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CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version Student Version McGraw-Hill/Irwin Copyright Copyright ®2012 The McGraw-Hill ®2012 The McGraw-Hill Companies, Inc. Companies, Inc.

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Page 1: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

CHAPTER 8

CORPORATE STRATEGY:Diversification and the Multibusiness Company

Student VersionStudent VersionMcGraw-Hill/IrwinCopyright Copyright ®2012 The McGraw-Hill Companies, Inc.®2012 The McGraw-Hill Companies, Inc.

Page 2: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–2

Crafting a Diversified Firm’s Overall Or Corporate Strategy

Step 1Picking new industries to enter and deciding on the best mode of entry.

Step 2Pursuing opportunities to leverage cross-business value chain relationships and strategic fit into competitive advantage.

Step 3Establishing investment priorities and steering corporate resources into the most attractive business units.

Step 4 Initiating actions to boost the combined performanceof the cooperation’s collection of businesses.

Page 3: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–3

BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING

The industry attractiveness

test

The cost-of-entry test

The better-off test

Testing Whether a Diversification Move Will Add Long-Term

Value for Shareholders

Page 4: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–4

Better Performance through Synergy

Evaluating the Potential for

Synergy through

Diversification

Firm A purchases Firm B in another industry. A and B’s profits are no greater than what each firm could have earned on its own.

Firm A purchases Firm C in another industry. A and C’s profits are greater than what each firm could have earned on its own.

No Synergy(1+1=2)

Synergy(1+1=3)

Page 5: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–5

STRATEGIES FOR ENTERING NEW BUSINESSES

AcquisitionInternal new

venture (start-up)Joint venture

Diversifying into New Businesses

Page 6: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–6

When to Engage in Internal Development

Availability of in-house skills and

resources

Ample time to develop and

launch businessCost of acquisition

is higher than internal entry

Added capacity will not affect

supply and demand balanceLow resistance

of incumbent firms to market

entry

No head-to-head competition in

targeted industry

Factors Favoring Internal Development

Factors Favoring Internal Development

Page 7: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–7

When to Engage in a Joint Venture

Evaluating

the Potential

for a Joint Venture

Is the opportunity too complex, uneconomical, or risky for one firm to pursue alone?

Does the opportunity require a broader range of competencies and know-how than the firm now possesses?

Will the opportunity involve operations in a country that requires foreign firms to have a local minority or majority ownership partner?

Page 8: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–8

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 an important factor 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?

Page 9: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–9

CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES

Related Businesses

Unrelated Businesses

Both Related and Unrelated

Businesses

Which Diversification Path to Pursue?

Page 10: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–10

Identifying Cross-Business Strategic Fitalong the Value Chain

R&D and Technology

Activities

Supply Chain Activities

Manufacturing-Related Activities

Distribution-Related Activities

Customer Service Activities

Sales and Marketing Activities

Potential Cross-Business Fits

Potential Cross-Business Fits

Page 11: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–11

Strategic Fit, Economies of Scope,and 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

Using Economies of Scope to Convert Strategic Fit into Competitive Advantage

Page 12: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–12

From Competitive Advantage to Added Profitability and Gains in Shareholder Value

Builds more shareholder value

than owning a stock portfolio

Is only possible via a strategy

of related diversification

Yields value in the application of specialized resources and

capabilities

Requires that management take internal actions to

realize them

Capturing the Cross-Business Benefits of Related Diversification

Page 13: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–13

DIVERSIFICATION INTO UNRELATED BUSINESSES

Evaluating the acquisition of a new business or the divestiture of

an existing business

Can it meet corporate targets for profitability and return on investment?

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?

Page 14: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–14

Building Shareholder Value via Unrelated Diversification

Astute Corporate Parenting by Management

Cross-Business Allocation of

Financial Resources

Acquiring and Restructuring Undervalued Companies

Using an Unrelated Diversification Strategy to Pursue Value

Page 15: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–15

The Path to Greater Shareholder Valuethrough Unrelated Diversification

Actions taken by upper management to create value and

gain a parenting advantage

Do a superior job of diversifying into businesses that produce good earnings and returns on investment.

Do an excellent job of negotiating favorable acquisition prices.

Provide managerial oversight and resource sharing, financial resource allocation and portfolio management, and restructure underperforming businesses.

Page 16: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–16

The Drawbacks of Unrelated Diversification

Pursuing an Unrelated

Diversification Strategy

Limited Competitive Advantage Potential

Demanding Managerial

Requirements

Monitoring and maintaining

the parenting advantage

Potential lack of cross-business

strategic-fit benefits

Page 17: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–17

Inadequate Reasons for PursuingUnrelated Diversification

Seeking 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

Poor Rationales for Unrelated Diversification

Page 18: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–18

COMBINATION RELATED-UNRELATEDDIVERSIFICATION STRATEGIES

Dominant-Business

Enterprises

Narrowly Diversified

Firms

Broadly Diversified

Firms

Multibusiness Enterprises

Related-Unrelated Business Portfolio Combinations

Page 19: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–19

EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY

Diversified Strategy

Attractiveness of industries

Strength of Business Units

Cross-business strategic fit

Fit of firm’s resources

Allocation of resources

New Strategic Moves

Page 20: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–20

Step 1: Evaluating Industry Attractiveness

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?

How attractive are the industries in which the firm has business operations?

Page 21: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–21

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.

♦ Strategic fit with the firm’s other businesses.

♦ Bargaining leverage with key suppliers or customers.

♦ Alliances and partnerships with suppliers and/or buyers.

♦ Profitability relative to competitors

Page 22: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–22

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

Page 23: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–23

Step 5: Ranking Business Unit Performance and Assigning Resource Allocation Priorities

♦ 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.

Page 24: CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company Student Version McGraw-Hill/Irwin Copyright ®2012 The McGraw-Hill Companies,

8–24

Step 6: Crafting New Strategic Moves to Improve Overall Corporate Performance

Stick with the Existing Business

Lineup

Broaden the Diversification Base with New Acquisitions

Divest and Retrench to a Narrower

Diversification Base

Restructure through

Divestitures and

Acquisitions

Strategy Options for a Firm That Is Already Diversified


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