Diversification strategy case study

Microsofts Diversification Strategy Case Solution & Answer.

In November 2005, Microsoft launched the Xbox 360, its latest game console. It was an extraordinary event, not because glamorous business leaders and journalists hanging around the event, the party atmosphere super cool dip the Mojave Desert, or technology giants dazzling graphics consoles around the conference room. Instead, the air was filled with a mixture of fear and excitement about the feasibility of the new strategy to overcome society Windows PC. Everyone in the room asked if the company could regain its past glory by entering new territories. What are the opportunities and challenges that were wondering, is expected of the company in the markets in which they have the exclusive benefit? What specific strategies had to take to exploit the opportunities and address the challenges? What is the best Microsoft could execute its diversification strategy?

Source: University of Hong Kong.

Release Date: November 9, 2006. Prod #: HKU617-PDF-ENG.

How to Drive Growth through Market Diversification.

If you examine the customer list of most small and midsize manufacturers (SMMs) you will find that the 80/20 rule applies; that is, 80% of their sales are from 20% of their customers (sometimes just one or two customers).

But what if one of these big customers decides to force discounts to the point that the SMM cannot make a profit? Or if the customer is like Wal-Mart, which compares the SMM's price to a Chinese supplier and force it to either match the Chinese price or lose the business? Or if the customer suddenly decides to source the products from Asia instead of buying from the SMM? Or if the customer operates in a cyclical industry which, like housing, drops during a recession and business dries up for several years.

The answer to all of these problems is market diversification.

Diversification is a strategy that should be adopted by all SMMs, as markets, industries and customers adapt to globalization. But you must have a well-planned diversification strategy, or you will find that there are many paths to many new markets -- and some of them lead to dead-ends.

The problem with going down a path when you don’t know where you want to go is best explained by Alice’s encounter with the Cheshire Cat, when the path she has taken diverges into three separate paths.

"Alice asks: 'Would you tell me, please, which way I ought to go from here?'

'That depends a good deal on where you want to get to,' said the Cat.

'I don’t much care where…,' said Alice.

'Then it doesn’t matter which way you go,' said the Cat.

'--so long as I get SOMEWHERE,' Alice added as an explanation.

'Oh, you’re sure to do that,' said the Cat, 'if you only walk long enough.'"

The point is that you must know where you want to go before you start down a path.

Here are three examples of how a variety of manufacturers diversified and found new market niches.

Davis Tool in Hillsboro, Ore.: Ron Davis, CEO of Davis Tool, saw the handwriting on the wall, as commodity job-shop parts were increasingly being sourced from Asia. Davis realized that, “If customers have the time, they can get anything they want from China for less money."

So Davis decided to change the company strategy to offer quick turnaround on custom or low-volume jobs. He knew that many of his company's customers were operating on a just-in-time basis and could not live with the uncertainties of using foreign suppliers.

One of Davis Tool's customers is Lite Edge Inc., of Tualatin, Ore. John Erickson of Lite Edge says, "We operate on a just-in-time basis, and we frankly can’t live with the uncertainties of ordering overseas.”

To support the new strategy also required that Davis Tool do the following :

Consolidate - Davis Tool consolidated its five different locations into one building and auctioned off some of the old equipment. Vertically integrate – Davis Tool offers machining, fabrication, nickel plating, anodizing, laser cutting tool design, Solid Works, Pro-Engineer, powder coating, painting, and engineering design from one location. This strategy allows it to offer very quick deliveries and to control most processes. Profile customers - Davis Tool worked to identify which customers most needed the new service offering. The best customers were those companies that were operating just in time, and needed high-quality and overnight service. Diversify into new markets – The strategy also included a conscious effort to diversify into more market niches and industries. Davis Tool sells to the high technology, military, medical, and aerospace industries, as well as the many market niches and applications within these industries. Cross train staff – At Davis Tool, specialists in one operation are cross-trained to complete other operations. For instance, a machinist is also trained in laser cutting of sheet metal. That gives company managers the ability to move people around and work in back-logged areas.

As a result of the new strategy, Davis Tool has reduced its flow time (average time a work order is open) from 40 days two years ago to 17 days today. As well, it has diversified into many new market niches and customers.

