WHAT DOES CRAFTING A DIVERSIFICATION STRATEGY ENTAIL?Step 1Picking new industries to enter and deciding on the means of entry.Step 2Pursuing opportunities to leverage cross-business value chain relationships and strategic fit into competitive advantage.Step 3Establishing investment priorities and steering corporate resources into the most attractive business units.Step 4Initiating actions to boost the combined performanceof the cooperations collection of businesses.8*

STRATEGIC DIVERSIFICATION OPTIONSSticking 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 firms business lineup.8*

WHEN BUSINESS DIVERSIFICATION BECOMES A CONSIDERATIONA firm should consider diversifying when:It can expand into businesses whose technologies and products complement its present business.Its resources and capabilities can be used as valuable competitive assets in other businesses.Costs can be reduced by cross-business sharing or transfer of resources and capabilities. Transferring a strong brand name to the products of other businesses helps drive up sales and profits of those businesses.8*

BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYINGThe industry attractiveness testThe cost-of-entry testThe better-off testTesting Whether Diversification Will Add Long-Term Value for Shareholders8*

TESTING WHETHER DIVERSIFICATION ADDS VALUE FOR SHAREHOLDERSThe Attractiveness Test:Are the industrys profits and return on investment as good or better than present business(es)?The Cost of Entry Test:Is the cost of overcoming entry barriers so great as to long delay or reduce the potential for profitability?The Better-Off Test:How much synergy (stronger overall performance) will be gained by diversifying into the industry?8*

CORE CONCEPT

Creating added value for shareholders via diversification requires building a multibusiness company where the whole is greater than the sum of its partsan outcome known as synergy.8*

BETTER PERFORMANCE THROUGH SYNERGYEvaluating the Potential for Synergy through DiversificationFirm A purchases Firm B in another industry. A and Bs profits are no greater than what each firm could have earned on its own.Firm A purchases Firm C in another industry. A and Cs profits are greater than what each firm could have earned on its own.No Synergy (1+1=2)Synergy (1+1=3)8*

APPROACHES TO DIVERSIFYING THE BUSINESS LINEUPAcquisition of an existing businessInternal new venture (start-up)Joint venture Diversifying into New Businesses8*

DIVERSIFICATION BY ACQUISITION OF AN EXISTING BUSINESSAdvantages:Quick entry into an industryBarriers to entry avoidedAccess to complementary resources and capabilitiesDisadvantages:Cost of acquisitionwhether to pay a premium for a successful firm or seek a bargain in struggling firmUnderestimating costs for integrating acquired firmOverestimating the acquisitions potential to deliver added shareholder value8*

CORE CONCEPT

An acquisition premium is the amount by which the price offered exceeds the preacquisition market value of the target firm.8*

ENTERING A NEW LINE OF BUSINESS THROUGH INTERNAL DEVELOPMENTAdvantages 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.8*

CORE CONCEPT

Corporate venturing (or new venture development) is the process of developing new businesses as an outgrowth of a firms established business operations. It is also referred to as corporate entrepreneurship or intrapreneurship since it requires entrepreneurial-like qualities within a larger enterprise.8*

WHEN TO ENGAGE IN INTERNAL DEVELOPMENT8*

WHEN TO ENGAGE IN A JOINT VENTUREEvaluating the Potential for a Joint VentureIs the opportunity too complex, uneconomical, or risky for one firm to pursue alone?Does the opportunity require a broader range of competencies and know-how than the firm now possesses? Will the opportunity involve operations in a country that requires foreign firms to have a local minority or majority ownership partner?8*

DIVERSIFICATION BY JOINT VENTUREJoint ventures are advantageous when diversification opportunities:Are too large, complex, uneconomical, or risky for one firm to pursue alone.Require a broader range of competencies and know-how than a firm possesses or can develop quickly.Are located in a foreign country that requires local partner participation and/or ownership.8*

DIVERSIFICATION BY JOINT VENTURE (contd)Joint ventures have the potential for developing serious drawbacks due to:Conflicting objectives and expectations of venture partners.Disagreements among or between venture partners over how best to operate the venture.Cultural clashes among and between the partners.The venture dissolving when one of the venture partners decides to go their own way.8*

