CHAPTER 8

CORPORATE STRATEGY:
DIVERSIFICATION AND THE
MULTIBUSINESS COMPANY
1. Understand when and how business diversification can
enhance shareholder value.
2. Gain an understanding of how related diversification strategies
can produce cross-business strategic fit capable of delivering
competitive advantage.
3. Become aware of the merits and risks of corporate strategies
keyed to unrelated diversification.
4. Gain command of the analytical tools for evaluating a firm’s
diversification strategy.
5. Understand a diversified firm’s four main corporate strategy
options for solidifying its diversification strategy and
improving company performance.

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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.
 Divesting some businesses and retrenching to a
narrower collection of diversified businesses with better
overall performance prospects.
 Restructuring the entire firm by divesting some
businesses and acquiring others to put a whole new
face on the firm’s business lineup.

8–3
APPROACHES TO DIVERSIFYING
THE BUSINESS LINEUP

Diversifying into
New Businesses

Acquisition of an Internal new Joint

existing business venture (start-up) venture

8–4
 DIVERSIFICATION BY ACQUISITION
OF AN EXISTING BUSINESS
 Advantages:
● Quick entry into an industry
● Barriers to entry avoided
● Access to complementary resources and capabilities
 Disadvantages:
● Cost of acquisition—whether to pay a premium for a
successful firm or seek a bargain in struggling firm
● Underestimating costs for integrating acquired firm
● Overestimating the acquisition’s potential to deliver
added shareholder value

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 ENTERING A NEW LINE OF BUSINESS
THROUGH INTERNAL DEVELOPMENT
 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.
 Disadvantages of 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.

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 WHEN TO ENGAGE IN
INTERNAL DEVELOPMENT
Ample time to
develop and
launch business
Availability of Cost of acquisition
in-house skills is higher than
and resources internal entry

Factors Favoring
Internal Development

No head-to-head Added capacity

competition in will not affect
targeted industry supply and
Low resistance of demand balance
incumbent firms
to market entry

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 WHEN TO ENGAGE IN
A JOINT VENTURE

Is the opportunity too complex, uneconomical,

or risky for one firm to pursue alone?

Evaluating
Does the opportunity require a broader range
the Potential
of competencies and know-how than the firm
for a Joint now possesses?
Venture

Will the opportunity involve operations in a

country that requires foreign firms to have a
local minority or majority ownership partner?

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CHOOSING THE DIVERSIFICATION PATH:
RELATED VERSUS UNRELATED
BUSINESSES

Which Diversification
Path to Pursue?

Both Related
Related Unrelated
and Unrelated
Businesses Businesses
Businesses

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CORE CONCEPT
♦ Related businesses possess 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.

8–10
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.

8–11
 DIVERSIFYING INTO RELATED
BUSINESSES
 Strategic Fit Opportunities:
● Transferring specialized expertise,
technological know-how, or other
resources and capabilities from one
business’s value chain to another’s.
● Cost sharing between businesses by
combining their related value chain
activities into a single operation.
● Exploiting common use of a well-known
brand name.
● Sharing other resources (besides
brands) that support corresponding
value chain activities across
businesses.
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 IDENTIFYING CROSS-BUSINESS
STRATEGIC FITS ALONG
THE VALUE CHAIN
Supply
Chain
Activities
R&D and Manufacturing-
Technology Related
Activities Activities

Potential
Cross-Business Fits

Sales and Distribution-

Marketing Related
Activities Activities
Customer
Service
Activities

8–13
 DIVERSIFICATION INTO
UNRELATED BUSINESSES

Can it meet corporate targets

for profitability and return on
investment?
Evaluating the
acquisition of a
Is it is in an industry with
new business or
attractive profit and growth
the divestiture of
potentials?
an existing
business
Is it is big enough to contribute
significantly to the parent firm’s
bottom line?

8–14
BUILDING SHAREHOLDER VALUE
VIA UNRELATED DIVERSIFICATION

Using an Unrelated Diversification

Strategy to Pursue Value

Cross-Business Acquiring and

Astute Corporate
Allocation of Restructuring
Parenting by
Financial Undervalued
Management
Resources Companies

8–15
 MISGUIDED REASONS FOR
PURSUING UNRELATED
DIVERSIFICATION

Poor Rationales for

Unrelated Diversification

Seeking
Seeking a 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

8–16
 COMBINATIONS OF RELATED-
UNRELATED DIVERSIFICATION
STRATEGIES

Related-Unrelated Business
Portfolio Combinations

Dominant- Narrowly Broadly

Multibusiness
Business Diversified Diversified
Enterprises
Enterprises Firms Firms

8–17
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.
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EVALUATING THE STRATEGY
OF A DIVERSIFIED COMPANY

Attractiveness Strength of Cross-business

of industries Business Units strategic fit

Diversified
Strategy

Fit of firm’s Allocation of New Strategic

resources resources Moves

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FIGURE 8.2
Three Strategy Alternatives
for Pursuing Diversification

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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?

