MGMT 490: Chapter 8 - Corporate strategy diversification and the multibusiness company
Transaction costs
are the costs of completing a business agreement or deal, not including the price of the actual deal. - They can include the costs of searching for an attractive target, the costs of evaluating its worth, bargaining costs, and the costs of completing the transaction.
Cash cow business
generates cash flows over and above its internal requirements, thus providing a corporate parent with funds for investing in cash hog businesses, financing new acquisitions, or paying dividends.
Cash hog business
generates cash flows that are too small to fully fund its operations and growth and requires cash infusions to provide additional working capital and finance new capital investment.
Using joint ventures to achieve diversification
Joint ventures are advantageous when diversification opportunities: 1. Are too large, complex, uneconomical, or risky for one firm to pursue alone. 2. Require a broader range of competencies and know-how than a firm possesses or can develop quickly. 3. Are located in a foreign country that requires local partner participation or ownership. - Entering a new business via a joint venture can be useful in at least three types of situations. - First, a joint venture is a good vehicle for pursuing an opportunity that is too complex, uneconomical, or risky for one company to pursue alone. - Second, joint ventures make sense when the opportunities in a new industry require a broader range of competencies and know-how than a company can marshal on its own. - Third, companies sometimes use joint ventures to diversify into a new industry when the diversification move entails having operations in a foreign country.
Risks of diversification by joint venture
Joint ventures have the potential for developing serious drawbacks due to: 1. Conflicting objectives and expectations of venture partners. 2. Disagreements among or between venture partners over how best to operate the venture. 3. Cultural clashes among and between the partners. 4. Dissolution of the venture when one of the venture partners decides to go their own way. - Partnering with another company has significant drawbacks due to the potential for conflicting objectives, disagreements over how to best operate the venture, culture clashes, and so on. - Joint ventures are generally the least durable of the entry options, usually lasting only until the partners decide to go their own ways
Three tests for building shareholder value through diversification
To add shareholder value, diversification into a new business must pass the three tests of corporate advantage: 1.The industry attractiveness test 2.The cost of entry test 3.The better-off test
Choosing the diversification path: Related versus unrelated businesses
Which diversification path to pursue? 1. related businesses 2. unrelated businesses 3. both related and unrelated businesses - Once a company decides to diversify, it faces the choice of whether to diversify into related businesses, unrelated businesses, or some mix of both
The question of comparative cost
Which is the least costly mode of entry, given the firm's objectives?
Strategic fit
exists whenever one or more activities constituting the value chains of different businesses are sufficiently similar in present opportunities for cross-business sharing or transferring of the resources and capabilities that enable these activities.
Unrelated businesses
have dissimilar value chains and resource requirements, with no competitively important cross-business relationships at the value chain level.
Identifying competitive advantage potential of cross-business strategic fit
illustrates the process of comparing the value chains of a company's businesses and identifying opportunities to exploit competitively valuable cross-business strategic fit. - A company pursuing related diversification exhibits resource fit when its businesses have matching specialized resource requirements along their value chains. - A company pursuing unrelated diversification has resource fit when the parent company has adequate corporate resources (parenting and general resources) to support its businesses' needs and to add value.
Related businesses provide opportunities to benefit from competitively valuable strategic fit
illustrates the range of opportunities to share and/or transfer specialized resources and capabilities among the value chain activities of related businesses. It is important to recognize that even though general resources and capabilities may be shared by multiple business units, such resource sharing alone cannot form the backbone of a strategy keyed to related diversification.
Spinoff
is an independent company created when a corporate parent divests a business, either by selling shares to the public via an initial public offering or by distributing shares in the new company to shareholders of the corporate parent.
Corporate parenting
is the role that a diversified corporation plays in nurturing its component businesses through the provision of: 1. Top management expertise 2. Disciplined control 3. Financial resources 4. Other types of generalized resources and capabilities such as long-term planning systems, business development skills, management development processes, and incentive systems
Corporate venturing
or new venture development, is the process of developing new businesses as an outgrowth of a firm's established business operations. - It is also referred to as corporate entrepreneurship or intrapreneurship since it requires entrepreneurial-like qualities within a larger enterprise.
