chapter 08

397Section 6 Lecture Notes for Chapter 8

Chapter 8Strategies for Multibusiness Corporations

Chapter SummaryChapter Eight moves up one level in the strategy-making hierarchy, from strategy making in a single business enterprise to strategy making in a diversifi ed enterprise. The chapter begins with a description of the various paths through which a company can become diversifi ed and provides an explanation of how a company can use diversifi cation to create or compound competitive advantage for its business units. The chapter also examines the techniques and procedures for assessing the strategic attractiveness of a diversifi ed companys business portfolio and surveys the strategic options open to already-diversifi ed companies.

Lecture OutlineI. Introduction

1. In most diversifi ed companies, corporate level executives delegate considerable strategy-making authority to the heads of each business, usually giving them the latitude to craft a business strategy suited to their particular industry and competitive circumstances and holding them accountable for producing good results. However, the task of crafting a diversifi ed companys overall or corporate strategy falls squarely on the shoulders of top-level corporate executives.

2. Devising a corporate strategy has four distinct facets:

a. Picking new industries to enter and deciding on the means of entry

b. Pursuing opportunities to leverage cross-business value chain relationships and strategic fi ts into competitive advantage

c. Steering corporate resources into the most attractive business units

d. Initiating actions to boost the combined performances of the corporations collection of businesses

II. When Business Diversifi cation Becomes a Consideration

1. Diversifying into new industries always merits strong consideration whenever a single-business company encounters diminishing market opportunities and stagnating sales in its principle business.

2. There are four other instances in which a company becomes a prime candidate for diversifying:

a. When it spots opportunities for expanding into industries whose technologies and products complement its present business.

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Section 6 Instructors Manual for Essentials of Strategic Management398

b. When it can leverage existing competencies and capabilities by expanding into businesses where these same resource strengths are key success factors and valuable competitive assets.

c. When diversifying into closely related businesses opens new venues for reducing costs.

d. When it has a powerful and well-known brand name that can be transferred to the products of other businesses and thereby used as a lever for driving up the sales and profi ts of such a business.

III. Building Shareholder Value: The Ultimate Justifi cation for Diversifying

1. Diversifi cation must do more for a company than simply spread its risk across various industries.

2. For there to be reasonable expectations that a diversifi cation move can produce added value for shareholders, the move must pass three tests:

a. The industry attractiveness test the industry chosen for diversifi cation must be attractive enough to yield consistently good returns on investment.

b. The cost of entry test The cost to enter the target industry must not be so high as to erode the potential for profi tability.

c. The better-off test Diversifying into a new business must offer potential for the companys existing businesses and the new business to perform better together under a single corporate umbrella than they would perform operating as independent stand-alone businesses.

3. Diversifi cation moves that satisfy all three tests have the greatest potential to grow shareholder values over the long term. Diversifi cation moves that can pass only one or two tests are suspect.

IV. Approaches to Diversifying the Business Lineup

A. Diversifi cation by Acquisition of an Existing Business

1. Acquisition is the most popular means of diversifying into another industry. It is quicker and offers an effective way to hurdle such entry barriers as acquiring technological know-how, establishing supplier relationships, achieving scale economies, building brand awareness and securing adequate distribution.

2. The big dilemma is whether to pay a premium price for a successful company or to buy a struggling company at a bargain price.

B. Entering a New Line of Business through Internal Start-Up

1. Achieving diversifi cation through internal start-up involves building a new business subsidiary from scratch.

2. Generally, forming a start-up subsidiary to enter a new business has appeal only when:

a. The parent company already has in-house most or all of the skills and resources it needs to piece together a new business and compete effectively

b. There is ample time to launch the business

c. Internal entry has lower entry costs than entry via acquisition

d. The targeted industry is populated with many relatively small fi rms such that the new start-up does not have to compete head-to-head against larger, more powerful rivals

e. Adding new production capacity will not adversely impact the supply-demand balance in the industry


f. Incumbent fi rms are likely to be slow or ineffective in responding to a new entrants efforts to crack the market

C. Using Joint Ventures to Achieve Diversifi cation

1. A joint venture can be useful in at least two types of situations:

a. To pursue an opportunity that is too complex, uneconomical, or risky for a single organization to pursue alone

b. When the opportunities in a new industry require a broader range of competencies and know-how than any one organization can marshal

2. However, partnering with another company has signifi cant drawbacks due to the potential for confl icting objectives, disagreements over how to best operate the venture, culture clashes, and so on.

