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Corporate Strategy:: Diversification and The Multibusiness Company
Corporate Strategy:: Diversification and The Multibusiness Company
CORPORATE STRATEGY:
Diversification and the Multibusiness Company
83
WHEN TO DIVERSIFY
84
Testing Whether Diversification Will Add
Value for Shareholders
85
Better Performance through Synergy
86
CHOOSING THE DIVERSIFICATION
PATH: RELATED VERSUS
UNRELATED BUSINESSES
Which Diversification
Path to Pursue?
Both Related
Related Unrelated
and Unrelated
Businesses Businesses
Businesses
87
CHOOSING THE DIVERSIFICATION
PATH: 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.
88
STRATEGIC FIT AND DIVERSIFICATION
INTO RELATED BUSINESSES
89
8.1 Related Businesses Provide Opportunities to Benefit
from Competitively Valuable Strategic Fit
810
Strategic Fit, Economies of Scope,
and Competitive Advantage
811
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.
812
From Competitive Advantage to Added
Profitability and Gains in Shareholder Value
813
DIVERSIFICATION INTO UNRELATED
BUSINESSES
814
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
815
The Path to Greater Shareholder Value
through Unrelated Diversification
816
The Drawbacks of Unrelated Diversification
Pursuing an Limited
Demanding
Unrelated Competitive
Managerial
Diversification Advantage
Requirements
Strategy Potential
817
Inadequate Reasons for Pursuing
Unrelated Diversification
Seeking
Seeking 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
818
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.
819
EVALUATING THE STRATEGY
OF A DIVERSIFIED COMPANY
Diversified
Strategy
820
Key Indicators of Industry Attractiveness
821
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.
Strategic fit with the firms other businesses.
Bargaining leverage with key suppliers or customers.
Alliances and partnerships with suppliers and/or buyers.
Profitability relative to competitors
822
8.3
A Nine-Cell Industry
Attractiveness
Star
Competitive Strength
Matrix
Cash
cow
823
8.4 Identifying the Competitive Advantage Potential
of Cross-Business Strategic Fit
824
Checking for Resource Fit
Success sequence:
Cash hog Star Cash cow
825
Checking for Resource Fit
826
Ranking Business Unit Performance
and Assigning Resource Allocation Priorities
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.
827
8.6
A Companys Four Main
Strategic Alternatives
After It Diversifies
828