Related businesses
possess competitively valuable cross-business value chain and resource matchups.
Portfolio approach
to ensuring financial fit among a firm's businesses is based on the fact that different businesses have different cash flow and investment characteristics.
Parenting advantage
when it is more able than other firms to boost the combined performance of its individual businesses through high-level guidance, general oversight, and other corporate-level contributions.
Three strategy options for pursuing diversification
options: 1. diversify into related business 2. diversify into unrelated business 3. diversify into both related and unrelated businesses
acquisition premium
or control premium, is the amount by which the price offered exceeds the pre-acquisition market value of the target company.
Acquiring and restructuing undervalued companies
- Acquire weakly performing firms at bargain prices - Use turnaround capabilities to restructure them to increase their performance and profitability
Pursuing related diversification
1. generalized resources and capabilities 2. specialized resources and capabilities
Countrywide restructuring
(corporate restructuring) involves making major changes in a diversified company by divesting some businesses or acquiring others to put a whole new face on the company's business lineup.
Step 3: Determining the competitive value of strategic fit in diversified strategy
- 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. - The greater the value of cross-business strategic fit in enhancing a firm's performance in the marketplace or on the bottom line, the more competitively powerful is its strategy of related diversification. - Without significant cross-business strategic fit and dedicated company efforts to capture the benefits, one must be skeptical about the potential for a diversified company's businesses to perform better together than apart.
Generalized resources and capabilities
- Can be deployed widely across a broad range of industry and business types. - Can be leveraged in both unrelated and related diversification situations. - This is in contrast to general resources and capabilities (such as general management capabilities, human resource management capabilities, and general accounting services), which can be applied usefully across a wide range of industry and business types.
the effects of cross-business fit
- Fit builds more value than owning a stock portfolio of firms in different industries. - Strategic-fit benefits are possible only via related diversification. - The stronger the fit, the greater its effect on the firm's competitive advantages. - Fit fosters the spreading of competitively valuable resources and capabilities specialized to certain applications and that have value only in specific types of industries and businesses. - Capturing the benefits of strategic fit along the value chains of its related businesses gives a diversified company a clear path to achieving competitive advantage over undiversified competitors and competitors whose own diversification efforts don't offer equivalent strategic-fit benefits. - Such competitive advantage potential provides a company with a dependable basis for earning profits and a return on investment that exceeds what the company's businesses could earn as stand-alone enterprises
Specialized resources and capabilities
- Have very specific applications which restrict their use to a narrow range of industry and business types. - Can typically be leveraged only in related diversification situations. - The resources and capabilities that are leveraged in related diversification are specialized resources and capabilities that have very specific applications; their use is restricted to a limited range of business contexts in which these applications are competitively relevant. - Because they are adapted for particular applications, to have value, specialized resources and capabilities must be utilized by particular types of businesses operating in specific kinds of industries; they have limited utility outside this designated range of industry and business applications.
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 - Benefits from strategic fit with firm's other businesses - Bargaining leverage with key suppliers or customers - Profitability relative to competitors - Relative market share is the ratio of a business unit's market share to the market share of its largest industry rival as measured in unit volumes, not dollars. - Using relative market share to measure competitive strength is analytically superior to using straight-percentage market share.
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
strategic diversification options
- Sticking closely with the existing business lineup and pursuing opportunities presented by these businesses - Broadening the current scope of diversification by entering additional industries - Retrenching to a narrower scope of diversification by divesting poorly performing businesses - Broadly restructuring the entire firm by divesting some businesses and acquiring others to put a whole new face on the firm's business lineup - The demanding and time-consuming nature of these four tasks explains why corporate executives generally refrain from becoming immersed in the details of crafting and executing business-level strategies. - Rather, the normal procedure is to delegate lead responsibility for business strategy to the heads of each business, giving them the latitude to develop strategies suited to the particular industry environment in which their business operates, and holding them accountable for producing good financial and strategic results.