3. Joint ventures are generally the least durable of the entry options, usually lasting only until the partners decide to go their own ways.

V. When Business Diversifi cation Becomes a Consideration.

1. So long as a single-business company can achieve profi table growth opportunities in its present industry, there is no urgency to pursue diversifi cation.

2. The big risk of a single-business company is having all the fi rms eggs in one industry basket.

3. Diversifying into new industries always merits strong consideration whenever a single-business company encounters diminishing market opportunities and stagnating sales in its principal business.

4. There are four other instances in which a company becomes a prime candidate for diversifying.

a. When it spots opportunities for expanding into industries whose technologies and products complement its present business.

b. When it can leverage existing competencies and capabilities by expanding into industries where these same resource strengths are valuable competitive assets.

c. When diversifying into closely related businesses opens new avenues for reducing costs.

d. When it has a powerful and well-known brand name that can be transferred to the products of other businesses.

VI. Building Shareholder Value: The Ultimate Justifi cation for Business Diversifi cation

1. In principle, diversifi cation cannot be considered a success unless it results in added shareholder valuevalue that shareholders cannot capture on their own by spreading their investments across the stocks of companies in different industries.

2. Business diversifi cation stands little chance of building shareholder value without passing the following three tests:

a. The industry attractiveness test

b. The cost-of-entry test

c. The better-off-test

VII. Approaches to Diversifying the Business Lineup

1. The means of entering new industries and lines of business can take any of three forms: acquisition, internal start-up, or joint ventures with other companies.


A. Diversifi cation by Acquisition of an Existing Business Acquisition is the most popular means of diversifying into another industry. Not only is it quicker than trying to launch a brand new operation, but it also offers an effective way to hurdle such entry barriers as acquiring technological know-how, establishing supplier relationships, achieving scale economies, building brand awareness, and securing adequate distribution.

B. Entering a New Line of Business through Internal Start-Up

1. Generally, forming a start-up subsidiary to enter a new business has appeal only when

a. the parent company already has in-house most or all of the skills and resources needed to compete effectively;

b. there is ample time to launch the business;

c. internal entry has lower costs than entry via acquisition;

d. the targeted industry is populated with relatively small fi rms such that the new start-up does not have to compete against large, powerful rivals;

e. adding new production capacity will not adversely impact the supplydemand balance in the industry; and

f. incumbent fi rms are likely to be slow or ineffective in responding to a new entrants efforts to crack the market.

A. Using Joint Ventures to Achieve Diversifi cation

1. A joint venture to enter a new business can be useful in at least two types of situations.

a. To pursue an opportunity that is too complex, uneconomical, or risky for one company to pursue alone.

b. When opportunities in a new industry require a broader range of competencies and know-how than an expansion minded company can marshal.

VIII. Defi ning the Corporate Strategy: Diversifi cation into Related or Unrelated Businesses?

1. Once a company decides to diversify, its fi rst big corporate strategy decision is whether to diversity into related businesses, unrelated businesses, or some mix of both (See Figure 8.1).

2. Businesses are said to be related when their value chains possess competitively valuable cross-business relationships.

A. The Appeal of Related Diversifi cation

1. A related diversifi cation strategy involves building the company around businesses whose value chains possess competitively valuable strategic fi ts.

2. Strategic fi t exists whenever one or more activities comprising the value chains of different businesses are suffi ciently similar as to present opportunities for:

3. Three types of acquisition candidates are usually of particular

a. skills transfer involving competitively valuable expertise, technological know-how or other capabilities from one business to another

b. cost sharing between separate businesses where value chain activities can be combined, generating cost savings for both businesses.

c. brand sharing between business units that have common customers or that draw upon common core competencies

4. Cross-business strategic fi ts can exist anywhere along the value chain.


Core Concept

Strategic fi t exists when the value chains of different businesses present opportunities for cross-business skills transfer, cost sharing or brand sharing.

