logo image

Ch. 8 Diversification Strategies

What is the challange for making strategies in a diverse enterprise?
assessing multiple industry environments, developing a set of business strategies, one for each industry area (or line of business) in which the diversified company operates
what is the extra steps executives must take in order to run a diversified enterprise?
devise a company wide strategy for improving the attractiveness and performance of the company’s overall business lineup and for making a rational whole out of its diversified collection of individual business and individual strategies
What is the first part of the chapter about?
What crafting a diversification strategy entails, when and why diversification makes good strategic sense, and the pros and cons of related versus unrelated diversification strategies
What does the second part of the chapter focus on?
How to evaluate the attractiness of a diversified company’s business lineup, how to decide whether it has a good diversification strategy , and what the strategy options are for improving a diversified company’s future performance
What is the first facet for a diversification strategy?
picking new industries to enter and deciding whether to enter the industry by starting a new business from the ground up, acquiring a company already in the target industry, or forming a joint venture or strategic alliance with another company
What is the second facet for a diversification strategy?
initiating actions to boost the combined performance of the biness the firm has entered
what is the third facet for a diversification strategy?
pursuing opportunities to leverage cross business value chain relationship and strategic fits into competitive advantage
What is the fourth facet for a diversifiaction strategy?
evaluating the growth and profitability prospects for each business and then investing aggressively in the most promising business with the best propects, investing cautiously in business with just average prospects, and divesting busiensses with unacceptable prospects.
What’s the first element of identifying a diversified company’s strategy?
Ask if the company’s diversification based narrowly in a few industries or broadly in many industries?
What is the second element of identifying a diversified company’s strategy?
Ask if the businesses the company has diversified into related, unrelated or a mixture of both
what is the third element of identifying a diversified company’s strategy?
As if the scope of the company operations are mostly domestic, increasingly multinational, or global.
What is the fourth element of identifying a diversified company’s strategy?
Ask if there are any recent moves to strengthen comapny’s positions in existing businessses
what is the fifth element of identifying a diversified company’s strategy?
Ask if there are any recent moves to build positions in new industries?
What is the sixth element of identifting a diversified company’s strategy?
Ask if there are any recent moves to divest weak business units.
What is the seventh element of identifying a diversified company’s strategy?
Ask if there is any effort to capture cross-business strategic fits.
What is the eigth element of identifying a diversified company’s strategy?
What is the company’s approach to allocating investment capital and resources across its present businesses?
What can undermine a company’s ability to deliver ongoing gains in revenues and profits?
Changing industry conditions: new technologies, product innovation that stimulates the introduction of substitute products, fast shifting buyer preferences, or intensifying competition
When does diversification always merit strong consideration?
When industry conditions turn sour and are expected to be long lasting
What are the four other instances in which a company becomes a prime candidate for diversifying?
-spots opportunities for expanding into other industries whose tech and products complement its present business
– leverage existing competencies and capabilities by expanding into businesses where these same resource strengths are key success factors and valuable competitive assets
– diversifying into closly related business opens new avenues for reducing costs
-has powerful and well know brand name that can be transferred to the products of other businesses and thereby boost the sales and profits
What are the ways a business can diversify?
-closely related businesees or into totally unrelated businesses
-present revenue and earning base to a small extent (new businesses account for less than 15% of a company wide reveneues and profits)
-move into one or two large new businesses or a greater number of small ones
-achieve multibusiness/multindustry status by acquiring an existing company already in a business/industry it wants to enter
-forming its own new business subsidary to enter a promising industry
-forming a joint venture with one or more companies to enter business
What is the first test a company must pass before it moves to diversify?
The industry attractiveness test, depends cheifly on the presence of industry and competitive conditions that are conducive to earning as good or better profits and return on investment than the company is earning in its present business
What is the second test a company must pass before it moves to diversify?
The cost of entry test
What is the third test a company must pass before it moves to diversify?
The better off Test, perform better together than standing alone
What is the first big strategy decision a company must make after deciding to diversify?
Whether to diversify into related businesses, unrelated businesses, or some mix of both
When are businesses considered related?
When their value chains possess competitively valuable cross business relationships that present opportunities for the business to perform better under the same corporate umbrella than they could operating as stand alone entities
-possess competitively valuable cross business value chain matchups
When are businesses considered unrelated?
When the activities comprising their respective value chains are so dissimilar that no competitively valueable cross-business relationships are present
-dissimilar value chains, containing no competitively useful cross business relationships
What are the three diversification strategy options?
