANIES

• Second Case Acquisition financed by stock.
• Company A has issued 1 share to stockholders of
  Co. B for every 3 shares held by them.
• Number of Additional Shares issued 2.5 Crores/3
  83,33,333
• Value of shares of Co. B Rs 49.85 83,33,333
• Rs 41.5 Crores
• Gains Captured by Shareholders of Co. B Rs 41.5
  Crores - Rs. 40 Crores
• Rs 1.5 Crores
• Gains of Shareholders of Co. A Economic Gain -
  Cost
• Rs. 20 Crores - Rs. 1.5 Crores
• Rs. 18.5 Crores.

12
VERTICAL INTEGRATION

• Benefits
• Building Barriers to Entry.
• Reduced Transaction Costs.
• Note Tapered Integration.
• Limits
• MES
• Responsibility for Technology Up-gradation and
  Innovation in all businesses.
• Integration of Cultures

• Questions for Deciding when to Vertically
  Integrate
• Are our existing suppliers or Customers meeting
  the Consumers needs?
• Can you own the business without really buying
  it?
• Is it giving any structural advantage? How
  volatile is the competitive environment

13
HORIZONTAL DIVERSIFICATION

• Horizontal Diversification entails moving into
  more than one industry. It can be
• Related Diversification
• Unrelated Diversification or Conglomerate
  Diversification
• The case for Conglomerates
• Corporate managers have capability to spot low
  valued stocks.
• Corporations may be able to borrow money at Lower
  interest rates and pay lower per share brokerage.
• The case against Conglomerates
• Conglomerate discounts. Resulting in Corporate
  Raiders.
• Takeover Premiums.

14