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CHAPTER 8

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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  1. CHAPTER 8 CORPORATE STRATEGYDiversification and the Multibusiness Company
  2. 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.
  3. APPROACHES TO DIVERSIFYING THE BUSINESS LINEUP Diversifying into New Businesses Acquisition of an existing business Internal new venture (start-up) Joint venture
  4. 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?
  5. CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES Which Diversification Path to Pursue? Both Related and Unrelated Businesses Related Businesses Unrelated Businesses
  6. 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.
  7. FIGURE 8.1 Related Businesses Provide Opportunities to Benefit from Competitively Valuable Strategic Fit
  8. 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
  9. 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.
  10. 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?
  11. 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.
  12. 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
  13. THE DRAWBACK OF UNRELATED DIVERSIFICATION Pursuing an Unrelated Diversification Strategy Demanding Managerial Requirements Monitoring and maintaining the parenting advantage
  14. 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
  15. COMBINATIONS OF RELATED-UNRELATED DIVERSIFICATION STRATEGIES Related-Unrelated Business Portfolio Combinations Dominant-Business Enterprises Narrowly Diversified Firms Broadly Diversified Firms Multibusiness Enterprises
  16. 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
  17. 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.
  18. 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?
  19. 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.
  20. 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.]
  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 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
  22. TABLE 8.2 Calculating Weighted Competitive Strength Scores for a Diversified Company’s Business Units [Rating scale: 1 = very weak; 10 = very strong.]
  23. 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.
  24. 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.
  25. FIGURE 8.4 Identifying the Competitive Advantage Potential of Cross-Business Strategic Fit
  26. 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
  27. 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?
  28. 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.
  29. FIGURE 8.6 A Firm’s Four Main Strategic Alternatives After It Diversifies
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