CHOOSING A MODE OF MARKET ENTRYThe Question of Critical Resources and CapabilitiesDoes the firm have the resources and capabilities for internal development?The Question of Entry BarriersAre there entry barriers to overcome?The Question of SpeedIs speed of the essence in the firms chances for successful entry?The Question of Comparative CostWhich is the least costly mode of entry, given the firms objectives?8*

CORE CONCEPT

Transaction costs are the costs of completing a business agreement or deal of some sort, over and above the price of the deal. They can include the costs of searching for an attractive target, the costs of evaluating its worth, bargaining costs, and the costs of completing the transaction.8*

CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSESRelated BusinessesUnrelated BusinessesBoth Related and Unrelated BusinessesWhich Diversification Path to Pursue?8*

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*

CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSESRelated BusinessesHave competitively valuable cross-business value chain and resource matchups.Unrelated BusinessesHave dissimilar value chains and resource requirements, with no competitively important cross-business relationships at the value chain level.8*

CORE CONCEPT

Strategic fit exists whenever one or more activities constituting the value chains of different businesses are sufficiently similar as to present opportunities for cross-business sharing or transferring of the resources and capabilities that enable these activities.8*

DIVERSIFYING INTO RELATED BUSINESSESStrategic Fit Opportunities:Transferring specialized expertise, technological know-how, or other resources and capabilities from one businesss value chain to anothers.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.8*

Pursuing Related DiversificationRelated diversification involves sharing or transferring specialized resources and capabilities.Specialized Resources and CapabilitiesHave very specific applications and their use is limited to a restricted range of industry and business types.8*

CORE CONCEPTS

Specialized Versus Generalized Resources and Capabilities Specialized resources and capabilities have very specific applications and their use is limited to a restricted range of industry and business types.Leveraged in related diversificationGeneralized resources and capabilities can be widely applied and can be deployed across a broad range of industry and business types.Leveraged in unrelated and related diversification

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Related Businesses Provide Opportunities to Benefit from Competitively Valuable Strategic FitFIGURE 8.18*

IDENTIFYING CROSS-BUSINESS STRATEGIC FITS ALONG THE VALUE CHAIN8*

STRATEGIC FIT, ECONOMIES OF SCOPE, AND COMPETITIVE ADVANTAGETransferring specialized and generalized skills and\or knowledgeCombining related value chain activities to achieve lower costsLeveraging brand names and other differentiation resourcesUsing cross-business collaboration and knowledge sharingUsing Economies of Scope to Convert Strategic Fit into Competitive Advantage8*

CORE CONCEPTS

Economies of scope are cost reductions that flow from operating in multiple businesses (a larger scope of operation).Economies of scale accrue from a larger-size operation.8*

ECONOMIES OF SCOPE DIFFER FROM ECONOMIES OF SCALEEconomies of ScopeAre cost reductions that flow from cross-business resource sharing in the activities of the multiple businesses of a firm.Economies of ScaleAccrue when unit costs are reduced due to the increased output of larger-size operations of a firm.8*

FROM STRATEGIC FIT TO COMPETITIVE ADVANTAGE, ADDED PROFITABILITY AND GAINS IN SHAREHOLDER VALUEBuilds more shareholder value than owning a stock portfolio Is only possible via a strategy of related diversification Yields value in the application of specialized resources and capabilitiesRequires that management take internal actions to realize themCapturing the Cross-Business Benefits of Related Diversification8*

STRATEGIC MANAGEMENT PRINCIPLE

Diversifying into related businesses where competitively valuable strategic-fit benefits can be captured puts a companys businesses in position to perform better financially as part of the company than they could have performed as independent enterprises, thus providing a clear avenue for boosting shareholder value and satisfying the better-off test.8*

DIVERSIFICATION INTO UNRELATED BUSINESSESEvaluating the acquisition of a new business or the divestiture of an existing businessCan it meet corporate targets for profitability and return on investment?Is it is in an industry with attractive profit and growth potentials?Is it is big enough to contribute significantly to the parent firms bottom line?8*

