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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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CHAPTER 8

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Chapter 8

CHAPTER 8

CORPORATE STRATEGYDiversification and the Multibusiness Company


When business diversification becomes a consideration

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.

    • Its resources and capabilities can be used as valuable competitive assets in other businesses.

    • Costs can be reduced by cross-business sharing or transfer of resources and capabilities.

    • Transferring a strong brand name to the products of other businesses helps drive up sales and profits of those businesses.


Approaches to diversifying the business lineup

APPROACHES TO DIVERSIFYING THE BUSINESS LINEUP

Diversifying into New Businesses

Acquisition of an existing business

Internal new venture (start-up)

Joint venture


Choosing a mode of market entry

CHOOSING A MODE OF MARKET ENTRY

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?


Choosing the diversification path related versus unrelated businesses

CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES

Which Diversification Path to Pursue?

Both Related and Unrelated Businesses

Related Businesses

Unrelated Businesses


Chapter 8

  • Strategic fit exists whenever one or more activities constituting the value chains of different businesses are sufficiently similar as to present opportunities for cross-business sharing or transferring of the resources and capabilities that enable these activities.


Chapter 8

FIGURE 8.1

Related Businesses Provide Opportunities to Benefit from Competitively Valuable Strategic Fit


Strategic fit economies of scope and competitive advantage

STRATEGIC FIT, ECONOMIES OF SCOPE, AND COMPETITIVE ADVANTAGE

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


Chapter 8

  • Economies of scope are cost reductions that flow from operating in multiple businesses (a larger scope of operation).

  • Economies of scale accrue from a larger-size operation.


Diversification into unrelated businesses

DIVERSIFICATION INTO UNRELATED BUSINESSES

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?


Building shareholder value via unrelated diversification

BUILDING SHAREHOLDER VALUE VIA UNRELATED DIVERSIFICATION

Astute Corporate Parenting by Management

  • Provide leadership, oversight, expertise, and guidance.

  • Provide generalized or parenting resources that lower operating costs and increase SBU efficiencies.

Cross-Business Allocation of Financial Resources

  • Serve as an internal capital market.

  • Allocate surplus cash flows from businesses to fund the capital requirements of other businesses.

Acquiring and Restructuring Undervalued Companies

  • Acquire weakly performing firms at bargain prices.

  • Use turnaround capabilities to restructure them to increase their performance and profitability.


The path to greater shareholder value through unrelated diversification

THE PATH TO GREATER SHAREHOLDER VALUE THROUGH UNRELATED DIVERSIFICATION

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


The drawback of unrelated diversification

THE DRAWBACK OF UNRELATED DIVERSIFICATION

Pursuing an Unrelated Diversification Strategy

Demanding Managerial Requirements

Monitoring and maintaining the parenting advantage


Misguided reasons for pursuing unrelated diversification

Poor Rationales for Unrelated 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 motives

MISGUIDED REASONS FOR PURSUING UNRELATED DIVERSIFICATION


Combinations of related unrelated diversification strategies

COMBINATIONS OF RELATED-UNRELATED DIVERSIFICATION STRATEGIES

Related-Unrelated Business Portfolio Combinations

Dominant-Business Enterprises

Narrowly Diversified Firms

Broadly Diversified Firms

Multibusiness Enterprises


Evaluating the strategy of a diversified company

Attractiveness of industries

Cross-business strategic fit

Strength of Business Units

Diversified Strategy

Fit of firm’s resources

New Strategic Moves

Allocation of resources

EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY


Evaluating the strategy of a diversified firm

EVALUATING THE STRATEGY OF A DIVERSIFIED FIRM

  • Assessing the attractiveness of the industries the firm has diversified into, both individually and as a group.

  • Assessing the competitive strength of the firm’s business units within their respective industries.

  • Evaluating the extent of cross-business strategic fit along the value chains of the firm’s various business units.

  • Checking whether the firm’s resources fit the requirements of its present business lineup.

  • Ranking the performance prospects of the businesses from best to worst and determining a priority for allocating resources.

  • Crafting strategic moves to improve corporate performance.


Step 1 evaluating industry attractiveness

STEP 1: EVALUATING INDUSTRY ATTRACTIVENESS

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?


Calculating industry attractiveness scores

CALCULATING INDUSTRY ATTRACTIVENESS SCORES

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.


Chapter 8

TABLE 8.1

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.]


Step 2 evaluating business unit competitive strength

STEP 2: EVALUATING BUSINESS-UNIT COMPETITIVE STRENGTH

  • Relative market share

  • Costs relative to competitors’ costs

  • Ability to match or beat rivals on key product attributes

  • Brand image and reputation

  • Other competitively valuable resources and capabilities and partnerships and alliances with other firms

  • Benefit from strategic fit with firm’s other businesses

  • Bargaining leverage with key suppliers or customers

  • Profitability relative to competitors


Chapter 8

TABLE 8.2

Calculating Weighted Competitive Strength Scores for a Diversified Company’s Business Units

[Rating scale: 1 = very weak; 10 = very strong.]


Chapter 8

FIGURE 8.3

A Nine-Cell Industry Attractiveness–Competitive Strength Matrix

Star

Cashcow

Note: Circle sizes are scaled to reflect the percentage of companywide revenues generated by the business unit.


Step 3 determining the competitive value of strategic fit in diversified companies

STEP 3: DETERMINING THE COMPETITIVE VALUE OF STRATEGIC FIT IN DIVERSIFIED COMPANIES

  • Assessing the degree of strategic fit across its businesses is central to evaluating a company’s related diversification strategy.

  • The real test of a diversification strategy is what degree of competitive value can be generated from strategic fit.


Chapter 8

FIGURE 8.4

Identifying the Competitive Advantage Potential of Cross-Business Strategic Fit


Step 4 checking for resource fit

STEP 4: CHECKING FOR RESOURCE FIT

  • Financial Resource Fit

    • State of the internal capital market

    • Using the portfolio approach:

      • Cash hogs need cash to develop.

      • Cash cows generate excess cash.

      • Star businesses are self-supporting.

  • Success sequence:

    • Cash hog  Star  Cash cow


Step 4 checking for resource fit1

STEP 4: CHECKING FOR RESOURCE FIT

  • Nonfinancial Resource Fit

    • Does the firm have (or can it develop) the specific resources and capabilities needed to be successful in each of its businesses?

    • Are the firm’s resources being stretched too thinly by the resource requirements of one or more of its businesses?


Step 5 ranking business units and assigning a priority for resource allocation

STEP 5: RANKING BUSINESS UNITS AND ASSIGNING A PRIORITY FOR RESOURCE ALLOCATION

  • Ranking Factors:

    • Sales growth

    • Profit growth

    • Contribution to company earnings

    • Return on capital invested in the business

    • Cash flow

  • Steer resources to business units with the brightest profit and growth prospects and solid strategic and resource fit.


Chapter 8

FIGURE 8.6

A Firm’s Four Main Strategic Alternatives After It Diversifies


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