5. Strategic Fit and Economies of Scope. Strategic fi t in the value chain activities of a diversifi ed corporations different businesses opens up opportunities for economies of scope a concept distinct from economies of scale. Economies of scale are cost savings that accrue directly from cost-saving strategic fi ts along the value chains of related businesses.

6. The greater the cross-business economies associated with cost-saving strategic fi ts, the greater the potential for a related diversifi cation strategy to yield a competitive advantage based on lower costs than rivals.

7. The Ability of Related Diversifi cation to Deliver Competitive Advantage and Gains in Shareholder Value. Economies of scope and the other strategic-fi t benefi ts provide a dependable basis for earning higher profi ts and returns than what a diversifi ed companys business could earn as standalone enterprises

a. capturing Cross-business strategic fi ts via related diversifi cation builds shareholder value in ways that shareholders cannot replicate by simply owning a diversifi ed portfolio of stocks;

b. the capture of cross-business strategic fi t is possible only through related diversifi cation

c. the benefi t of cross-benefi t strategic fi ts benefi ts are not automatically realizedthe benefi ts materialize only after management has successfully pursued internal actions to capture them.

B. Diversifying into Unrelated Businesses

1. The basic premise of unrelated diversifi cation is that any company that can be acquired on good fi nancial terms and that has satisfactory earnings potential represents a good business opportunity.

2. Company managers spends much time and effort screening acquisition candidates and evaluating the pros and cons of keeping or divesting existing businesses, using such criteria as:

a. Whether the business can meet corporate targets for profi tability and return on investment

b. Whether the business is an industry with attractive growth potential

c. Whether the business is big enough to contribute signifi cantly to the parent fi rms bottom line

d. Whether the business has burdensome capital requirements

e. Whether there is industry vulnerability to recession, infl ation, high interest rates, tough government regulations concerning product safety or the environment, and other potentially negative factors.

3. Three types of acquisition candidates are usually of particular

a. Companies that have bright growth prospects but are short on investment capital

b. Undervalued companies that can be acquired at a bargain price.

c. Struggling companies whose operations can be turned around with the aid of a parent companys fi nancial resources and managerial know-how.


4. Companies that pursue a strategy of unrelated diversifi cation generally exhibit a willingness to diversify into any industry where there is potential for a company to realize consistently good fi nancial results.

5. A Strategy of Unrelated Diversifi cation, Revenue and Earnings Growth, and Risk Reduction is suggested to offer growth and reduced risk because of the following:

a. Business risk is scattered over a set of truly diverse industries

b. The companys fi nancial resources can be employed to maximum advantage by investing in whatever industries offer the best profi t prospects

c. To the extent that corporate managers are exceptionally astute at spotting bargain-priced companies with big upside profi t potential, 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 know-how supplied by the parent company

d. Company profi tability may prove somewhat more stable over the course of economic upswings and downswings

6. Unrelated diversifi cation certainly merits consideration when a fi rm is trapped in or overly dependent on an endangered or unattractive industry.

7. Building Shareholder Value Through Unrelated Diversifi cation: Building shareholder value via unrelated diversifi cation ultimately hinges on the business acumen of corporate executives. In more specifi c terms, this means that corporate level executives must:

a. Do a superior job of diversifying into new businesses that can produce consistently good earnings and returns on investment

b. Do an excellent job of negotiating favorable acquisition prices

c. Be shrewd in identifying when to shift resources out of businesses with dim profi t prospects and into businesses with above-average

d. be good at discerning when it is the right time to sell a particular business

8. The Pitfalls of Unrelated Diversifi cation: Unrelated diversifi cation strategies have two important negatives that undercut the positives:

a. Very demanding managerial requirements

b. Limited competitive advantage potential

Core Concept

Unrelated diversifi cation requires that corporate executives rely on the skills and expertise of business level managers to build competitive advantage and boost the performance of individual businesses.

9. Demanding Managerial Requirements: Successfully managing a set of fundamentally different businesses operating in fundamentally different industry and competitive environments is a very challenging and exceptionally diffi cult proposition for corporate level managers.