BUILDING SHAREHOLDER VALUE VIA UNRELATED DIVERSIFICATIONAstute Corporate Parenting by ManagementCross-Business Allocation of Financial ResourcesAcquiring and Restructuring Undervalued CompaniesUsing an Unrelated Diversification Strategy to Pursue Value8*

BUILDING SHAREHOLDER VALUE VIA UNRELATED DIVERSIFICATIONAstute Corporate Parenting by ManagementProvide leadership, oversight, expertise, and guidance.Provide generalized or parenting resources that lower operating costs and increase SBU efficiencies.Cross-Business Allocation of Financial ResourcesServe as an internal capital market.Allocate surplus cash flows from businesses to fund the capital requirements of other businesses.Acquiring and Restructuring Undervalued CompaniesAcquire weakly performing firms at bargain prices.Use turnaround capabilities to restructure them to increase their performance and profitability.8*

CORE CONCEPT

Corporate parenting refers to the role that a diversified corporation plays in nurturing its component businesses through the provision of top management expertise, disciplined control, financial resources, and other types of generalized resources and capabilities such as long-term planning systems, business development skills, management development processes, and incentive systems.8*

CORE CONCEPT

A diversified firm has a parenting advantage when it is more able than other firms to boost the combined performance of its individual businesses through high-level guidance, general oversight, and other corporate-level contributions.8*

STRATEGIC MANAGEMENT PRINCIPLE

An umbrella brand is a corporate brand name that can be applied to a wide assortment of business types. As such, it is a generalized resource that can be leveraged in unrelated diversification.8*

CORE CONCEPT

Restructuring refers to overhauling and streamlining the activities of a businesscombining plants with excess capacity, selling off underutilized assets, reducing unnecessary expenses, and otherwise improving the productivity and profitability of the firm.8*

THE PATH TO GREATER SHAREHOLDER VALUE THROUGH UNRELATED DIVERSIFICATIONDiversify into businesses that can produce consistently good earnings and returns on investmentNegotiate favorable acquisition pricesProvide managerial oversight and resource sharing, financial resource allocation and portfolio management, and restructure underperforming businessesThe attractiveness testThe cost-of-entry testActions taken by upper management to create value and gain a parenting advantageThe better-off test8*

THE DUAL DRAWBACKS OF UNRELATED DIVERSIFICATIONPursuing an Unrelated Diversification StrategyLimited Competitive Advantage PotentialDemanding Managerial RequirementsMonitoring and maintaining the parenting advantagePotential lack of cross-business strategic-fit benefits8*

MISGUIDED REASONS FOR PURSUING UNRELATED DIVERSIFICATION8*

STRATEGIC MANAGEMENT PRINCIPLE

Only profitable growththe kind that comes from creating added value for shareholderscan justify a strategy of unrelated diversification.8*

COMBINATIONS OF RELATED-UNRELATED DIVERSIFICATION STRATEGIESDominant-Business EnterprisesNarrowly Diversified FirmsBroadly Diversified FirmsMultibusiness EnterprisesRelated-Unrelated Business Portfolio Combinations 8*

STRUCTURES OF COMBINATION RELATED-UNRELATED DIVERSIFIED FIRMSDominant-Business EnterprisesHave 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 FirmsAre comprised of a few related or unrelated businesses.Broadly Diversified FirmsHave a wide-ranging collection of related businesses, unrelated businesses, or a mixture of both.Multibusiness EnterprisesHave a business portfolio consisting of several unrelated groups of related businesses.8*

EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY8*

EVALUATING THE STRATEGY OF A DIVERSIFIED FIRMAssessing the attractiveness of the industries the firm has diversified into, both individually and as a group.Assessing the competitive strength of the firms business units within their respective industries.Evaluating the extent of cross-business strategic fit along the value chains of the firms various business units.Checking whether the firms resources fit the requirements of its present business lineup.Ranking the performance prospects of the businesses from best to worst and determining a priority for allocating resources.Crafting strategic moves to improve corporate performance.8*

Three Strategy Alternatives for Pursuing DiversificationFIGURE 8.28*

STEP 1: EVALUATING INDUSTRY ATTRACTIVENESSDoes 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?How attractive are the industries in which the firm has business operations?8*

