1. Strategies for Multibusiness Corporations
CHAPTER 9
Strategies for Multibusiness Corporations
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Four Main Tasks in Crafting Corporate Strategy
Picking new industries to enter and deciding on means of entry
Pursuing opportunities to leverage cross-business value chain relationships into competitive advantage
Steering resources into most attractive business units
Initiating actions to boost the combined performance of businesses

3. When Business Diversification Becomes a Consideration
It is faced with diminishing growth prospects in present business
When an expansion opportunity exists in an industry whose technologies and products complement its present business
It can leverage existing competencies and capabilities by expanding into an industry that requires similar resource strengths
It can reduce costs by diversifying into closely related businesses
It has a powerful brand name it can transfer to products of other businesses

4. Building Shareholder Value Through Business Diversification
Diversification is capable of building shareholder value if it passes three tests:
Industry Attractiveness Test—the industry presents good long-term profit opportunities
Cost of Entry Test—the cost of entering is not so high as to spoil the profit opportunities
Better-Off Test—the company’s different businesses should perform better together than as stand-alone enterprises, thereby producing a = 3 effect for shareholders

5. Acquisition of an Existing Business
Most popular approach to diversification
Advantages
Quicker entry into target market
Easier to hurdle certain entry barriers
Acquiring technological know-how
Establishing supplier relationships
Securing adequate distribution access

6. Entering a New Business Through Internal Start-up
More attractive when
Parent firm already has most of needed resources to build a new business
Ample time exists to launch a new business
Internal entry has lower costs than entry via acquisition
New start-up does not have to go head-to-head against powerful rivals
Additional capacity will not adversely impact supply-demand balance in industry

7. Joint Ventures and Strategic Partnerships
Good way to diversify when
The expansion opportunity is too complex, uneconomical, or risky to go it alone
The opportunity in a new industry requires a range of competencies and know-how that is greater than an expansion-minded company can marshal

8. Corporate Strategy Options: Related vs. Unrelated Diversification
Related diversification attempts to increase shareholder value by capturing cross-business strategic fits along value chain segments
Unrelated diversification attempts to build shareholder value by doing a superior job of choosing businesses to diversify into and managing the whole collection of businesses

9. Value Chain Relationships for Related Businesses

10. Related Diversification and Competitive Advantage
Strategic fit exists when one or more activities included in the value chains of of a diversified company’s businesses present opportunities to
Transfer expertise/capabilities/technology from one business to another
Reduce costs by combining related activities of different businesses into a single operation
Transfer use of firm’s brand name from one business to another

11. Related Diversification and Economies of Scope
Stem from cross-business opportunities to reduce costs
Arise when costs can be cut by operating two or more businesses under same corporate umbrella
Cost saving opportunities can stem from interrelationships anywhere along the value chains of different businesses—R&D, manufacturing, distribution, or administrative functions

12. What Is Unrelated Diversification?
Involves diversifying into businesses with
No strategic fit
No meaningful value chain relationships
No unifying strategic theme
Basic approach – Diversify into any industry where potential exists to realize good financial results
While industry attractiveness and cost-of-entry tests are important, better-off test is secondary

13. Acquisition Criteria For Unrelated Diversification Strategies
Can business meet corporate targets for profitability and ROI?
Is business in an industry with growth potential?
Is business big enough to contribute to parent firm’s bottom line?
Does the business have burdensome capital requirements?
Is industry vulnerable to inflation, tough government regulations or other negative factors?