10. The greater the number of businesses a company is in and the more diverse those businesses are, the harder it is for corporate managers to:

a. Stay abreast of what is happening in each industry and each subsidiary .

b. Pick business-unit heads having the requisite combination of managerial skills and know-how to drive gains in performance.


c. Be able to tell the difference between those strategic proposals of business-unit managers that are prudent and those that are risky or unlikely to succeed.

d. Know what to do if a business unit stumbles and its results suddenly head downhill.

11. As a rule, the more unrelated businesses that a company has diversifi ed into, the more corporate executives are reduced to managing by the numbers.

12. Overseeing a set of widely diverse businesses may turn out to be much harder than it sounds. In practice, comparatively few companies have proved that they have top management capabilities that are up to the task. Far more companies have failed at unrelated diversifi cation than have succeeded.

Core Concept

Relying solely on the expertise of corporate executives to wisely manage a set of unrelated businesses is a much weaker foundation for enhancing shareholder value than is a strategy of related diversifi cation where corporate performance can be boosted by competitively valuable cross-business strategic fi ts.

13. Limited Competitive Advantage Potential: Unrelated diversifi cation offers no potential for competitive advantage beyond that of what each individual business can generate on its own.

14. Without the competitive advantage potential of strategic fi ts, consolidated performance of an unrelated group of businesses stands to be little or no better than the sum of what the individual business units could achieve independently.

C. Corporate Strategies Combining Related and Unrelated Diversifi cation

1. There is nothing to preclude a company from diversifying into both related and unrelated Businesses.

2. Indeed, the business makeup of diversifi ed companies varies considerably

a. Dominant-business enterprises one major core business accounts for 50 to 80 percent of total revenues and a collection of small related or unrelated businesses accounts for the remainder

b. Narrowly diversifi ed 2 to 5 related or unrelated businesses

c. Broadly diversifi ed wide ranging collection of related businesses, unrelated businesses, or a mixture of both

3. Figure 8.4, Identifying a Diversifi ed Companys Strategy, indicates what to look for in identifying the main elements of a companys diversifi cation strategy.

IX. Evaluating the Strategy of a Diversifi ed Company

1. The procedure for evaluating a diversifi ed companys strategy and deciding how to improve the companys performance involves six steps:

a. Assessing the attractiveness of the industries the company has diversifi ed into.

b. Assessing the competitive strength of the companys business-units.

c. Evaluating the extent of cross-business strategic fi ts along the value chains of the companys various business units.

d. Checking whether the fi rms resources fi t the requirements of its present business lineup.


e. Ranking the performance prospects of the businesses from best to worst and determining a priority for resource allocation.

f. Crafting new strategic moves to improve overall corporate performance.

A. Step 1: Evaluating Industry Attractiveness

1. A principal consideration in evaluating a diversifi ed companys strategy is the attractiveness of the industries in which it has business operations. A reliable analytical tool for gauging industry attractiveness scores based on the following measures.

Market size and projected growth rate The intensity of competition Emerging opportunities and threats The presence of cross-industry strategic fi ts Resource requirements Seasonal and cyclical factors Social, political, regulatory, and environmental factors Industry profi tability Industry uncertainty and business risk

2. Interpreting the Industry Attractiveness Scores: Industries with a score much below 5.0 probably do not pass the attractiveness test. For a diversifi ed company to be a strong performer, a substantial portion of its revenues and profi ts must come from business units with relatively high attractiveness scores.

3. Calculating Industry Attractiveness Scores

a. There are two necessary conditions for producing valid industry attractiveness scores.

One is deciding on appropriate weights for the industry attractiveness measure. The second requirement is to have suffi cient knowledge to rate the industry on each

attractiveness measure

b. Despite the hurdles, calculating industry attractiveness scores is a systematic and reasonably reliable method for ranking a diversifi ed companys industries from most to least attractive.

B. Step 2: Evaluating Business-Unit Competitive Strength

1. The second step in evaluating a diversifi ed company is to determine how strongly positioned each of its business units are in their respective industry.