-diversifying into related businesses
-diversifying into unrelated businesses
-diversifying into both related and unrelated businesses
What does a related diversification strategy involve?
Building the company around businesses whose value chains possess competitively valuable strategic fits
What is a Strategic Fit?
Whenever one or more activities comprising the value chains of different businesses are sufficiently similar to present opportunities for cross business resource transfer, lower costs through combining the performance or related value chain activities, cross business use of a potenet brand name, and cross business collaboration to build new or stronger competitive capabilities
What are economies of scope?
Cost reductions that flow from operating in multiple businesses. They Stem directly from strategic fit efficiencies along the value chains or related businesses
What are the keys to added profitability and gains in shareholder value?
Strategic fit and Competitive Advantage
What makes related diversification an attractive strategy?
the opportunity to convert cross business strategic fits into a competitve advantage over business rivals whose operations do not offer comparable strategic fit benefits
The greater the relatedness among a diversified company’s sister businesses, the bigger a company’s window for converting strategic fits into competitive advantage via …
1. cross business transfer of competitively valuable skills and technology
2. the capture of cost saving efficiencies along the value chains of related businesses
3. cross business use of a well respected brand name
4. cross business collaboration to create new resource strengths and capabilities
How does a company achieve syngeristic financial performance
by capturing strategic benefits.
What three things should you remember?
-capturing cross business strategic fits via a strategy of related diversification builds long term economic value for shareholders in ways that shareholders cannot undertake by simply owning a portfolio of stocks of companies in different industries
-the capture of cross business strategic fit benefits is possible only via a strategy of related diversification
-the benefits of cross business strategic fits are not automatically realized when a company diversifies into related businesses
What do unrelated diversification strategies aim at?
Entering any industry and operating any business where senior managers see opportunity to realize consistently good financial results, there is no deliberate effort to diversify only into businesses with strategic fits
How do companies that pursue unrelated diversification nearly always enter new businessses?
By acquiring an established company rather than by forming a startup subsidiary within their own corporate structures or participating in joint ventures
When is an acquisition deemed passable with a strategy of unrelated diversification?
If it passes the industry attractivness and cost to entry tests and if it has good prospects for attractive financial performance.
What is appealing about unrelated diversification?
-Business risk is scattered over a set of truly diverse industries, the company’s investments are spread over businesses whose technologies and value chain activities bear no close relationship and whose markets are largely disconnected.
– The company’s financial resources can be employed to a maximum advantage by 1) investing in whatever industries offer the best profit prospects (as opposed to considering only opportuniteis in industries with related value chain activities) and (2) diverting cash flows from company businesses with lower growth and profit prospects to acquiring and expanding businesses with higher growth and profit potentials
– Shareholder wealth can be enhanced by buying distressed businesses at a low price, turning their operations around fairly quickly with infusions of cash and managerial knowhow supplied by the parent company, and then riding the crest of the profit increases generated by the newly acquired businesses
– Company profitability may prove somewhat more stable over the course of economic upswings and downswings because market conditions in all industries down move upward or downward simultaneously
When does unrelated diversification merit consideration?
-When a firm is trapped in or overly dependent on an endangered or unattractive industry
-When it has no competitively valubable resources or capabilities it can transfer to a closely related industry
-When a company strongly prefers to spread business risks widely and not restrict itself to only owning businesses with related value chain activities
What must executives do in order to build wealth with a strategy of unrelated diversification?
-Do a superior job of diversifying into new businesses that can produce consistently good earnings and returns on investment (satisfies attractiveness test)
-Negotiate favorable acquisition prices(cost of entry test)
-Oversee and parent the firms business subsidaries and contribute to how they are managed (better off test)
-shredwly identify when to shift resources out of businesses with dim profit prospects and into businesses with above average prospects and into businesses with above average prospects for growth and profitability
-Be astute at discerning when a business needs to be sold and finding buyers who will pay the right price
What are the parenting activities a corporation can take part of
-providing expert problem solving skills
-creative strategy suggestions
-first rate advice and guidance on how to improve competitiveness and finanical performance to the heads of the subsidaries
What is a key isse with unrelated diversification?
How wide a net to cast in building a portfolio of unrelated businesses, should a company pursue unrelated diversification seek to have a few or many unrelated businesses
What two questions should you ask before applying unrealted diversification?
-What is the least diversification it will take to achieve acceptable growth and profitability?