Nimet Industries, South Bend, Ind.: A job shop in that offers proprietary anodizing and nickel finishes, Nimet employs 75 operators in a 60,000-square-foot plant. Its primary strategies can be described as follows:

Market diversification – Nimet has consciously tried to diversify into industries such as medical, dental, pharmaceutical, food processing, fluid power and electronics. Within these industries, they serve many market niches defined by processes and application. “The advantage for us is that when one industry segment is down it’s hardly a blip in our sales, Vice President Guy Ellis says. "We really try to diversify as much as we can to minimize the impact of business cycles on our company.” Geographic expansion – Most job shops focus on local markets and customers. Nimet, on the other hand, has expanded its market to the entire country. Very little of Nimet’s work comes from companies located close to its facility. Sales organization flexibility – Nimet uses a combination of independent reps and factory sales people to call on their customers. Customer profiling – Part of Nimet's sales strategy is a conscious effort to not sell a large percentage of their capacity to any one customer. Ellis says, "If it looks like a job will take too much of our capacity, we won’t quote it as competitively as some companies might. Anything above 20% of total sales, we really scrutinize to try and make sure it makes sense for us.” This is a very progressive strategy because most job shops depend on two or three customers for the majority of their business and rise and fall with these customers. Proprietary processes – Nimet has developed NiTuff, a PTFE (Teflon) impregnated hard anodize finish that is also available in dyed black. They also offer NiCoTef, which is a co-deposition of nickel and PTFE. Both are proprietary processes that give them a solid competitive advantage in the market place. Low volume – “We don’t do big parts. We largely work with small components for industrial equipment," Ellis says. "We don’t do architectural parts, for instance, and we don’t do high volume." Instead, Nimet has focused on market niches that are low volume of 100 to 500 pieces. Quick deliveries – From its 3,000 active customers Nimet gets orders that average 100 to 200 line items per day. They are able to average 3.5 days from the time an order is received until it is shipped.

DECC COMPANY INC. in Grand Rapids. Mich.: For many years the DECC Company was a contract manufacturer applying coatings almost exclusively for automotive components. Company CEO Fred Mellema and Sales and Marketing Coordinator Mike Michalak decided to focus on diversification as a means for growth. Whether pursuing business in industries as diverse as military or commercial laundry, the company found that it could pick and choose which markets it serves based on the near universal need for coatings.

The automotive sector still accounts for approximately 30% of the company’s current business, and Mellema says it is still the biggest driver of growth. However, DECC executives do not want to depend just on the auto industry, so they have embarked on a market diversification strategy that Mike Michalak calls “casting a wider net.”

The focal point of the strategy is the company website which provides enough information to generate hundreds of leads on new applications. On the site, prospective customers can ask what kind of coating could be applied to their products. If the lead turns into a request for quote, Mallema and Michalak begin to examine it as a potential new market niche.

For example, through the website, they discovered an application in the commercial laundry industry: rubber gloves and other plastics often get mixed into the laundry and melt to the interior of the dryer drum. This results in hours of costly downtime, as maintenance crews are forced to shut down an entire dryer to scrape the plastic from panels. A laundry company asked DECC if there was a coating that would prevent the plastics from sticking to the drum. DECC supplied a non-stick abrasion resistant coating that dramatically reduced downtime and decreased the drying cycle by up to 20% when compared to non-coated dryers.

After this success, Michalak learned of the Clean Show, an industry trade show that is specifically targeted to the laundry industry. They developed some specific literature, attended the show and began gathering leads. From this initial marketing effort, they connected with some of the OEMs who manufactured the commercial dryers and began providing their coating service to them directly. As a result, DECC now has an arrangement with one of the largest manufacturers of laundry systems in the world to be their exclusive supplier of coated dryer panels.

Executives project 2015 to be a record sales year in DECC’s 50-year history, with revenues topping $9 million.

The diversification strategy used by DECC is a great example of identifying a new application from a lead, quoting the application, successfully testing and applying the product, and then tailoring marketing needs to the specific customers in that particular niche.

Since 2008, the firm has grown from around 50 employees to about 85 people currently. Executives project 2015 to be a record sales year in DECC’s 50-year history, with revenues topping $9 million. Mellema said over the next three years, he is looking to experience 15% growth.

There are two objectives in adopting the strategy of diversification. The first is to put the company into a position of not allowing a few customers to dominate your business. The second objective is to find more customers and market niches for growth.

Brexit: A Case Study in Diversification and Downside Protection.

You probably know by now that Britain has voted to exit the European Union. We won’t offer detailed commentary on the political situation, but those who are interested can watch Prime Minister David Cameron’s resignation speech here, and see a Globe and Mail situation brief here.

The ‘Leave’ outcome was mostly unexpected, as polls run earlier in the week had shown the ‘Remain’ camp to be confidently in control. As a result, stock markets around the world reacted predictably to heightened uncertainty and potential hidden risks on bank balance sheets.