2. The following factors may be used in quantifying the competitive strengths of a diversifi ed companys business subsidiaries:

Relative market share Costs relative to competitors costs Products or services that satisfy buyer expectations Ability to benefi t from strategic fi ts with sibling businesses Number and caliber of strategic alliances and collaborative partnerships Brand image and reputation


Competitively valuable capabilities Profi tability relative to competitors

3. After settling on a set of competitive strength measures that are well matched to circumstances of the various business units, weights indicating each measures importance need to be assigned. As before, the importance weights must add up to 1. Each business unit is then rated on each of the chosen strength measures, using a rating scale of 1 to 10. Weighted strength ratings are calculated by multiplying the business units rating on each strength by the assigned weights. The sum of weighted ratings across all the strength measures provides a quantitative measure of a business units overall market strength and competitive standing. Table 8.2 shows the results of Calculating Weighted Competitive Strength Scores for a Diversifi ed Companys Business Units.

4. Interpreting the Competitive Strength Scores: Business units with competitive strength ratings above 6.7 on a rating scale of 1 to 10 are strong market contenders in their industries.

5. Using a Nine-Cell Matrix to Evaluate the Strength of a Diversifi ed Companys Business Lineup: The industry attractiveness and business strength scores can be used to portray the strategic positions of each business in a diversifi ed 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 and the horizontal axis into three regions. Figure 8.3, A Nine-Cell Industry Attractiveness-Competitive Strength Matrix, depicts this tool. Each business unit is plotted on the nine-cell matrix according to its overall attractiveness score and strength score and then shown as a bubble. The size of each is scaled to what percentage of revenues the business generates relative to total corporate revenue. The location of the business units on the attractiveness-strength matrix provides valuable guidance in deploying corporate resources to the various business units. In general, a diversifi ed companys prospects for good overall performance are enhanced by concentrating corporate resources and strategic attention on those business units having the greatest competitive strength and industry attractiveness.

6. The nine-cell attractiveness-strength matrix provides clear, strong logic for why a diversifi ed company needs to consider both the industry attractiveness and business strength in allocating resources and investment capital to its different businesses.

C. Step 3: Checking the Competitive Advantage Potential of Cross-Business Strategic Fits

1. Checking the competitive advantage potential of cross-business strategic fi ts involves searching and evaluating how much benefi t a diversifi ed company can gain from four types of value chain matchups:

a. Opportunities to combine the performance of certain activities thereby reducing costs and capturing economies of scale.

b. Opportunities to transfer skills, technology, or intellectual capital from one business to another.

c. Opportunities to share the use of a well-respected brand name across multiple product and/or service categories.

D. Step 4: Evaluating the Suffi ciency of Corporate Resources in Diversifi ed Companies

1. The businesses in a diversifi ed companys lineup need to exhibit good resource fi t.

2. Resource fi t exists when:

a. Businesses, individually, add to a companys collective resource strengths

b. A company has suffi cient resources to support its entire group of businesses without spreading itself too thin


3. Financial Resource Fits: Cash Cows versus Cash Hogs: Different businesses have different cash fl ow and investment characteristics. For example, business units in rapidly growing industries are often cash hogs so labeled because the cash fl ows they are able to generate from internal operations are not big enough to fund their expansion. Business units with leading market positions in mature industries may be cash cows businesses that generate substantial cash surpluses over what is needed to fund their operations.

Core Concept

A cash cow generates cash fl ows over and above its internal requirements, thereby providing fi nancial resources that may be used to invest in cash hogs, fi nance new acquisitions, fund share buyback programs or pay dividends.

4. A diversifi ed company has a good fi nancial resource fi t when the excess cash generated by its cash cow businesses is suffi cient to fund the investment requirements of promising cash hog businesses. Ideally, investing in promising cash hog businesses over time results in growing the hogs into self-supporting star businesses.

5. Star businesses are often the cash cows of the future.

6. Aside from cash fl ow considerations, there are two other factors to consider in assessing the fi nancial resource fi r for businesses in a diversifi ed fi rms portfolio:

Do individual businesses adequately contribute to achieving companywide performance targets?

Does the corporation have adequate fi nancial strength to fund its different businesses and maintain a healthy credit rating?

