Presentation on theme: "CORPORATE STRATEGY: Diversification and the Multibusiness Company"— Presentation transcript:
1 CORPORATE STRATEGY: Diversification and the Multibusiness Company CHAPTER 8CORPORATE STRATEGY:Diversification and the Multibusiness CompanyStudent VersionCopyright ®2012 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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 4Initiating actions to boost the combined performanceof the cooperation’s collection of businesses.2
3 BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING Testing Whether a DiversificationMove Will Add Long-Term Value for ShareholdersThe industry attractiveness testThe cost-of-entry testThe better-off test
4 Better Performance through Synergy 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.No Synergy (1+1=2)Evaluating the Potential for Synergy through DiversificationFirm A purchases Firm C in another industry. A and C’s profits are greater than what each firm could have earned on its own.Synergy (1+1=3)
5 STRATEGIES FOR ENTERING NEW BUSINESSES Diversifying into New BusinessesAcquisitionInternal new venture (start-up)Joint venture
6 When to Engage in Internal Development Availability of in-house skills and resourcesAmple time to develop and launch businessCost of acquisition is higher than internal entryAdded capacity will not affect supply and demand balanceLow resistance of incumbent firms to market entryNo head-to-head competition in targeted industryFactors Favoring Internal Development
7 When to Engage in a Joint Venture Is the opportunity too complex, uneconomical, or risky for one firm to pursue alone?Evaluating the Potential for a Joint VentureDoes 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?
8 Choosing a Mode of Market Entry The Question of Critical Resources and CapabilitiesDoes the firm have the resources and capabilities for internal development?The Question of Entry BarriersAre there entry barriers to overcome?The Question of SpeedIs speed an important factor in the firm’s chances for successful entry?The Question of Comparative CostWhich is the least costly mode of entry, given the firm’s objectives?
9 CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES Which Diversification Path to Pursue?Related BusinessesUnrelated BusinessesBoth Related and Unrelated Businesses
10 Identifying Cross-Business Strategic Fit along the Value Chain R&D and Technology ActivitiesSupply Chain ActivitiesManufacturing-Related ActivitiesDistribution-Related ActivitiesCustomer Service ActivitiesSales and Marketing ActivitiesPotential Cross-Business Fits
11 Strategic Fit, Economies of Scope, and Competitive Advantage Using Economies of Scope to Convert Strategic Fit into Competitive AdvantageTransferring specialized and generalized skills and\or knowledgeCombining related value chain activities to achieve lower costsLeveraging brand names and other differentiation resourcesUsing cross-business collaboration and knowledge sharing
12 From Competitive Advantage to Added Profitability and Gains in Shareholder Value Capturing the Cross-Business Benefits of Related DiversificationBuilds more shareholder value than owning a stock portfolioIs only possible via a strategy of related diversificationYields value in the application of specialized resources and capabilitiesRequires that management take internal actions to realize them
13 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 businessIs 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?
14 Building Shareholder Value via Unrelated Diversification Using an Unrelated Diversification Strategy to Pursue ValueAstute Corporate Parenting by ManagementCross-Business Allocation of Financial ResourcesAcquiring and Restructuring Undervalued Companies
15 The Path to Greater Shareholder Value through Unrelated Diversification Do a superior job of diversifying into businesses that produce good earnings and returns on investment.Actions taken by upper management to create value and gain a parenting advantageDo an excellent job of negotiating favorable acquisition prices.Provide managerial oversight and resource sharing, financial resource allocation and portfolio management, and restructure underperforming businesses.
16 The Drawbacks of Unrelated Diversification Pursuing an Unrelated Diversification StrategyDemanding Managerial RequirementsLimited Competitive Advantage PotentialMonitoring and maintaining the parenting advantagePotential lack of cross-business strategic-fit benefits
17 Inadequate Reasons for Pursuing Unrelated Diversification Seeking reduction of business investment riskPursuing rapid or continuous growth for its own sakeSeeking stabilization to avoid cyclical swings in businessesPursuing personal managerial motivesPoor Rationales for Unrelated Diversification
19 EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY Diversified StrategyAttractiveness of industriesStrength of Business UnitsCross-business strategic fitFit of firm’s resourcesAllocation of resourcesNew Strategic Moves
20 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?
21 Step 2: Evaluating Business-Unit Competitive Strength Relative market shareCosts 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
22 Step 4: Checking for Resource Fit Financial Resource FitState of the internal capital marketUsing 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
23 Step 5: Ranking Business Unit Performance and Assigning Resource Allocation Priorities Ranking Factors:Sales growthProfit growthContribution to company earningsReturn on capital invested in the businessCash flowSteer resources to business units with the brightest profit and growth prospects and solid strategic and resource fit.
24 Step 6: Crafting New Strategic Moves to Improve Overall Corporate Performance Strategy Options for a Firm That Is Already DiversifiedStick with the Existing Business LineupBroaden the Diversification Base with New AcquisitionsDivest and Retrench to a Narrower Diversification BaseRestructure through Divestitures and Acquisitions