-What is the most diversification that can be managed, given the complexity it adds?
Optimal amount lies between these two extremes
What are the two negatives of unrelated diversification?
-Demanding managerial requirements
– No potential for competitive advantage beyond any benefits of corporate parenting and what each individual business can generate on its own
What are the differnet combinations of related vs unrealted businesses?
-dominat-business enterprises – one major core accounts for 50-80%
-Narrowly diversified- 2-5 related or unrealted businesses
-broadly diversified – wide ranging collection of related businesses unrelated businesses, or mixture
-several unrealted groups of related businesses- diversify into unrelated areas but have a collection of related businesses within each area
What are the six steps for evaluating the pluses and minuses of a diversified company’s strategy and what actions to take to improve the company’s performance?
-assess the attractivenss of the industries the company has diversified into both individualy and as a goup
-assess the competitive strength of the companys business units and determine how many are strong contenders in their respective industries
-check the competitive advantege potential of cross business strategic fits among the companys various business units
-check whether the firms resources fit the requirements of its present business lineup
-rank the performance prospects of the business from best to worst and determine what the corporate parents priority should be in allocating resources to its various businesses
-Craft new strategic moves to improve overall corporate performance
How do you evaluate industry attractiveneess?
-Does each industry the company has diversified into represent a good business for the company to be in?
-which of the companys industries are most attractive and which are least attractive?
-How appealing is the whole group of industries in which the company has invested?
How do you calculate The Industry Attractiveness scores?
Calculate quantitative industry attractiveness scores based on the following measures
-MArket size and projected growth rate, big industries are more attractive than small indistries annd fast growing industries tend to be more attractive than slow growing industries, other things being equal
-the intensity of competition – industries where competitive pressures are relatively weak are more attractive than industries where competitive pressures are strong
-emerging oportunities and threats, industrues with promising opportunities and minimal threats
-prescence of cross industry strategic fits , match up value chain activities over industries
-resource requirements
-seasonal and cyclical factors, own companies with different season peaks in order to diversify
-Social, political, regulatory, and environmental factors, consumer health safety, or environmental pollution, or intense regulations, are less attractive
-Industry profitability
-Industry uncertainty and business risk
What weights should you assign to the industry attractiveness measures?
-intensity of competition – high (.2-.3)
-Strategic fit considerations – high with related diversificaiton strategies, dropped if unrealted
-Seasonal and cyclical – low
-add up weights to equal 1.0
How do you interpret the industry attractiveness scores?
-score below 5 do not pass the attractiveness test
What is the second step in evaluating a diversified company?
Appraise how strongly positioned each of its business units are in their respective industry
What factors are used in quantifying the competitive strengths of a diversified company’s business subsidiaries?
-Relative market share
-Costs relative to the competitors costs
-Ability to match or beat rivals on key product attributes- satisfy buyer expectations with regard to features, product performance, reliability, service
-Ability to benefit from strategic fits with sister business
-Ability to exercise barganing leverage with key suppliers or customers
-Brand image and reputation
-Competitively valuable capabilities – important alliances and collaborative partnerships
-Profitability relative to competitors
What is a business unit’s relative market share?
the ratio of its market share to the market share held by the largest rival firm in the industry, measured in unit volume, not dollars
When is the only time a business unit’s competitive strength not be undermined by having higher costs than rivals?
When it has incurred the higer costs to strongly differentiate its product offering and its customers are willing to pay premium prices for the differentiating features
How do you create a nine cell matrix?
-plot industry attractiveness on the vertical axis
-competitive strength on the horizontal axis
-divide vertical axis into three regions (high, medium, and low attractivness)
-divide horizontal axis into three (strong, average, and weak competitive strength)
-each business unit is plotted on the nine cell matrix according to its overall attractiveness score and strength of score , then shown as a bubble
-size of each bubble is scaled to what percentage of revenues the business generates relative to total corproate revenues
What do the locations of the business units on the attractiveness grid provide?
Valuable guidance in deploying corproate resources to teh various business units
How do you enhance a diversified company’s prospects for good overall performance?
Concentrate corproate resources and strategic attention on those business units having the greatest competitive strength and positioned in highly attractive industries
How do you conclude just how good a companys related diversification strategy is?
Has a high potential for converting strategic fits into competitive advantage
What does checking the competitive advantage potential of cross business strategic fits involve?