7. Examining a Diversifi ed Companys Nonfi nancial Resource Fits. Diversifi ed companies must also ensure that the nonfi nancial resource needs of its portfolio of businesses are met by its corporate capabilities. Companies should avoid adding to the business lineup in ways that overly stretch such nonfi nancial resources as managerial talent, technology and information systems, and marketing support.

Does the company have or can it develop the specifi c resource strengths and competitive capabilities needed to be successful in each of its businesses?

Are recently acquired businesses acting to strengthen a companys resource8. Are recently acquired businesses acting to strengthen a companys resource base and competitive

capabilities or are they causing its competitive and managerial resources to be stretched too thin?

9. A diversifi ed company has to guard against overtaxing its resource strengths, a condition that can arise when

a. it goes on an acquisition spree and management is called upon to assimilate and oversee many new businesses very quickly

b. it lacks suffi cient resource depth to do a creditable job of transferring skills and competencies from one of its businesses to another.

E. Step 5: Ranking Business Units and Setting a Priority for Resource Allocation

1. Once a diversifi ed companys strategy has been evaluated from the perspectives of industry attractiveness, competitive strength, strategic fi t, and resource fi t, the next step is to rank the performance prospects of the businesses from best to worst and determine which businesses merit top priority for new capital investments by the corporate parent.


2. The most important considerations in settling on resource allocation decisions is business units past performance in terms of sales growth, profi t growth, contribution to companys earnings, and the return on capital.

3. The industry attractiveness/business strength evaluations provide a basis for judging a businesss future prospects.

4. The rankings of future performance generally determine what priority the corporate parent should give to each business in terms of resource allocation. The task here is to decide which business units should have top priority for corporate resource support and new capital investment and which should carry the lowest priority.

5. Business units with the brightest profi t and growth prospects and solid strategic and resource fi ts generally should head the list for corporate resource support.

G. Step 6: Crafting New Strategic Moves to Improve Overall Corporate Performance

1. The conclusions fl owing from the fi ve preceding analytical steps set the agenda for crafting strategic moves to improve a diversifi ed companys overall performance. The strategic options boil down to four broad categories of actions:

a. Sticking closely with the existing business lineup and pursuing the opportunities it presents.

b. Broadening the companys business scope by making new acquisitions in new industries.

c. Divesting some businesses and retrenching to a narrower base of business operations.

d. Restructuring the companys business lineup and putting a whole new face on the companys business makeup.

2. Sticking Closely with the Existing Business Lineup makes sense when the companys present businesses offer attractive growth opportunities and can be counted on to generate good earnings and cash fl ow.

3. In the event that corporate executives are not entirely satisfi ed with the opportunities they see in the companys present set of businesses. they can opt for any of the three strategic alternatives listed below.

4. Broadening a Diversifi ed Companys Business Base Motivating factors to build positions in new industries

a. Sluggish growth in revenues and profi ts

b. Vulnerability to seasonal or recessionary infl uences or to threats from emerging new technologies

c. The potential for transferring resources and capabilities to other related or complementary businesses

d. Rapidly changing conditions in one or more of a companys core businesses brought on by technological, legislative or new product innovations

e. To complement and strengthen the market position and competitive capabilities of one or more of its present businesses.

5. Reasons for Divesting Some Businesses and Retrenching to a Narrower Diversifi cation Base:

a. Retrenching to a narrower diversifi cation base is usually undertaken when top management concludes that its diversifi cation strategy has ranged too far afi eld and that the company can improve long term performance by concentrating on building stronger positions in a smaller number of core businesses and industries.


b. Market conditions in a once-attractive business have badly deteriorated

c. A business lacks adequate strategic or resource fi t, either because its a cash cow or it is weakly positioned in the industry.

d. A diversifi cation move that seems sensible from a strategic-fi t stand-point turns out to be a poor cultural fi t.

Core Concept

Focusing corporate resources on a few core and mostly related businesses avoids the mistake of diversifying so broadly that resources and management attention are stretched too thin.

Concepts & Connections 8.1, VFs Restructuring Strategy that Made it a Star of the Apparel Industry

Discussion Question: Discuss How VF Corporations restructuring was so successful, both in terms of people and profi t. How will VF measure up to other apparel fi rms in these current economic times?