Astute corporate parenting by management
- provide leadership, oversight, expertise, and guidance - Provide generalized or parenting resources that lower operating costs and increase SBU efficiencies
Entering a new line of business through internal development
1. Advantages of new venture development - Avoids pitfalls and uncertain costs of acquisition - Allows entry into a new or emerging industry where there are no available acquisition candidates 2. Disadvantages of corporate intrapreneurship - Must overcome industry entry barriers - Requires extensive investments in developing production capacities and competitive capabilities - May fail due to internal organizational resistance to change and innovation - Achieving diversification through internal development involves starting a new business subsidiary from scratch. Internal development has become an increasingly important way for companies to diversify.
Diversification by acquisition of an existing business
1. Advantages: - Quick entry into an industry - Barriers to entry avoided - Access to complementary resources and capabilities 2. Disadvantages: - Cost of acquisition—whether to pay a premium for a successful firm or seek a bargain in a struggling firm -Underestimating costs for integrating acquired firm - Overestimating the acquisition's potential to deliver added shareholder value - Acquisition is a popular means of diversifying into another industry. Not only is it quicker than trying to launch a new operation, but it also offers an effective way to hurdle such entry barriers.
Building shareholder value via unrelated diversification
1. Astute corporate parenting by management 2. cross business allocation of financial resources 3. acquiring and restructuring undervalued companies
The drawbacks of unrelated diversification
1. Demanding managerial requirements - monitoring and maintaining the parenting advantage 2. Limited competitive advantage potential - possible lack of cross-business strategic fit benefits - Unrelated diversification strategies have two important negatives that undercut the pluses: very demanding managerial requirements and limited competitive advantage potential.
step 4: Checking for good resource fit
1. Financial resource fit: - State of the internal capital market - Using the portfolio approach: 1. Cash hogs need cash to develop. 2. Cash cows generate excess cash. 3. Star businesses are self-supporting. 2. 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 thin by the resource requirements of one or more of its businesses? 3. success sequence: - cash hog to star to cash cow
Calculating industry attractiveness from the multibusiness perspective
1. The question of cross-industry strategic fit - How well do the industry's value chain and resource requirements match up with the value chain activities of other industries in which the firm has operations? 2. The questions of resource requirements - Do the resource requirements for an industry match those of the parent firm or are they otherwise within the company's reach? - The more one industry's value chain and resource requirements match up well with the value chain activities of other industries in which the company has operations, the more attractive the industry is to a firm pursuing related diversification. However, cross-industry strategic fit is not something that a company committed to a strategy of unrelated diversification considers when it is evaluating industry attractiveness.
Approaches to diversifying the business lineup
1. existing new acquisition 2. internal new venture (start-up) 3. joint venture - The means of entering new businesses can take any of three forms: acquisition, internal startup, or joint ventures with other companies.
The chief strategic and financial options for allocating a diversified company's financial resources
1. strategic options: - Invest in ways to strengthen or grow existing business. - Make acquisitions to establish positions in new industries or to complement existing businesses. - Fund long-range R&D ventures aimed at opening market opportunities in new or existing businesses. 2. financial options: - Pay off existing long-term or short-term debt. - Increase dividend payments to shareholders. - Repurchase shares of the company's common stock. - Build cash reserves; invest in short-term securities. - As a rule, business subsidiaries with the brightest profit and growth prospects, attractive positions in the nine-cell matrix, and solid strategic and resource fit should receive top priority for allocation of corporate resources. - However, in ranking the prospects of the different businesses from best to worst, it is usually wise to also consider each business's past performance regarding sales growth, profit growth, contribution to company earnings, return on capital invested in the business, and cash flow from operations. - While past performance is not always a reliable predictor of future performance, it does signal whether a business is already performing well or has problems to overcome.
Steps in evaluating the strategy of a diversified firm
1.Assess the attractiveness of the industries the firm has diversified into, both individually and as a group. 2.Assess the competitive strength of the firm's business units within their respective industries. 3.Evaluate the extent of cross-business strategic fit along the value chains of the firm's various business units. 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 resource allocation priorities. 6.Craft strategic moves to improve corporate performance. -Strategic analysis of diversified companies builds on the concepts and methods used for single-business companies. - 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 involves six steps.
