CORPORATE STRATEGY:
Diversification and
the Multibusiness Company
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THIS CHAPTER WILL HELP YOU UNDERSTAND:
LO 1 When and how business diversification
can enhance shareholder value.
LO 2 How related diversification strategies can produce cross-
business strategic fit capable of delivering competitive
advantage.
LO 3 The merits and risks of unrelated diversification strategies.
LO 4 The analytic tools for evaluating a companys diversification
strategy.
LO 5 What four main corporate strategy options a diversified
company can employ for solidifying its strategy and
improving company performance.
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WHAT DOES CRAFTING A
DIVERSIFICATION STRATEGY ENTAIL?
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STRATEGIC DIVERSIFICATION OPTIONS
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WHEN TO CONSIDER DIVERSIFYING
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BUILDING SHAREHOLDER VALUE: THE ULTIMATE
JUSTIFICATION FOR DIVERSIFYING
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BUILDING SHAREHOLDER VALUE: THE ULTIMATE
JUSTIFICATION FOR DIVERSIFYING
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
CORE CONCEPT
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CORE CONCEPT
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BETTER PERFORMANCE THROUGH SYNERGY
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manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
APPROACHES TO DIVERSIFYING
THE BUSINESS LINEUP
Diversifying into
New Businesses
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DIVERSIFICATION BY ACQUISITION
OF AN EXISTING BUSINESS
Advantages:
Quick entry into an industry
Barriers to entry avoided
Access to complementary resources and capabilities
Disadvantages:
Cost of acquisitionwhether to pay a premium for a
successful firm or seek a bargain in struggling firm
Underestimating costs for integrating acquired firm
Overestimating the acquisitions potential to deliver
added shareholder value
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CORE CONCEPT
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ENTERING A NEW LINE OF BUSINESS THROUGH
INTERNAL DEVELOPMENT
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WHEN TO ENGAGE IN INTERNAL DEVELOPMENT
Ample time to
develop and
launch business
Availability of Cost of acquisition
in-house skills is higher than
and resources internal entry
Factors Favoring
Internal Development
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WHEN TO ENGAGE IN A JOINT VENTURE
Evaluating
Does the opportunity require a broader range
the Potential
of competencies and know-how than the firm
for a Joint now possesses?
Venture
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USING JOINT VENTURES TO ACHIEVE
DIVERSIFICATION
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DIVERSIFICATION BY JOINT VENTURE
The Question of Critical Does the firm have the resources and
Resources and Capabilities capabilities for internal development?
The Question of
Are there entry barriers to overcome?
Entry Barriers
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STRATEGIC MANAGEMENT PRINCIPLE
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CHOOSING THE DIVERSIFICATION PATH:
RELATED VERSUS UNRELATED BUSINESSES
Which Diversification
Path to Pursue?
Both Related
Related Unrelated
and Unrelated
Businesses Businesses
Businesses
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CORE CONCEPTS
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RELATED VERSUS UNRELATED BUSINESSES
Related Businesses
Have competitively valuable cross-business
value chain and resource matchups.
Unrelated Businesses
Have dissimilar value chains and resource
requirements, with no competitively important
cross-business relationships at the value
chain level.
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
CORE CONCEPT
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
DIVERSIFICATION INTO RELATED BUSINESSES
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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
PURSUING RELATED DIVERSIFICATION
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CORE CONCEPTS
Specialized Versus Generalized Resources
and Capabilities
Specialized resources and capabilities
have very specific applications and their use is
limited to a restricted range of industry and
business types.
Leveraged in related diversification
General resources and capabilities can be
widely applied and can be deployed across a
broad range of industry and business types.
Leveraged in unrelated and related diversification
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FIGURE 8.1 Related Businesses Provide Opportunities to
Benefit from Competitively Valuable Strategic Fit
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IDENTIFYING CROSS-BUSINESS STRATEGIC FITS
ALONG THE VALUE CHAIN
Supply
Chain
Activities
R&D and Manufacturing-
Technology Related
Activities Activities
Potential
Cross-Business
Fits
Sales and Distribution-
Marketing Related
Activities Activities
Customer
Service
Activities
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STRATEGIC FIT, ECONOMIES OF SCOPE, AND
COMPETITIVE ADVANTAGE
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CORE CONCEPT
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832
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ECONOMIES OF SCOPE DIFFER
FROM ECONOMIES OF SCALE
Economies of Scope
Are cost reductions that flow from cross-
business resource sharing in the activities of
the multiple businesses of a firm.
Economies of Scale
Accrue when unit costs are reduced due to
the increased output of larger-size operations
of a firm.