Answer: VF Corporation took at look at its business line-up and made the decision to get rid of its slow growing businesses, including Vanity Fair (VF). It then began to research different kinds of apparel companies, developed a relationship with each companys management team making sure there was a strategic fi t between the companies before closing a deal,. Once a business was acquired, VF kept the same management team, guaranteeing a motivated and committed leadership team. Knowing what to divest, and what to acquire made VF Corporation the most profi table apparel fi rm in the industry with net earnings of $603 million in 2008.

6. Options for Divesting a Business: Sell or Spin Off? Selling a business outright to another company is far and away the most frequently used option for divesting a business. Sometimes a business selected for divestiture has ample resource strengths to compete successfully on its own. In such cases, a corporate parent may elect to spin the unwanted business off as a fi nancially and managerially independent company. When a corporate parent decides to spin off one of its businesses as a separate company, there is the issue of whether or not to retain partial ownership.

7. Broadly Restructuring the Business Lineup through a Mix of Divestitures and New Acquisition; Restructuring strategies involve divesting some businesses and acquiring others to put a whole new face on the companys business lineup. Performing radical surgery on a companys group of businesses is an appealing strategy alternative when a diversifi ed companys fi nancial performance is being squeezed or eroded by:

a. Too many businesses in slow-growth, declining, low-margin, or otherwise unattractive industries.

b. Too many competitively weak businesses.

c. An excessive debt burden with interest costs that eat deeply into profi tability

e. Ill-chosen acquisitions that have not lived up to expectations


Assurance of Learning Exercises 1. See if you can identify the value chain relationships which make the businesses of the following

companies related in competitively relevant ways. In particular, you should consider whether there are cross-business opportunities for (1) skills/technology transfer, (2) combining related value chain activities to achieve lower costs, and/or (3) leveraging use of a well-respected brand name.

Outback Steakhouse

Outback Steakhouse Carrabbas Italian Grill Roys Restaurant (Hawaiian fusion cuisine) Bonefi sh Grill (Market-fresh fi ne seafood) Flemings Prime Steakhouse & Wine Bar Lee Roy Selmons (Southern comfort food) Cheeseburger in Paradise Blue Coral Seafood & Spirits (Fine seafood)LOral

Maybelline, Lancme, Helena Rubenstein, Kiehls, Garner, and Shu Uemura cosmetics LOral and Soft Sheen/Carson hair care products Redken, Matrix, LOral Professional, and Kerastase Paris professional hair care and skin care

products

Ralph Lauren and Giorgio Armani fragrances Biotherm skincare products La RochePosay and Vichy Laboratories dermocosmeticsJohnson & Johnson

Baby products (powder, shampoo, oil, lotion) Band-Aids and other fi rst-aid products Womens health and personal care products (Stayfree, Carefree, Sure &Natural) Neutrogena and Aveeno skin care products Nonprescription drugs (Tylenol, Motrin, Pepcid AC, Mylanta, Monistat) Prescription drugs Prosthetic and other medical devices Surgical and hospital products Accuvue contact lensesOutback Steakhouse. The companys overall strategy is to differentiate its restaurants by emphasizing consistently high-quality food and service, generous portions at moderate prices and a casual atmosphere. This is a good example of two strategic fi t opportunities: transferring skills and combining the related value chain activities to achieve lower costs, especially in the administrative functions.


LOral. One strategic fi t opportunity is skills transfer which involves cross-business collaboration to focus on innovation of new beauty-related products, i.e. creating new strengths and capabilities. In some of the businesses, there is the potential of combining related value chain activities, including manufacturing and R&D.

Johnson & Johnson. This a great example of leveraging a well-respected brand name. Another potential strategic fi t opportunity is combining related value chain activities, including distribution and manufacturing.

2. The defi ning characteristic of unrelated diversifi cation is few competitively valuable cross-business relationships. Peruse the business group listings for Lancaster Colony shown below and see if you can confi rm why it is pursuing an unrelated diversifi cation strategy.