When to consider diversifying
A firm should consider diversifying when: 1.Growth opportunities are limited as its principal markets reach their maturity and buyer demand is either stagnating or set to decline. 2.Changing industry conditions—new technologies, inroads being made by substitute products, fast-shifting buyer preferences, or intensifying competition—are undermining the firm's competitive position. - As long as a company has plentiful opportunities for profitable growth in its present industry, there is no urgency to pursue diversification. - But growth opportunities are often limited in mature industries and markets where buyer demand is flat or declining. - In addition, changing industry conditions—new technologies, inroads being made by substitute products, fast-shifting buyer preferences, or intensifying competition— can undermine a company's ability to deliver ongoing gains in revenues and profits.
Economies of scale
Accrue when unit costs are reduced due to the increased output of larger-size operations of a firm. - accrue from the lower variable costs of outputs from a larger-size operation.
Narrowly diversified firms
Are comprised of a few related or unrelated businesses.
Economies of scope
Are cost reductions that flow from cross-business resource sharing in the activities of the multiple businesses of a firm. - are cost reductions that flow from operating the same essential activities in multiple businesses (a larger scope of operation).
The attractiveness test
Are the industry's profits and return on investment as good or better than present business(es)?
The question of entry barriers
Are there entry barriers to overcome?
From strategic fit to competitive advantage, added profitability, and gains in shareholder value
Capturing the cross-business strategic-fit benefits of related diversification 1. Builds more shareholder value than owning a stock portfolio 2. Only possible via a strategy of related diversification 3. Yields value in the application of specialized resource and capabilities 4. Requires that management take internal actions to realize them - Diversifying into related businesses where competitively valuable strategic-fit benefits can be captured puts a firm's businesses in position to perform better financially as part of the firm than they could have performed as independent enterprises, thus, providing a clear avenue for boosting shareholder value and satisfying the better-off test
Multibusiness enterprises
Have a business portfolio consisting of several unrelated groups of related businesses.
How much diversification?
Deciding how wide-ranging diversification should be 1.Diversify into closely related businesses or into totally unrelated businesses? 2.Diversify present revenue and earnings base to a small or major extent? 3.Move into one or two large new businesses or a greater number of small ones? 4.Acquire an existing company? 5.Start up a new business from scratch? 6.Form a joint venture with one or more companies to enter new businesses? - The decision to diversify presents wide-ranging possibilities. - A company can diversify into closely related businesses or into totally unrelated businesses. - It can diversify its present revenue and earnings base to a small or major extent. - It can move into one or two large new businesses or a greater number of small ones. - It can achieve diversification by acquiring an existing company, starting up a new business from scratch, or forming a joint venture with one or more companies to enter new businesses. - In every case, however, the decision to diversify must start with a strong economic justification for doing so.
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.
The question of critical resources and capabilities
Does the firm have the resources and capabilities for internal development?
Broadly diversified firms
Have a wide-ranging collection of related businesses, unrelated businesses, or a mixture of both.
Calculating industry-attractiveness scores
Evaluating industry attractiveness 1. Deciding on appropriate weights for industry attractiveness measures 2. Gaining sufficient knowledge of the industry to assign accurate and objective ratings 3. Whether to use different weights for different business units whenever the importance of strength measures differs significantly from business to business - Each attractiveness measure is then assigned a weight reflecting its relative importance in determining an industry's attractiveness, since not all attractiveness measures are equally important. - The intensity of competition in an industry should nearly always carry a high weight (say, 0.20 to 0.30). Strategic-fit considerations should be assigned a high weight in the case of companies with related diversification strategies; but for companies with an unrelated diversification strategy, strategic fit with other industries may be dropped from the list of attractiveness measures altogether. - The importance weights must add up to 1.