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FROM STRATEGIC FIT TO COMPETITIVE
ADVANTAGE, ADDED PROFITABILITY AND
GAINS IN SHAREHOLDER VALUE
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STRATEGIC MANAGEMENT PRINCIPLE
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ILLUSTRATION Microsofts Acquisition of Skype: Pursuing
CAPSULE 8.1
the Benefits of Cross-Business Strategic Fit
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DIVERSIFICATION INTO
UNRELATED BUSINESSES
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BUILDING SHAREHOLDER VALUE
VIA UNRELATED DIVERSIFICATION
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BUILDING SHAREHOLDER VALUE
VIA UNRELATED DIVERSIFICATION
Cross-Business
Serve as an internal capital market.
Allocation of
Allocate surplus cash flows from businesses to fund
Financial
the capital requirements of other businesses.
Resources
Acquiring and
Acquire weakly performing firms at bargain prices.
Restructuring
Use turnaround capabilities to restructure them to
Undervalued
increase their performance and profitability.
Companies
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CORE CONCEPT
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STRATEGIC MANAGEMENT PRINCIPLE
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842
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
CORE CONCEPT
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THE PATH TO GREATER SHAREHOLDER VALUE
THROUGH UNRELATED DIVERSIFICATION
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THE DRAWBACKS OF UNRELATED
DIVERSIFICATION
Pursuing an Limited
Demanding
Unrelated Competitive
Managerial
Requirements Diversification Advantage
Strategy Potential
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MISGUIDED REASONS FOR PURSUING
UNRELATED DIVERSIFICATION
Seeking
Seeking a Pursuing rapid Pursuing
stabilization to
reduction of or continuous personal
avoid cyclical
business growth for its managerial
swings in
investment risk own sake motives
businesses
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STRATEGIC MANAGEMENT PRINCIPLE
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COMBINATION RELATED-UNRELATED
DIVERSIFICATION STRATEGIES
Related-Unrelated Business
Portfolio Combinations
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STRUCTURES OF COMBINATION RELATED-
UNRELATED DIVERSIFIED FIRMS
Dominant-Business Enterprises
Have a major core firm that accounts for 50 to 80% of total
revenues and a collection of small related or unrelated firms that
accounts for the remainder.
Narrowly Diversified Firms
Are comprised of a few related or unrelated businesses.
Broadly Diversified Firms
Have a wide-ranging collection of related businesses, unrelated
businesses, or a mixture of both.
Multibusiness Enterprises
Have a business portfolio consisting of several unrelated groups
of related businesses.
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EVALUATING THE STRATEGY
OF A DIVERSIFIED COMPANY
Diversified
Strategy
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EVALUATING THE STRATEGY
OF A DIVERSIFIED FIRM
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FIGURE 8.2
Three Strategy Options for
Pursuing Diversification
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STEP 1: EVALUATING INDUSTRY
ATTRACTIVENESS
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CALCULATING INDUSTRY-ATTRACTIVENESS
SCORES: KEY MEASURES
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CALCULATING INDUSTRY ATTRACTIVENESS
FROM THE MULTIBUSINESS PERSPECTIVE
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CALCULATING INDUSTRY
ATTRACTIVENESS SCORES
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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.]
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STEP 2: EVALUATING BUSINESS-UNIT
COMPETITIVE STRENGTH
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STRATEGIC MANAGEMENT PRINCIPLE
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TABLE 8.2
Calculating
Weighted
Competitive-
Strength
Scores for a
Diversified
Companys
Business
Units
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FIGURE 8.3
A Nine-Cell Industry Star
Attractiveness
Competitive
Strength Matrix
Cash
cow
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STEP 3: DETERMINING THE COMPETITIVE VALUE
OF STRATEGIC FIT IN DIVERSIFIED COMPANIES
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STRATEGIC MANAGEMENT PRINCIPLE
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FIGURE 8.4 Identifying the Competitive Advantage
Potential of Cross-Business Strategic Fit
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CORE CONCEPT
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CORE CONCEPTS
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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.
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FIGURE 8.5 The Chief Strategic and Financial Options for Allocating
a Diversified Companys Financial Resources
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STEP 6: CRAFTING NEW STRATEGIC MOVES
TO IMPROVE OVERALL CORPORATE
PERFORMANCE
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FIGURE 8.6
A Firms Four Main
Strategic Alternatives
After It Diversifies
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BROADENING A DIVERSIFIED
FIRMS BUSINESS BASE
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DIVESTING BUSINESSES AND RETRENCHING
TO A NARROWER DIVERSIFICATION BASE
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CORE CONCEPT
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STRATEGIC MANAGEMENT PRINCIPLE
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RESTRUCTURING A DIVERSIFIED COMPANYS
BUSINESS LINEUP
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CORE CONCEPT
Companywide restructuring
(corporate restructuring) involves making
major changes in a diversified company
by divesting some businesses and/or
acquiring others, so as to put a whole
new face on the companys business
lineup.
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STRATEGIC MANAGEMENT PRINCIPLE
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ILLUSTRATION Growth through Restructuring
CAPSULE 8.2
at Kraft Foods
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