Lancaster Colonys business lineup

Specialty food products: Cardini, Marzetti, Girards, and Pheiffer salad dressings; T. Marzetti and Chatham Village croutons; Jack Daniels mustards; Inn Maid noodles; New York and Mamma Bella garlic breads; Reames egg noodles; Sister Schuberts rolls; and Romanoff caviar

Candle-lite brand candles marketed to retailers and private-label customers chains Glassware, plastic ware, coffee urns, and matting products marketed to the food-service and

lodging industry

If need be, visit the companys Web site (www.lancastercolony.com) to obtain additional information about its business lineup and strategy.

In their responses, students should indicate an understanding of the basic premise of unrelated diversifi cation, which is that any company that can be acquired on good fi nancial terms and that has satisfactory growth and earnings potential represents a good acquisition and a good business opportunity for the diversifying enterprise. Based on information provided on the Web site, Lancaster Colony is a diversifi ed marketer and manufacturer for two product groups: Specialty Foods, the largest and fastest growing division, and Glassware and Candles. The groups operate autonomously, allowing each to focus on their specifi c customer base and market opportunities. Thus, this description of the company indicates it is pursuing an unrelated diversifi cation strategy. In a recent Financial Release (09/09), Lancaster Colony provided four initiatives related to shareholder returns: grow existing businesses, acquire good-fi tting food businesses, repurchase shares, and grow cash dividends. This is further evidence that Lancaster Colony is concentrating on unrelated diversifi cation.

3. General Electric recently organized its broadly diversifi ed lineup of products and services into the following business groups:

Capital Finance: Commercial and consumer fi nance (loans, operating leases, fi nancing programs and fi nancial services provided to corporations, retailers, and consumers in 35 countries)revenues of $67.0 billion in 2008.

Technology Infrastructure: Jet engines for military and civil aircraft, freight and passenger locomotives, medical imaging and information technologies, medical diagnostics, patient monitoring systems, disease research, drug discovery and biopharmaceuticalsrevenues of $46.3 billion in 2008.

Consumer & Industrial: Consumer appliances and electrical equipment; industrial automation hardware and software, controls, sensors, and security systemsrevenues of $11.7 billion in 2008.

Energy Infrastructure: Gas turbines for marine and industrial applications, electric power generation equipment, power transformers, high-voltage breakers, distribution transformers and


breakers, capacitors, relays, regulators, substation equipment, metering productsrevenues of $38.6 billion in 2008.

NBC Universal: Owns and operates the NBC television network, a Spanish-language network (Telemundo), several news and entertainment networks (CNBC, MSNBC, Bravo, Sci-Fi Channel, Sleuth, USA Network), Universal Pictures, Universal Studios Home Entertainment, various television production operations, several special interest Internet sites, a group of television stations, and theme parksrevenues of $17.0 billion in 2008.

a. Is GEs diversifi ed business lineup best characterized as unrelated diversifi cation or a combination of related and unrelated diversifi cation?

b. Is GE more accurately categorized as a dominant business enterprise or a broadly diversifi ed conglomerate or something else?

c. Do you see any strategic fi t opportunities in GEs business lineup? Are these strategic fi t opportunities, if any, more within each of the fi ve business groupings or do they (also?) cut across the fi ve business groupings? Explain.

(a) Students should recognize that GEs business groups would best be described as unrelated diversifi cation. According to the Web site, GE businesses all share one important trait: each harnesses the power of imagination to make life better for our customers and consumers all around the world. However, there appears to be minimal focus on capturing strategic-fi t opportunities among the value chains of the various businesses in its portfolio.

(b) GE would most likely be described as a broadly diversifi ed conglomerate. The company has diversifi ed into fi ve mostly unrelated business groups of related businesses. There are few opportunities to pursue synergies in the areas of skills/technology transfer and combining related value chain activities to achieve lower costs. Within the fi ve groups, there are potential value chain synergies that can be achieved.

(c) Students should arrive at the conclusion that strategic fi t opportunities are more likely to be realized within each of (rather than across) GEs fi ve business groups. For example, there is a possibility of combining manufacturing and R&D within the following business groups: Technology Infrastructure, Consumer & Industrial, and Energy Infrastructure. One example of a strategic fi t that may apply to all the business groups is leveraging GEs strong brand name recognition.

chapter 08

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