Whether a diversified company’s businesses have value chains matchups that present
1)opportunities to reduce costs by combining the performance of certain value chain activities and thereby capture economies of scope
2) opportunities to transfer skills, technology, or intellictual capaital from one business to anotehr and thereby boost the performance of the receiving business
3) opportunities for certain business to share use of a highly regarded brand name
4) opportunities for sister business to collaborate in creating valuable new competitive capabilities (enhanced supply chain management capabilities, quicker first to market capabilities, or greater product innovation capabilitites)
What else is needed besides strategic fit identification?
What competitive value can be generated from these fits.
Questions to determine what competitive value can be generated from strategic fits?
1) to what extent can cost savings be realized?
2)How much competitive value will come from cross business transfer of skills, technology, or intellectual capaital?
3) Will transferring a potenet brand name to the products of sister businesses grow sales significantly?
4) Will cross business collaboration to create or strengthen competitive capabilities lead to significant gains int he market placeir b=in financial performance?
How does a comapny’s related diversification strategy derive its power?
In large part from the presence of competitively valuable strategic fits among its business
How does a company create a more competitively powerful strategy for related diversification?
The greater the value of cross business strategic fits in enhancing an company’s performance in the market place or on the bottom line
When does a company exhibit a good resource fit?
1) businesses add to a company’s overall resource strengths and
2)a company has adequate resources to support its entire group of business without spreading itself too thin
What is an improtant deminsion of resource fit concerns?
Whether a diversified company can generate the internal cash flows sufficient to fun the capaital requirements of its businesses, pay divends, meet its debt obligations, and otehrwise remain financially healthy
What is a cash hog?
Business that generatees cash flows that are too small to fully fun its operations and growth, it requires cash infusions to provide additional working capital and finance new capital investment
When does a busines in a fast growing industry become an even bigger cash hog?
Whenit has relatively low market share and is pursuing a strategy to become an industry elader.
What is a cash cow?
Business that generates cash flows over and above its internal requirments, thus providing a corporate parent with funds for investing in cash hog businesses, financing new acquisitions, or paying dividends
Why do market leaders in slow growth industries often generate sizeeable positive cash flows over and above what is needed for growth and reinvestment?
Their industry leading positions tend to give them the sales volumes and reputation to earn attractive profits and because the slow growth nature of their industry often entails relatively modest annual investment requirements
What can you do with surplus cash flows from cash cows?
Pay corporate dividends, finance acquisitions and provide funds for investing in the comapnys promising cash hogs.
What does investing in promising cash hog businesses over time result in?
Growing the hogs into self supporting star businesses that have storng or market leading competitive positions in attractive high growth markets and high levels of profitability
What is the success sequence?
Cash hog to young star to self supporting star to cash cow
What other two factors must be considered when assessing whether a diversified company’s businesses exhibit good financial fit?
1)Does the company have adequate financial strength to fun its different business and maintain a healthy credit rating
2) Do any of the companys induvudual businesses not contribute adequately to achieving company wide performance targets?
When is a diversified company’s strategy fails the resources fit test?
ITs financial resrouces are stretched scross so many businesses that irs credit rating is impaired.
What happens when a company borrows to heavily to finance new acquisitions?
It has to trim its way back (sever financial strain) on capital expenditures for existing businesses and use the big majority of its financial resources to meet interest obligations and pay down debt
How do you reveal whether a diversified company has adequate nonfinancial resources?
1) does the company have (or can it develop) the specific resource strengths and competitive capabilities needed to be successful in each of tis businesses?
2) Are the company’s resources being stretched too thinky by teh resource requirements of one or more of its businesses?
When does the condition of overtaxing its resource capaabiltities arise?
1) it goes on an acquisition spree and management is called upon to assimilate and oversee many new businesses very quickly
2) it lacks sufficient resource depth to do a creditable jon of transferring skills and compettencies from one of its businesses to anotehr
What happens the broader the diversification gets?
The greater the concern about whether the company has sufficient managerial depth to cope with the diverse range of operating problems its wide business lineup presents
What is step 5 of assessing a company’s diversified portfolio?
Ranking the performance prospects of business units and assigning a priority for resource allocation.
What is the next step after a company evaluates from the standpoints of industry attractiveness, competitive strength, strategic fit, and resource fit?
Use the information to rank the performance prospects of the businesses from best to worst.
What do the locations of the different busineses in the nine cell industry attractiveness competitive strength matrix provide?
A solid basis for identifying high opportunity busineses and low opportunity businesses
Rules for ranking performance prospects of busines units?