Interestingly, while naively optimistic stock investors were caught flat footed, global government bond markets had been signaling that a British exit was a real possibility for most of the year. To wit, government bonds in Japan, Germany, and the United States – the world’s perceived ‘safe havens’ – have been hitting fresh all-time lows in yields over the past few weeks. Since falling yields mean higher prices, this behavior suggests that many large and well informed institutions have been seeking safety, pushing these bond prices to all-time highs. Gold – another traditional safe-haven asset – has also been quietly outperforming.

Recall that the investment methodology we employ for the ReSolve Adaptive Asset Allocation strategy systematically tracks the capital deployment patterns of global investors, which manifest as relative price trends. We also seek to maximize diversification and balance risks across asset classes, as this is the only reliable shield against the sort of shocks markets are experiencing this morning. As such, U. S. Treasury bonds have been our largest holdings in portfolios for most of 2016. Today they closed very near to new all time highs . Our gold position also paid off, to the tune of about 5%.

The balance of strategy assets are in U. S. traded real estate, and U. S. and Canadian stock markets, largely insulated from the direct economic fall-out in Europe and the U. K. In fact, the only position that the strategy held with material direct exposure to Europe is an international real-estate ETF, and this represents just 8% of the portfolio. Even better, European assets are less than 1/3 of the holdings of this fund, so the true exposure is less than 3%. The following table delineates the geographic exposure of RWX, our international REIT holding.

Source: State Street.

As a result of our large positions in safe-haven assets and extreme level of portfolio diversification, we expected today’s volatility to have a minimal impact on the strategy. We were confident in this benign outcome because we quantify each day how risks are balanced in the portfolio, and because we have experienced these sorts of days in the past. For example, we estimated coming into today that ‘safe haven’ and ‘risky’ assets comprised about equal portions of the fund’s portfolio after accounting for correlations (see donut chart of risk contributions below).

ReSolve Adaptive Asset Allocation Fund | Estimated Proportional Risk Contributions for June 24, 2016.

Source: ReSolve Asset management. Data from CSI.

You may recall a similar type of morning in August last year, when stock markets around the world opened down 5-10% after stocks plunged overnight in Shanghai. On the same day, safe-haven bonds and gold jumped commensurately. But, as you can see in the chart below, the Fund portfolio was like the eye in the middle of a hurricane. Notice how assets in the portfolio surged higher or lower while the actual portfolio (thicker dark blue line) holding those assets in diversified weights was flat as a pancake.

ReSolve Adaptive Asset Allocation Fund, 5 minute data, August 24, 2015.

Source: ReSolve Asset Management. Data from Reuters.

We waited to publish this until after markets closed today so that we can present the same chart using today’s returns. Unsurprisingly, we have observed the same quality of result. That is, by dynamically adjusting portfolios to bias toward higher momentum global assets, and emphasizing exposures to assets with strong diversification properties, the strategy is resilient to these types of shocks. The following chart also highlights portfolio weights in brackets next to asset class names.

ReSolve Adaptive Asset Allocation Fund, 1 Minute data, June 24, 2016.

Source: ReSolve Asset Management. Data from Yahoo Finance.

We’ve said it before, and we’ll say it again: our top priority is protection of capital. During uncertain times like we have today, that means taking cautionary market signals seriously, and consistently prioritizing diversification. Remember, our dollars are invested in the strategy too, so we are unequivocally on this journey together.

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The Importance of Asset Allocation vs. Security Selection: A Primer.

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Risk Parity isn't the Problem, it's the Solution.

ReSolve Asset Management Inc. (“ReSolve”). is registered as an investment fund manager in Ontario and Newfoundland and Labrador, and as a portfolio manager and exempt market dealer in Ontario, Alberta, British Columbia and Newfoundland and Labrador. In the U. S. ReSolve is registered with the United States Securities and Exchange Commission as a Non-Resident Investment Adviser.

Forward-Looking Information. The contents hereof may contain “forward-looking information” within the meaning of the Securities Act (Ontario) and equivalent legislation in other provinces and territories. Because such forward-looking information involves risks and uncertainties, actual performance results may differ materially from any expectations, projections or predictions made or implicated in such forward-looking information. Prospective investors are therefore cautioned not to place undue reliance on such forward-looking statements. In addition, in considering any prior performance information contained herein, prospective investors should bear in mind that past results are not necessarily indicative of future results, and there can be no assurance that results comparable to those discussed herein will be achieved. The contents hereof speaks as of the date hereof and neither ReSolve nor any affiliate or representative thereof assumes any obligation to provide subsequent revisions or updates to any historical or forward-looking information contained herein to reflect the occurrence of events and/or changes in circumstances after the date hereof.