Diversification into unrelated businesses
Evaluating the acquisition of a new business or the divestiture of an existing business 1. can it meet corporate targets for profitability and return on investment? 2. Is it in an industry with attractive profit and growth potentials? 3. is it big enough to contribute significantly to the parents firm's bottom line? - Achieving cross-business strategic fit is not a motivation for unrelated diversification. - Companies that pursue a strategy of unrelated diversification often exhibit a willingness to diversify into any business in any industry where senior managers see an opportunity to realize consistently good financial results. - With an unrelated diversification strategy, company managers spend much time and effort screening acquisition candidates and evaluating the pros and cons of keeping or divesting existing businesses using the criteria listed in this slide
Better performance through synergy
Evaluating the potential for synergy through diversification - 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 syngery (1+1=2) - Firm A purchase 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) - Creating added value for shareholders via diversification requires building a multibusiness company in which the whole is greater than the sum of its parts; such 1 + 1= 3 effects are called synergy.
When to engage in internal development
Factors favoring internal development: 1. low resistance of incumbent firms to market entry 2. Ample time to develop and launch business 3. availability of in-house skills and resources 4. added capacity affects supply and demand balance 5. cost of acquisition higher than internal entry - Generally, internal development of a new business has appeal only when (1) the parent company already has in-house most of the resources and capabilities it needs to piece together a new business and compete effectively; (2) there is ample time to launch the business; (3) the internal cost of entry is lower than the cost of entry via acquisition; (4) adding new production capacity will not adversely impact the supply- demand balance in the industry; and (5) incumbent firms are likely to be slow or ineffective in responding to a new entrant's efforts to crack the market.
Divesting businesses and retrenching to a narrower diversification base
Factors motivating business divestitures 1. Long-term performance can be improved by concentrating on stronger positions in fewer core businesses and industries. 2. The business is in a once-attractive industry where market conditions have badly deteriorated 3. The business has either failed to perform as expected or is lacking in cultural, strategic, or resource fit. 4. The business will become more valuable if sold to another firm or as an independent spin-off firm.
Broadening a diversified firm's business base
Factors motivating the addition of more businesses 1. The transfer of resources and capabilities to related or complementary businesses 2. Rapidly changing technology, legislation, or new product innovations in core businesses 3. Shoring up the market position and competitive capabilities of the firm's present businesses 4. Extension of the scope of the firm's operations into additional country markets
Restructuring a diversified company's business lineup
Factors that drive corporate restructuring 1. A serious mismatch between the firm's resources and capabilities and the type of diversification it has pursued 2. Too many businesses in slow-growth, declining, low-margin, or otherwise unattractive industries 3. Too many competitively weak businesses 4. Ongoing declines in the market shares of major business units that are falling prey to more market-savvy competitors 5. An excessive debt burden with interest costs that eat deeply into profitability 6. Ill-chosen acquisitions that haven't lived up to expectations - Diversified companies need to divest low-performing businesses or businesses that do not fit in order to concentrate on expanding existing businesses and entering new ones where opportunities are more promising.
The path to greater shareholder value through unrelated diversification
For a strategy of unrelated diversification to produce company-wide financial results above and beyond what the businesses could generate operating as stand-alone entities, corporate executives must do three things to pass the three tests of corporate advantage: 1.Diversify into industries where the businesses can produce consistently good earnings and returns on investment (to satisfy the industry-attractiveness test). 2.Negotiate favorable acquisition prices (to satisfy the cost of entry test). 3.Do a superior job of corporate parenting via high-level managerial oversight and resource sharing, financial resource allocation and portfolio management, and/or the restructuring of underperforming businesses (to satisfy the better-off test).
Step 1: Evaluating industry attractiveness
How attractive are the industries in which the firm has business operations? 1.Does each industry represent a good market for the firm to be in? 2.Which industries are most attractive, and which are least attractive? 3.How appealing is the whole group of industries? - A principal consideration in evaluating the caliber of a diversified company's strategy is the attractiveness of the industries in which it has business operations. - The more attractive the industries (both individually and as a group) that a diversified company is in, the better its prospects for good long-term performance.
The better-off test
How much synergy (stronger overall performance) will be gained by diversifying into the industry?
