CHAPTER 8. CORPORATE STRATEGY Diversification and the Multibusiness Company. WHEN BUSINESS DIVERSIFICATION BECOMES A CONSIDERATION. A firm should consider diversifying when: It can expand into businesses whose technologies and products complement its present business.
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CORPORATE STRATEGYDiversification and the Multibusiness Company
Diversifying into New Businesses
Acquisition of an existing business
Internal new venture (start-up)
The Question of Critical Resources and Capabilities
Does the firm have the resources and capabilities for internal development?
The Question of Entry Barriers
Are there entry barriers to overcome?
The Question of Speed
Is speed of the essence in the firm’s chances for successful entry?
The Question of Comparative Cost
Which is the least costly mode of entry, given the firm’s objectives?
Which Diversification Path to Pursue?
Both Related and Unrelated Businesses
Related Businesses Provide Opportunities to Benefit from Competitively Valuable Strategic Fit
Using Economies of Scope to Convert Strategic Fit into Competitive Advantage
Transferring specialized and generalized skills and\or knowledge
Combining related value chain activities to achieve lower costs
Leveraging brand names and other differentiation resources
Using cross-business collaboration and knowledge sharing
Can it meet corporate targets for profitability and return on investment?
Evaluating the acquisition of a new business or the divestiture of an existing business
Is it is in an industry with attractive profit and growth potentials?
Is it is big enough to contribute significantly to the parent firm’s bottom line?
Astute Corporate Parenting by Management
Cross-Business Allocation of Financial Resources
Acquiring and Restructuring Undervalued Companies
Diversify into businesses that can produce consistently good earnings and returns on investment
The attractiveness test
Actions taken by upper management to create value and gain a parenting advantage
Negotiate favorable acquisition prices
The cost-of-entry test
Provide managerial oversight and resource sharing, financial resource allocation and portfolio management, and restructure underperforming businesses
The better-off test
Pursuing an Unrelated Diversification Strategy
Demanding Managerial Requirements
Monitoring and maintaining the parenting advantage
Poor Rationales for DIVERSIFICATIONUnrelated Diversification
Seeking a reduction of business investment risk
Pursuing rapid or continuous growth for its own sake
Seeking stabilization to avoid cyclical swings in businesses
Pursuing personal managerial motivesMISGUIDED REASONS FOR PURSUING UNRELATED DIVERSIFICATION
Related-Unrelated Business Portfolio Combinations
Narrowly Diversified Firms
Broadly Diversified Firms
Attractiveness DIVERSIFICATIONof industries
Cross-business strategic fit
Strength of Business Units
Fit of firm’s resources
New Strategic Moves
Allocation of resourcesEVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY
How attractive are the industries in which the firm has business operations?
Does each industry represent a good market for the firm to be in?
Which industries are most attractive, and which are least attractive?
How appealing is the whole group of industries?
Deciding on appropriate weights for the industry attractiveness measures.
Evaluating Industry Attractiveness
Gaining sufficient knowledge of the industry to assign accurate and objective ratings.
Whether to use different weights for different business units whenever the importance of strength measures differs significantly from business to business.
Calculating Weighted Industry Attractiveness Scores
Remember:The more intensely competitive an industry is, the lower the attractiveness rating for that industry!
[Rating scale: 1 = very unattractive to the firm; 10 = very attractive to the firm.]
Calculating Weighted Competitive Strength Scores for a Diversified Company’s Business Units
[Rating scale: 1 = very weak; 10 = very strong.]
A Nine-Cell Industry Attractiveness–Competitive Strength Matrix
Note: Circle sizes are scaled to reflect the percentage of companywide revenues generated by the business unit.
FIGURE IN DIVERSIFIED COMPANIES8.4
Identifying the Competitive Advantage Potential of Cross-Business Strategic Fit
FIGURE RESOURCE ALLOCATION 8.6
A Firm’s Four Main Strategic Alternatives After It Diversifies