14. Building Shareholder Value via Unrelated Diversification
Corporate managers must
Do a superior job of diversifying into businesses capable of producing good earnings and returns on investments
Do an excellent job of negotiating favorable acquisition prices
Shift corporate financial resources from poorly-performing businesses to those with potential for above-average earnings growth
Discern when it is the “right” time to sell a business at the “right” price

15. Combination Related-Unrelated Diversification Strategies
Dominant-business firms
One major core business accounting for percent of revenues, with several small related or unrelated businesses accounting for remainder
Narrowly diversified firms
Diversification includes a few (2 - 5) related or unrelated businesses
Broadly diversified firms
Diversification includes a wide collection of either related or unrelated businesses or a mixture

16. How to Evaluate a Diversified Company’s Strategy
Step 1: Assess the long-term attractiveness of each industry the company has diversified into
Step 2: Assess competitive strength of each of the company’s business units
Step 3: Check potential for cross-business strategic fits among business units
Step 4: Check whether the firm’s resources fit the requirements of its business units
Step 5: Rank performance and determine priority for resource allocation
Step 6: Craft new strategic moves to improve overall company performance

17. Industry Attractiveness Factors
Market size and projected growth
Intensity of competition
Emerging opportunities and threats
Presence of cross-industry strategic fits
Resource requirements
Seasonal and cyclical factors
Social, political, regulatory, and environmental factors
Industry profitability
Degree of uncertainty and business risk

18. Calculating Industry Attractiveness Scores

19. Factors to Use in Evaluating Competitive Strength
Relative market share
Costs relative to competitors
Products or services that satisfy buyer expectations
Ability to benefit from strategic fits with sister businesses
Ability to exercise bargaining leverage with key suppliers or customers
Caliber of alliances and collaborative partnerships
Brand image and reputation
Competitively valuable capabilities
Profitability relative to competitors

20. Calculating Competitive Strength Scores

21. Nine-Cell Industry Attractiveness-Competitive Strength Matrix

22. Strategy Implications of Attractiveness/Strength Matrix
Businesses in upper left corner
Receive top investment priority
Strategic prescription – grow and build
Businesses in three diagonal cells
Given medium investment priority
Some businesses in this category may have brighter or dimmer prospects than others
Businesses in lower right corner
Candidates for divestiture or managed to take cash out of the business

23. Identifying Cross-Business Strategic Fits

24. Evaluating Resource Fit and Sufficiency
Good resource fit exists when
A company’s businesses, individually, add to its collective resource strengths, either financially or strategically
Firm has resources to adequately support its businesses without spreading itself too thin

25. Determining Financial Resource Fit
Determine cash flow and investment requirements of business units
Which are cash hogs and which are cash cows?
Aside from cash flow, financial resource fit also includes
Assessing the individual contributions to companywide performance targets by each business unit
Determining if the company has the financial strength to provide proper funding to its business unit and maintain a healthy credit rating

26. Ranking Business Units for Resource Allocation
Factors to consider in judging business-unit performance
Sales growth
Profit growth
Contribution to company earnings
Cash flow generation
Return on capital employed in business

27. Crafting New Strategic Moves
Stick closely with existing business lineup and pursue opportunities it presents
Broaden company’s business scope by making new acquisitions in new industries
Divest certain businesses and retrench to a narrower base of business operations
Restructure company’s business lineup, putting a whole new face on business makeup

28. Broadening the Diversification Base
Multi business companies may consider adding to the diversification base when
Revenues and profits are growing slowly
Opportunities exist to transfer resources and capabilities to a related business
Unfavorable driving forces face its core business
The market positions of one or more of its business units can be strengthened with the acquisition of a related business

29. Retrenching to a Narrower Diversification Base
Retrenchment focuses corporate resources to building strong positions in a smaller number of businesses and industries
Retrenchment involves
Divesting businesses that have become unattractive because of deteriorating market conditions
Eliminating cash hog businesses with questionable long-term potential
Divesting business units with weak strategic fit with other businesses in the portfolio
Eliminating weakly positioned businesses that offer little prospect for earning a decent return on investment

30. Broadly Restructuring the Business Lineup
Radically altering the business lineup may be necessary when
Too many businesses are in unattractive industries
The business lineup is made up of too many weak businesses
The company is saddled with excessive debt
Ill-chosen acquisitions have not lived up to expectations