The question of speed
Is speed crucial to the firm's chances for successful entry?
The cost of entry test
Is the cost of overcoming entry barriers so great as to cause delay or reduce the potential for profitability?
Misguided reasons for pursuing unrelated diversification
Poor rationals for unrelated diversification - Seeking a reduction of business investment risk - Pursuing rapid or continuous growth for its own sake - Seeking stabilization of earnings to avoid cyclical swings in businesses - Pursuing personal managerial motives - Companies sometimes pursue unrelated diversification for reasons that are entirely misguided. - Because unrelated diversification strategies at their best have only a limited potential for creating long-term economic value for shareholders, it is essential that managers not compound this problem by taking a misguided approach toward unrelated diversification, in pursuit of objectives that are more likely to destroy shareholder value than create it.
Identifying cross-business strategic fit along the value chain
Potential Cross-Business Fits 1. Sales and marketing activities 2. R&D technology activities 3. Supply chain activities 4.Manufacturing-related activities 5. related activities 6. Customer service activities - Cross-business strategic fit can exist anywhere along the value chain—in R&D and technology activities, in supply chain activities and relationships with suppliers, in manufacturing, in sales and marketing, in distribution activities, or in customer service activities.
Step 5: Ranking business units and assigning a priority for resource allocation
Ranking factors 1. Sales growth 2. Profit growth 3. Contribution to company earnings 4. Return on capital invested in the business 5. Cash flow - Steer resources to business units with the brightest profit and growth prospects and solid strategic and resource fit. - Once a diversified company's strategy has been evaluated from the perspective of industry attractiveness, competitive strength, strategic fit, and resource fit, the next step is to use this information to rank the performance prospects of the businesses from best to worst. - Such ranking helps top-level executives assign each business a priority for resource support and capital investment
Restructuring for better performance at Hewlett-packard (HP)
Restructuring a diversified company on a companywide basis (corporate restructuring) involves divesting some businesses and/or acquiring others to put a whole new face on the company's business lineup. - Illustration Capsule 8.2 discusses how HP Inc. has been restructuring its operations to address internal problems and improve its profitability.
What does crafting a diversification strategy entail?
Step 1: Picking new industries to enter and deciding on the means of entry Step 2: Pursuing opportunities to leverage cross-business value chain relationships and strategic fit into competitive advantage Step 3: Establishing investment priorities and steering corporate resources into the most attractive business units - The task of crafting a diversified company's overall corporate strategy falls squarely in the lap of top-level executives and involves three distinct steps.
Opportunity for diversifying
Strategic diversification possibilities 1.Expand into businesses whose technologies and products complement present business(es). 2.Employ current resources and capabilities as valuable competitive assets in other businesses. 3.Reduce overall internal costs by cross-business sharing or transfers of resources and capabilities. 4.Extend a strong brand name to the products of other acquired businesses to help drive up sales and profits of those businesses. - In every case, however, the decision to diversify must start with a strong economic justification.
Diversification into related businesses
Strategic fit opportunities 1. Transferring specialized expertise, technological know-how, or other resources and capabilities from one business's value chain to another's 2. Sharing costs by combining the related value chain activities of different businesses into a single operation 3. Exploiting common use of a well-known brand name 4. Sharing other resources (besides brands) that support corresponding value chain activities across businesses 5. Engaging in cross-business collaboration and knowledge sharing to create new competitively valuable resources and capabilities
Step 6: Crafting new strategic moves to improve overall corporate performance
Strategy options for a firm that is already diversified 1.Stick with the present business lineup. 2.Broaden the diversification with new acquisitions. 3.Divest and retrench to a narrower diversification base. 4.Restructure through divestitures and acquisitions. - The conclusions flowing from the five preceding analytic steps set the agenda for crafting strategic moves to improve a diversified company's overall performance. - The strategic options boil down to four broad categories of actions.
