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Virgin's unrelated diversification (Assessing options (Acceptance by…
Virgin's unrelated diversification
Igor Ansoff Matrix
Existing market
A: Market Penetration i.e. promoting existing products (mediocre performance)
B: New product/services (related diversification: safest + best performance)
New Market
C: market development (related diversification: safest + best performance)
D: unrelated diversification (most risky) -
yet Virgin is a successful conglomerate
Reasons to diversify
Value-adding synergies
stretching dominant logic / parenting capabilities i.e. managers' experience, skills + knowledge
increasing market power
efficiency gains / economies of scope i.e. utilising existing resources, capabilities + capacity. Can get economies of scale if able to produce or order in bulk for many SBUs.
Value-destroying synergies
responding to market decline and spreading risk - as Kodak did during their decline which was a bad idea
managerial ambition
Assessing options
Acceptance by stakeholders inc. employees + funding bodies
Feasibility e.g. can it be done? do we have the skills+ resources? Finances - pay back period, DCF, ROCE, etc
Suitability - will it address the reason for diversification
Evaluate the above. Are there differences of judgement?
What are the options? Ansoff Matrix
SAFe - although for strategy implementation, can be a useful way to look at new business
PESTLE / Porter's Five Forces
avoiding the risks
Richard Branson: ventures are scrapped if they do not payback within a year – and such a stringent approach along with the experience Virgin have developed through the years of diversification is surely one of the factors of Virgin’s success.
Lack of knowledge/skills. Choose the right option to fill gaps:
Acquisitions
Mergers
Alliances / Co-operation
Organic Development
Employment drives (getting the right people on board)
Joint Venture e.g. Virgin and Tata's defunct Indian network
Franchise
managing the SBUs for success
Virgin is a recognised brand that can be applied to a new Strategic Business Unit (SBU)
Growth - as Virgin grows through diversification they learn and expand their resources + capabilities + dominant logic which via the RBV view gives them access to more opportunities to expand
Corporate Parenting
coaching,
providing central resources and
facilitating liaison between SBUs,
intervening when required.
providing a clear vision,
avoid high centralised costs, excessive bureaucracy and being too rigid as a parent
conclusion
even if SBU does not realise the desired benefits - it might provide access to resources for existing and/or future SBUs
bureaucracy can be costly and stifle creativity
SBU has some freedom but still benefit from the corporate parent
Virgin have allowed enough freedom for their individual SBUs that costs are reduced, innovation and creativity is increased – yet Virgin is still able to parent the SBU through advise, training, sharing resources and brand value.
Virgin has been successful in setting up new separate SBUs