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 Key Indicators of Industry Attractiveness

♦ Social, political, regulatory, environmental factors

♦ Seasonal and cyclical factors
♦ Industry uncertainty and business risk
♦ Market size and projected growth rate
♦ Industry profitability
♦ The intensity of competition among market rivals
♦ Emerging opportunities and threats
http://www.theatlantic.com/business/archive/2012/03/newspaper
s-are-americas-fastest-shrinking-industry/254307/

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 CALCULATING INDUSTRY
ATTRACTIVENESS SCORES

Deciding on appropriate weights for

the industry attractiveness measures.

Evaluating Gaining sufficient knowledge of the

Industry industry to assign accurate and
Attractiveness objective ratings.

Whether to use different weights for

different business units whenever the
importance of strength measures differs
significantly from business to business.

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TABLE 8.1
Calculating
Weighted
Industry
Attractiveness
Scores

Remember:
The more
intensely
competitive
an industry is,
the lower the
attractiveness
rating for that
industry!

[Rating scale: 1 = very unattractive to the firm; 10 = very attractive to the firm.]

8–25
 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
and partnerships and alliances with other firms
 Benefit from strategic fit with firm’s other businesses
 Bargaining leverage with key suppliers or customers
 Profitability relative to competitors

8–26
TABLE 8.2
Calculating
Weighted
Competitive
Strength
Scores for a
Diversified
Company’s
Business
Units

[Rating scale: 1 = very weak; 10 = very strong.]

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FIGURE 8.3
A Nine-Cell Industry Star
Attractiveness–
Competitive
Strength Matrix

Cash
cow

Note: Circle sizes are scaled to

reflect the percentage of
companywide revenues
generated by the business unit.

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 STEP 3: DETERMINING THE
COMPETITIVE VALUE OF STRATEGIC
FIT IN DIVERSIFIED COMPANIES
 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.

8–29
STEP 4: CHECKING FOR RESOURCE FIT

 Financial Resource Fit

● State of the internal capital market
● Using 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

8–30
STEP 5: RANKING BUSINESS UNITS
AND ASSIGNING A PRIORITY FOR
RESOURCE ALLOCATION
 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.
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STEP 6: CRAFTING NEW STRATEGIC
MOVES TO IMPROVE OVERALL
CORPORATE PERFORMANCE

Strategy Options for a Firm

That Is Already Diversified

Divest and Restructure

Stick with Broaden the
Retrench to through
the Existing Diversification
a Narrower Divestitures
Business Base with New
Diversification and
Lineup Acquisitions
Base Acquisitions

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FIGURE 8.6
A Firm’s Four Main
Strategic Alternatives
After It Diversifies

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 DIVESTING BUSINESSES AND
RETRENCHING TO A NARROWER
DIVERSIFICATION BASE
 Factors Motivating Business Divestitures:
● Improvement of long-term performance by
concentrating on stronger positions in fewer
core businesses and industries.
● Business is now in a once-attractive industry where
market conditions have badly deteriorated.
● Business has either failed to perform as expected
and\or is lacking in cultural, strategic or resource fit.
● Business has become more valuable if sold to
another firm or as an independent spin-off firm.
8–34
Using Divestitures and Acquisitions to
Restructure the Business Lineup

♦ Factors Leading to Corporate Restructuring:

● Too many businesses in unattractive industries
● Too many competitively weak businesses
● Ongoing declines in the market shares of business units
due to more market-savvy competitors
● Debt and interest costs that sap profitability
● Acquisitions that haven’t lived up to expectations
● Reallocation of assets to strengthen the lineup
● Businesses with poor resource or strategic fit

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 ILLUSTRATION CAPSULE 8.1
Managing Diversification at Johnson & Johnson:
The Benefits of Cross-Business Strategic Fit

♦ What does the growth in both revenues and

profits reveal about the success of J&J’s
diversification through acquisition strategy?
♦ To what extent is decentralization required
when seeking cross-business strategic fit?
♦ What should J&J do to ensure the continued
success of its diversification strategy?

8–36
 RESTRUCTURING A DIVERSIFIED
COMPANY’S BUSINESS LINEUP
 Factors Leading to Corporate Restructuring:
● A serious mismatch between the firm’s resources and
capabilities and the type of diversification that it has pursued.
● Too many businesses in slow-growth, declining, low-margin,
or otherwise unattractive industries.
● Too many competitively weak businesses.
● Ongoing declines in the market shares of major business
units that are falling prey to more market-savvy competitors.
● An excessive debt burden with interest costs that eat deeply
into profitability.
● Ill-chosen acquisitions that haven’t lived up to expectations.

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 ILLUSTRATION CAPSULE 8.2
Growth through Restructuring at Kraft Foods

♦ Is Kraft Food’s corporate restructuring strategy

narrowing or broadening its diversification base?
♦ How will restructuring help ensure that Kraft
Foods will be better prepared to adapt to
changing market conditions than its competitors?
♦ What actions did Kraft Foods take after making
acquisitions to ensure the success of those
acquisitions?

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