General information regarding returns. Performance data prior to August, 2015 reflects the performance of accounts managed by Dundee Securities Ltd., which used the same investment decision makers, processes, objectives and strategies as ReSolve has used since it became registered and commenced operations in August, 2015. Records that document and support this past performance are available upon request. Performance is expressed in CAD, net of applicable management fees. Indicated returns of one year or more are annualized. Past performance is not indicative of future performance.

General information regarding the use of benchmarks. The indices listed have been selected for purposes of comparing performance with widely-known, broad-based benchmarks. Performance may or may not correlate to any of these indices and should not be considered as a proxy for any of these indices. The S&P/TSX Composite Index (Net TR) (“S&P TSX TR”) is the headline index and the principal broad market measure for the Canadian equity markets. The Standard & Poor’s 500 Composite Stock Price Index (“S&P 500”) is a capitalization-weighted index of 500 stocks intended to be a representative sample of leading companies in leading industries within the U. S. economy.

General information regarding hypothetical performance and simulated results. These results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under - or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account or fund managed by ReSolve will or is likely to achieve profits or losses similar to those being shown. The results do not include other costs of managing a portfolio (such as custodial fees, legal, auditing, administrative or other professional fees). The contents hereof has not been reviewed or audited by an independent accountant or other independent testing firm. More detailed information regarding the manner in which the charts were calculated is available on request. Any actual fund or account that ReSolve manages will invest in different economic conditions, during periods with different volatility and in different securities than those incorporated in the hypothetical performance charts shown. There is no representation that any fund or account will perform as the hypothetical or other performance charts indicate.

General information regarding the simulation process. The systematic model used historical price data from Exchange Traded Funds (“ETFs”) representing the underlying asset classes in which it trades. Where ETF data was not available in earlier years, direct market data was used to create the trading signals. The hypothetical results shown are based on extensive models and calculations that are available for any potential investor to review before making a decision to invest.

Technometry: e-pinions on Technology.

Thoughts on Technology.

Case Study: Nokia’s Product Market Diversification Strategy.

Diversification Ansoff Matrix.

Diversification is an Organisational Strategy for sustainability and growth. Its not a new strategy by any means but it is a necessary one. Nokia, the leading consumer mobile phone producer have now taken the next step towards creating new markets with new products and services. Let’s take a closer look at this strategy!

Competition influences Diversification.

Diversification is a direct result of competition. This can occur at many different levels – Competitors in the same space can offer the same product at different price points, or they offer different features and functionality in their products, or they offer value added services and brand loyalty programmes. Given that we live in the Age of Now – consumer demand is fickle and fast - companies must be able to adapt and react quickly to the changing needs of the consumer before the next trend comes along. Nokia currently own a 40% market share of the consumer mobile phone market however profit margins appear to be dropping as Apple and RIM gain greater profits in the Business Smart Phone sector. If Nokia were to maintain at status quo – you’d eventually see them shrink and disappear.

Product Diversification 101.

New Products in New markets.

Smartphones Nokia releases the N97/N900 Fully featured Smartphones to compete with Apple iPhone and RIM BlackBerry in the corporate market. An area where Nokia is practically unknown and traditionally very weak. Nokia is also looking to expand its reach in the US markets. Online Services – Nokia Xpress/X3/X6 – comes with Music, offers users services in the same breath as Apple iTunes, Lifecasting (Social Networking) – allows users to post locations in Facebook. Nokia Booklet 3G – A completely new product to combine the world of computing mobility and connectivity with online and offline communication. Nokia Money - It will enable consumers to send money, pay for goods, services and bills, and recharge their prepaid SIM cards. Nokia Messaging – Push services. Operating in the vast India market – Nokia looks to partners with telco carriers to on their phones similar to how Rim offers enterprise on the Blackberry.

Product Development 102.

New Features in Current Markets.

Nokia joins forces with Microsoft Office Mobile to offer Microsoft software on Nokia Phones. Nokia Maemo platform on the N900 – A simple Operating system developed by Nokia and used on their N900 device.

Overall, this is a hugely aggressive move by Nokia to reinvent themselves. They are looking at all the latest technology trends and jumping on the bandwagon - with Social Media, Mobile payments, Computing, Software, and Entertainment are steps into the unknown. The risk is obvious for Nokia – By investing in these offerings they hope consumers will continue to follow the Nokia brand and only time will tell how good these products are and if Nokia can stand up to the competition.

Microsoft, Google, Apple, Ebay, Oracle, Amazon are all examples of successful Organizations that have diversified and diversified again. While Yahoo, Sun Microsystems and IBM may well be on the way out if not already…

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