Chapter 8
Unrelated diversification strategies surrender the competitive advantage potential of strategic fit and seek to add long-term shareholder value in four ways:
1. Acquiring companies in any industry with growth and earnings prospects that can satisfy the industry attractiveness test 2. Acquiring undervalued or underperforming businesses that present appealing opportunities for being overhauled in ways that will result in big gains in profitability 3. Being disciplined enough to acquire companies at prices sufficiently low to pass the cost of entry test, and 4. Developing and nurturing outstanding corporate parenting resources and capabilities.
The greater the relatedness among the value chains of a diversified company's sister businesses, the bigger the window for converting strategic fits into competitive advantage via:
1. Cross-business transfer of valuable competitive assets 2. The capture of cost-saving efficiencies via sharing use of the same resources 3. Cross-business use of a well-respected brand name, and/or 4. Cross-business collaboration to create new resource strengths and capabilities.
Analyzing the attractiveness of a company's diversification strategy is a six-step process:
1. Evaluate the long-term attractiveness of the industries into which the firm has diversified. 2. Evaluate the relative competitive strength of each of the company's business units. 3. Evaluate the competitive value of cross-business strategic fits. 4. Check whether the firm's resources fit the requirements of its present business lineup. 5. Rank the performance prospects of the businesses from best to worst and determine what the corporate parent's priority should be in allocating resources to its various businesses. 6. Craft new strategic moves to improve overall corporate performance.
3. Evaluate the competitive value of cross-business strategic fits.
A business is more attractive strategically when it has value chain relationships with sister business units that offer potential to: 1. Realize economies of scope or cost-saving efficiences 2. Transfer technology, skills, know-how, or other resource capabilities from one business to another 3. Leverage use of a well-known and trusted brand name 4. Collaborate with sister businesses to build new or stronger resource strengths and competitive capabilities
A diversified company's business units exhibit good resource fit when:
A company has the resources to adequately support the requirements of its entire group of businesses without spreading itself too thin and when individual businesses add to a company's overall resource strength.
Which of the following is the best example of unrelated diversification?
A producer of mens apparel acquiring a maker of golf equipment.
Which of the following is not something that corporate executives must do to succeed in using a strategy of unrelated diversification to produce companywide financial results above and beyond what the businesses could generate operating as stand-alone entities?
Be shred in identifying opportunities to acquire businesses that possess exceptionally good resource fits and/or that can significantly boost sales and market share by incorporating use of the parent company's technological expertise.
Which of the following best illustrates an economy of scope?
Being able to eliminate or reduce costs by combining related value-chain activities of different businesses into a single operation.
Creating added long-term value for shareholders via diversification requires:
Building a multi-business company where the whole is greater than the sum of its parts--such 1+1=3 effects are called synergy.
Which of the following is not part of the procedure for evaluating the pluses and minuses of a diversified company's strategy and deciding what actions to take to improve the company's performance?
Conducting a SWOT analysis of each business the company has diversified into.
The rationale for related diversification is strategic:
Diversify into businesses with strategic fits along their respective value chains, capitalize on strategic-fit relationships to gain competitive advantage over rivals whose operations do not offer comparable strategic fit benefits, and then use competitive advantage to boost profitability and achieve the desired 1+1=3 impact on shareholder value.
The top-level executive task of crafting a diversified company's overall or corporate strategy includes which one of the following?
Evaluating the growth and profitability prospects for each business and then investing aggressively in the most promising businesses with the best prospects, investing cautiously in businesses with just average prospects, and divesting businesses with unacceptable prospects.
Strategic fit between two or more businesses exists whenever one or more activities comprising the value chains of different businesses are sufficiently similar to present opportunities:
For cross-business use of a potent brand name/or cross-business collaboration to build new or stronger competitive capabilities.
The nine-cell attractiveness strength matrix provides strong logic for:
Fully funding the resource needs of competitively strong businesses in attractive industries, investing selectively in businesses with intermediate position on the grid, and getting rid of competitively weak businesses in unattractive industries unless they generate a sizable cash flows that can be redeployed elsewhere.
Once a company has diversified into a collection of related or unrelated businesses and concludes that some strategy adjustments are needed, which one of the following is not one of the main strategy options that a company can pursue?
Have all the company's businesses operate under a common brand name and craft new initiatives to build/enhance the reputation of this brand name worldwide.
The chief purpose of calculating quantitative industry attractiveness scores for each industry a company has diversified into is to:
Help determine 1. Whether each industry the company has diversified into represents a good business for the company to be in. 2. Which of the company's industries are most attractive and which are least attractive and 3. The overall appeal of the whole group of industries in which the company has invested.
What are the two fundamental approaches to diversifying?
Into related businesses and into unrelated businesses.
A "cash hog" type of business:
Is one that generates cash flows that are too small to fully fund its operations and growth--such businesses require periodic cash infusions by the corporate parent to fund internal operations and finance capital requirements.
For a move to diversify into a new business to have a reasonable prospect of adding shareholder value, it must be what?
It must be capable of passing the industry attractiveness test, the cost-to-entry test, and the better-off test.
A "good" diversification strategy must produce what?
Must produce increases in long-term shareholder value--increases that shareholders cannot otherwise obtain on their own.
1. Evaluate the long-term attractiveness of the industries into which the firm has diversified.
Needs to be evaluated from three angles: 1. The attractiveness of each industry on its own 2. The attractiveness of each industry relative to the others 3. The attractiveness of all the industries as a group
Which of the following are negatives or disadvantages of pursuing unrelated diversification strategies?
No potential for competitive advantage beyond any benefits of corporate parenting and what each individual business can generate on its own.
2. Evaluate the relative competitive strength of each of the company's business units.
Purpose is to gain a clear understanding of which businesses are strong contenders in their industries, which are weak contenders, and the underlying reasons for their strength or weakness.
4. Check whether the firm's resources fit the requirements of its present business lineup.
Resource fit exists when: 1. Each company business had adequate access to the resources it needs to be competitively successful 2. The parent company has sufficient financial resources and parenting capabilities to support its entire group of businesses without spreading itself too thin
The greater the number of businesses a company has diversified into and the more diverse these businesses are, the harder is it for corporate executives to:
Select capable managers to run each business, know when the major strategic proposals of business units are sound, or help guide the creation of an effective action plan to restore profitability when a business unit stumbles.
The basic premise of unrelated diversification is:
That any business that has good profit prospects and can be acquired on good financial terms is a good business to diversify into.
Which of the following would not be something to look for in identifying a diversified company's strategy?
The competitive strategy each business is employing to try to build a competitive advantage over rivals.
5. Rank the performance prospects of the businesses from best to worst and determine what the corporate parent's priority should be in allocating resources to its various businesses.
The most important considerations in judging business unit performance are sales growth, profit growth, contribution to company earnings, and the return on capital invested in the business.
What makes related diversification an attractive strategy?
The opportunity to convert cross-business strategic fits into a competitive advantage over business rivals whose operations do not offer comparable strategic-fit benefits.
6. Craft new strategic moves to improve overall corporate performance.
There are basically five strategic options: 1. Sticking closely with the existing business lineup and pursuing the opportunities theses business present. 2. Broadening the company's business scope by making new acquisitions in new industries 3. Divesting certain businesses and retrenching to a narrower base of business operations 4. Restructuring the company's business lineup and putting a whole new face on the company's business makeup 5. Pursuing a strategy of multinational diversification
Different businesses are said to be "unrelated" when:
They have dissimilar value chains containing no competitively useful cross-business relationships or strategic fits.
Businesses are said to be "related" when:
They possess competitively valuable cross-business value-chain matchups.
The value of determining the relative competitive strength of each business a company has diversified into is:
To have a quantitative basis for rating them from strongest to weakest in contending for market leadership in their respective industries.
Diversification becomes a prime strategic option in all but which one of the following situations?
When a company has more resource deficiencies than resource strengths in its principal business.
Which one of the following is not among the conditions that make restructuring a diversified company's business lineup an appealing strategic option?
When the company lacks a strong global brand name and lacks the managerial know-how and technological expertise needed to achieve economies of scope.