1) competitvely strong businesses in attractive industries have significantly better performance prospects than competitively weak business in unattractive industries
2) The revenue and earning outlook for businesses in fast growing businesses is better than for businesses in slow growing businesses
3) business subsidaries witht eh brightest profit and growth prospects, attractive positions in the nin cell matrix and solid strategic and resource fits should reveive top proioity for allocation of corporate resources
What should youy tak into account when ranking the prospects of the different business from best to worst?
Each business’s past performance as concerns sales growth, profit growth, contribution to company earnings, return on capital invested inteh business, and cash flow from operations
What is one of the best ways of generating additional funds for redeployment to businesses with better opportunities and better strategic and resource fits?
Divesting businesses with teh weakest future prospects and businesses tha tlack adequate strategic fit and resource fit
What are the strategic options for allocating company financial resources?
1) invest in ways to strengthen or grow existing businesses
2) Make acquisisitons to establish positions in new industries or to complement existing businesses
3) Fund long range R&D ventures aimed at opening market opportunities in new or existing businesses
What are the financial options for allocating comapny financial options for allocating comapny financial resources?
1) Pay off existing long term or short term debt
2) Increase dividend payments to shareholders
3) repurchase shares of the comapny’s common stock
4) build cash reserves, invest in short term securities
What is the 6th step for assessing a comapny’s diversified portfolio?
Crafting new strategic moves to improve overall corporate performance
What are the 5 broad categories of actions for strategic options?
1) stickign closely with the existing busines lineup and putsuing the opportunities these businesses present
2) broadening the comapnys business cscope by making new acquisition in new industries
3) divesting certain vusiness and retrenching to a narrower base of business operations
4) restructuring the comapnys business lineup and putting a whole new face on the companys business makeup
5) pursuing multinational diversification and striving to globalize the operations of several of the company’s business units
When does it make sense to stick with the current business lineup?
When the company’s present businesses offer attractive growth opprotunities and can be counted on to generate good earnings and cash flows
What are the motivating factors for a diversified comapny to build positions in new industries related or unrealted?
1) sluggish growth that makes the potential revenue and profit boost of a newly acquired business look attractive
2) the potential for transgerring resources and capabilities to otehr realted or complementary businesses
3) raidly changing conditions (favorable or unfavorable) in one or mrore of a companys core businessses that make it desirable to expand into other industries
4) motivating factors for adding new businesses is to complement and strengthen the market position and competitive capabiltities of one or more of its present businesses
When is retrenching to a narrower diversification base usually undertaken?
When top management concludes its diversification strategy has ranged too far afield and that the company can improve long term performance by concentrating on building stronger positions in a smaller number of core businesses and industries
What are some other reasons for divesting one or more of a comapnys present businesses?
1) market condiitons in a once attractive industry have badly deteriorated
2) lacks adequate strategic or resource fit , because it is a cash hog with questionable long term potential
3) it is weakly positioned in its industry with lottle propect the corproate parent can realize a devent return on its investment in the business
How do you avoid the mistake of diversifying so broadly that resources and management attention are stretched too thin?
Focus corproate resources on a few core and mostly related businesses
What is a useful guide to determine whether or when to divest a business subsidiary?
Ask “If we were not in this business today, would we want to get into it now?”
How does managment set up a company to compete on its own instead of selling to antoehr company when divesting?
Spin the unwanted business off as a financially and mangerially independent company, either by selling shares to teh investing public via an initial public offering or by distributing shares on the new comapny to existing shareholders of the corporate parent
What does restructuring a comapny’s business lineup involve?
Divesting some businesses and acquiring others so as to put a whole new gace on the company’s business lineup
What factors could be eroding a company’s financial performance?
1) too many business in slow growth, declining, low-margin, or otherwise unattractive industries
2) Too many competitively weak businesses
3) the emergence of new technologies that threaten the survival of one or more important businesses
4) Ongoing declines in hte market shares of one or more major business units that are falling prey to more market savvy compettors
5) An excessive debt burden with interest costs that eat deeply into profitability
6) Ill chosen acquisitions that havn’t lived up to expectations
Why might a diversified comapny seek to acquire a business and then rapidly expand its operations into more and more countries?
The ability to drive down unit costs by expanding sales to additiona l country markets
What makes a strategy of multinational diversification appealing?
All five paths to competitive advantage can be pursued simultaneously.
We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy close
We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy