1-1

CHAPTER 9CHAPTER 9

Strategies for Strategies for Multibusiness Multibusiness CorporationsCorporations

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

9-2

Four Main Tasks inFour Main Tasks inCrafting Corporate StrategyCrafting Corporate Strategy

Picking new industries to enterand deciding on means of entry

Pursuing opportunities to leverage cross-business value chain relationships into competitive advantage

Steering resources into most attractive business units

Initiating actions to boost the combined performance of businesses

9-3

When Business Diversification When Business Diversification Becomes a ConsiderationBecomes a Consideration

It is faced with diminishing growth prospects in present business

When an expansion opportunity exists in an industry whose technologies and products complement its present business

It can leverage existing competencies and capabilities by expanding into an industry that requires similar resource strengths

It can reduce costs by diversifyinginto closely related businesses

It has a powerful brand name it cantransfer to products of other businesses

9-4

Building Shareholder Value Through Building Shareholder Value Through Business DiversificationBusiness Diversification

Diversification is capable of building shareholder value if it passes three tests:

1. Industry Attractiveness Test—the industry presents good long-term profit opportunities

2. Cost of Entry Test—the cost of entering is not so high as to spoil the profit opportunities

3. Better-Off Test—the company’s different businesses should perform better together than as stand-alone enterprises, thereby producing a 1 + 1 = 3 effect for shareholders

9-5

Acquisition of an Existing Acquisition of an Existing BusinessBusiness

Most popular approach to diversification

Advantages Quicker entry into target market

Easier to hurdle certain entry barriers

» Acquiring technological know-how

» Establishing supplier relationships

» Securing adequate distribution access

9-6

Entering a New Business Through Entering a New Business Through Internal Start-upInternal Start-up

More attractive whenParent firm already has most of needed

resources to build a new businessAmple time exists to launch a new businessInternal entry has lower costs

than entry via acquisitionNew start-up does not have to go

head-to-head against powerful rivalsAdditional capacity will not adversely impact

supply-demand balance in industry

9-7

Joint Ventures andJoint Ventures andStrategic PartnershipsStrategic Partnerships

Good way to diversify when

1. The expansion opportunity is too complex, uneconomical, or risky to go it alone

2. The opportunity in a new industry requires a range of competencies and know-how that is greater than an expansion-minded company can marshal

9-8

Corporate Strategy Options: Corporate Strategy Options: Related vs. Unrelated Related vs. Unrelated DiversificationDiversification

Related diversification attempts to increase shareholder value by capturing cross-business strategic fits along value chain segments

Unrelated diversification attempts to build shareholder value by doing a superior job of choosing businesses to diversify into and managing the whole collection of businesses

9-9

Value Chain Relationships for Related Value Chain Relationships for Related BusinessesBusinesses

9-10

Related Diversification and Related Diversification and Competitive AdvantageCompetitive Advantage

Strategic fit exists when one or more activities included in the value chains of of a diversified company’s businesses present opportunities to

Transfer expertise/capabilities/technologyfrom one business to another

Reduce costs by combining related activities of different businesses into a single operation

Transfer use of firm’s brand name from one business to another

9-11

Related Diversification and Related Diversification and Economies of ScopeEconomies of Scope

Stem from cross-business opportunities to reduce costs

Arise when costs can be cut by operating two or more businesses under same corporate umbrella

Cost saving opportunities can stem from interrelationships anywhere along the value chains of different businesses—R&D, manufacturing, distribution, or administrative functions

9-12

What Is Unrelated Diversification?What Is Unrelated Diversification?

Involves diversifying into businesses with

No strategic fit

No meaningful value chainrelationships

No unifying strategic theme

Basic approach – Diversify intoany industry where potential existsto realize good financial results

While industry attractiveness and cost-of-entry tests are important, better-off test is secondary

9-13

Acquisition Criteria For Unrelated Acquisition Criteria For Unrelated Diversification StrategiesDiversification Strategies

Can business meet corporate targets for profitability and ROI?

Is business in an industry with growth potential?

Is business big enough to contribute to parent firm’s bottom line?

Does the business have burdensome capital requirements?

Is industry vulnerable to inflation, tough government regulations or other negative factors?

9-14

Building Shareholder ValueBuilding Shareholder Valuevia Unrelated Diversificationvia Unrelated Diversification

Corporate managers must Do a superior job of diversifying into businesses

capable of producing good earnings and returns on investments

Do an excellent job of negotiating favorable acquisition prices

Shift corporate financial resources from poorly-performing businesses to those with potential for above-average earnings growth

Discern when it is the “right” time to sell a business at the “right” price

9-15

Combination Related-Unrelated Combination Related-Unrelated Diversification StrategiesDiversification Strategies

Dominant-business firms One major core business

accounting for 50 - 80 percent of revenues, with several small related or unrelated businesses accounting for remainder

Narrowly diversified firms Diversification includes a few (2 -

5) related or unrelated businesses Broadly diversified firms

Diversification includes a wide collection of either related or unrelated businesses or a mixture

9-16

How to Evaluate aHow to Evaluate aDiversified Company’s StrategyDiversified Company’s Strategy

Step 1: Assess the long-term attractiveness of each industry the company has diversified into

Step 2: Assess competitive strength of each of the company’s business units

Step 3: Check potential for cross-business strategic fits among business units

Step 4: Check whether the firm’s resources fit the requirements of its business units

Step 5: Rank performance and determine priority for resource allocation

Step 6: Craft new strategic moves to improve overall company performance

9-17

Industry Attractiveness FactorsIndustry Attractiveness Factors

Market size and projected growth Intensity of competition Emerging opportunities and threats Presence of cross-industry strategic fits Resource requirements Seasonal and cyclical factors Social, political, regulatory, and

environmental factors Industry profitability Degree of uncertainty and business risk

9-18

Calculating Industry Attractiveness Calculating Industry Attractiveness ScoresScores

9-19

Factors to Use in Evaluating Factors to Use in Evaluating Competitive StrengthCompetitive Strength

Relative market share Costs relative to competitors Products or services that satisfy buyer

expectations Ability to benefit from strategic fits with sister

businesses Ability to exercise bargaining leverage with key

suppliers or customers Caliber of alliances and collaborative partnerships Brand image and reputation Competitively valuable capabilities Profitability relative to competitors

9-20

Calculating Competitive Strength Calculating Competitive Strength ScoresScores

9-21

Nine-Cell Industry Attractiveness-Nine-Cell Industry Attractiveness-Competitive Strength MatrixCompetitive Strength Matrix

9-22

Strategy Implications of Strategy Implications of Attractiveness/Strength MatrixAttractiveness/Strength Matrix

Businesses in upper left cornerReceive top investment priorityStrategic prescription – grow and build

Businesses in three diagonal cellsGiven medium investment prioritySome businesses in this category may have

brighter or dimmer prospects than others Businesses in lower right corner

Candidates for divestiture or managed to take cash out of the business

9-23

Identifying Cross-Business Identifying Cross-Business Strategic FitsStrategic Fits

9-24

Evaluating Resource Fit and Evaluating Resource Fit and SufficiencySufficiency

Good resource fit exists when

A company’s businesses, individually, add to its collective resource strengths, either financially or strategically

Firm has resources to adequately support its businesses without spreading itself too thin

9-25

Determining Financial Resource FitDetermining Financial Resource Fit

Determine cash flow and investmentrequirements of business unitsWhich are cash hogs and which are

cash cows? Aside from cash flow, financial resource fit

also includesAssessing the individual contributions to

companywide performance targets by each business unit

Determining if the company has the financial strength to provide proper funding to its business unit and maintain a healthy credit rating

9-26

Ranking Business Units for Resource Ranking Business Units for Resource AllocationAllocation

Factors to consider in judgingbusiness-unit performanceSales growthProfit growthContribution to company earningsCash flow generationReturn on capital employed in business

9-27

Crafting New Strategic MovesCrafting New Strategic Moves

Stick closely with existing business lineupand pursue opportunities it presents

Broaden company’s business scope bymaking new acquisitions in new industries

Divest certain businesses and retrenchto a narrower base of business operations

Restructure company’s business lineup, putting a whole new face on business makeup

9-28

Broadening the Diversification BaseBroadening the Diversification Base

Multi business companies may consider adding to the diversification base whenRevenues and profits are growing slowlyOpportunities exist to transfer resources and

capabilities to a related businessUnfavorable driving forces face its core

businessThe market positions of one or more of its

business units can be strengthened with the acquisition of a related business

9-29

Retrenching to a Narrower Retrenching to a Narrower Diversification BaseDiversification Base

Retrenchment focuses corporate resources to building strong positions in a smaller number of businesses and industries

Retrenchment involves Divesting businesses that have become unattractive

because of deteriorating market conditions Eliminating cash hog businesses with questionable

long-term potential Divesting business units with weak strategic fit with

other businesses in the portfolio Eliminating weakly positioned businesses that offer

little prospect for earning a decent return on investment

9-30

Broadly Restructuring the Business Broadly Restructuring the Business LineupLineup

Radically altering the business lineup may be necessary whenToo many businesses are in unattractive

industriesThe business lineup is made up of too

many weak businessesThe company is saddled with excessive

debtIll-chosen acquisitions have not lived up

to expectations