Building Shareholder value: the ultimate justification for diversifying
Testing whether diversification will add long-term value for shareholders 1. the industry attractiveness test 2. the cost-of-entry test 3. the better of test - Diversification must do more for a company than simply spread its business risk across various industries. - In principle, diversification cannot be considered wise or justifiable unless it results in added long-term economic value for shareholders—value that shareholders cannot capture on their own by purchasing stock in companies in different industries or investing in mutual funds to spread their investments across several industries. - A move to diversify into a new business stands little chance of building shareholder value without passing the three Tests of Corporate Advantage.
Resource fit
The businesses in a diversified company's lineup need to exhibit good resource fit. - In firms with a related diversification strategy, good resource fit exists when the firm's businesses have well-matched specialized resource requirements at points along their value chains that are critical for the businesses' market success. - Matching resource requirements are important in related diversification because they facilitate resource sharing and low-cost resource transfer.
Choosing a mode of market entry
The choice of how best to enter a new business—whether through internal development, acquisition, or joint venture—depends on the answers to four important questions.
A nine-cell industry attractiveness -competitive- strength matrix
The industry-attractiveness and business-strength scores can be used to portray the strategic positions of each business in a diversified company. - Industry attractiveness is plotted on the vertical axis and competitive strength on the horizontal axis. - A nine-cell grid emerges from dividing the vertical axis into three regions (high, medium, and low attractiveness) and the horizontal axis into three regions (strong, average, and weak competitive strength). - As shown in Figure 8.3, scores of 6.7 or greater on a rating scale of 1 to 10 denote high industry attractiveness, scores of 3.3 to 6.7 denote medium attractiveness, and scores below 3.3 signal low attractiveness. - Likewise, high competitive strength is defined as scores greater than 6.7, average strength as scores of 3.3 to 6.7, and low strength as scores below 3.3. - Each business unit is plotted on the nine-cell matrix according to its overall attractiveness score and strength score, and then it is shown as a "bubble." - The size of each bubble is scaled to the percentage of revenues the business generates relative to total corporate revenues. - The bubbles in Figure 8.3 were located on the grid using the three industry-attractiveness scores from Table 8.1 and the strength scores for the three business units in Table 8.2.
Structures of combination related-unrelated diversified firms
There's ample room for companies to customize their diversification strategies to incorporate elements of both related and unrelated diversification, as may suit their own competitive asset profile and strategic vision. - Combination related-unrelated diversification strategies have particular appeal for companies with a mix of valuable competitive assets, covering the spectrum from general to specialized resources and capabilities.
Strategic fit, economies of scope and competitive advantage
Using economies of scope to convert strategic fit into competitive advantage can entail: 1. Transferring specialized and generalized skills or knowledge 2. Combining related value chain activities to achieve lower costs 3. Leveraging brand names and other differentiation resources 4. Using cross-business collaboration and knowledge sharing - The greater the cross-business economies associated with resource sharing and transfer, the greater the potential for a related diversification strategy to give individual businesses of a multibusiness enterprise a cost advantage over their rivals.
Combination related-unrelated diversification strategies
related-unrelated business portfolio combinations may be suitable for 1. dominant- business enterprises 2. Narrowly diversified firms 3. broadly diversified firms 4. multibusiness enterprises - Combination related-unrelated diversification strategies have particular appeal for companies with a mix of valuable competitive assets, covering the spectrum from general to specialized resources and capabilities
A company's four main strategic alternatives after it diversifies
shows the chief strategic and financial options for allocating a diversified company's financial resources. - Divesting businesses with the weakest future prospects and businesses that lack adequate strategic fit and/or resource fit is one of the best ways of generating additional funds for redeployment to businesses with better opportunities and better strategic and resource fit. - Free cash flows from cash cow businesses also add to the pool of funds that can be usefully redeployed
Calculating industry-attractiveness scores: key measures
•Market size and projected growth rate •The intensity of competition among market rivals •Emerging opportunities and threats •The presence of cross-industry strategic fit •Resource requirements •Social, political, regulatory, environmental factors •Industry profitability - A simple and reliable analytic tool for gauging industry attractiveness involves calculating quantitative industry-attractiveness scores based on these measures.