KEY INDICATORS OF INDUSTRY ATTRACTIVENESSSocial, political, regulatory, environmental factorsSeasonal and cyclical factorsIndustry uncertainty and business riskMarket size and projected growth rateIndustry profitabilityThe intensity of competition among market rivalsEmerging opportunities and threats8*

CALCULATING INDUSTRY ATTRACTIVENESS FROM THE MULTIBUSINESS PERSPECTIVEThe Question of Cross-Industry Strategic FitHow well do the industrys value chain and resource requirements match up with the value chain activities of other industries in which the firm has operations?The Question of Resource RequirementsDo the resource requirements for an industry match those of the parent firm or are they otherwise within the companys reach?8*

CALCULATING INDUSTRY ATTRACTIVENESS SCORESEvaluating Industry AttractivenessDeciding on appropriate weights for the industry attractiveness measures.Gaining sufficient knowledge of the industry to assign accurate and objective ratings.Whether to use different weights for different business units whenever the importance of strength measures differs significantly from business to business.8*

Calculating Weighted Industry Attractiveness ScoresRemember: The more intensely competitive an industry is, the lower the attractiveness rating for that industry!TABLE 8.1[Rating scale: 1 = very unattractive to the firm; 10 = very attractive to the firm.]8*

STEP 2: EVALUATING BUSINESS-UNIT COMPETITIVE STRENGTHRelative market shareCosts relative to competitors costsAbility to match or beat rivals on key product attributesBrand image and reputationOther competitively valuable resources and capabilities and partnerships and alliances with other firmsBenefit from strategic fit with firms other businessesBargaining leverage with key suppliers or customersProfitability relative to competitors

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STRATEGIC MANAGEMENT PRINCIPLE

Using relative market share to measure competitive strength is analytically superior to using straight-percentage market share.Relative market share is the ratio of a business units market share to the market share of its largest industry rival as measured in unit volumes, not dollars.8*

Calculating Weighted Competitive Strength Scores for a Diversified Companys Business UnitsTABLE 8.2[Rating scale: 1 = very weak; 10 = very strong.]8*

A Nine-Cell Industry AttractivenessCompetitive Strength MatrixNote: Circle sizes are scaled to reflect the percentage of companywide revenues generated by the business unit.StarCash cowFIGURE 8.38*

STEP 3: DETERMINING THE COMPETITIVE VALUE OF STRATEGIC FIT IN DIVERSIFIED COMPANIESAssessing the degree of strategic fit across its businesses is central to evaluating a companys related diversification strategy.The real test of a diversification strategy is what degree of competitive value can be generated from strategic fit.8*

STRATEGIC MANAGEMENT PRINCIPLE

The greater the value of cross-business strategic fit in enhancing a firms performance in the marketplace or on the bottom line, the more competitively powerful is its strategy of related diversification.8*

Identifying the Competitive Advantage Potential of Cross-Business Strategic FitFIGURE 8.48*

CORE CONCEPT

A diversified firm exhibits resource fit when its businesses add to a firms overall resource strengths and have matching resource requirements and/or when the parent firm has adequate corporate resources to support its businesses needs and add value.8*

STEP 4: CHECKING FOR RESOURCE FITFinancial Resource FitState of the internal capital marketUsing 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 cow8*

CORE CONCEPT

A cash cow business generates cash flows over and above its internal requirements, thus providing a corporate parent with funds for investing in cash hog businesses, financing new acquisitions, or paying dividends.8*

CORE CONCEPT

A cash hog business generates cash flows that are too small to fully fund its operations and growth and requires cash infusions to provide additional working capital and finance new capital investment.

8*

CORE CONCEPT

A strong internal capital market allows a diversified firm to add value by shifting capital from business units generating free cash flow to those needing additional capital to expand and realize their growth potential.8*

STEP 4: CHECKING FOR RESOURCE FITNonfinancial Resource FitDoes the firm have (or can it develop) the specific resources and capabilities needed to be successful in each of its businesses?Are the firms resources being stretched too thinly by the resource requirements of one or more of its businesses?8*

CORE CONCEPT

A portfolio approach to ensuring financial fit among a firms businesses is based on the fact that different businesses have different cash flow and investment characteristics.8*

STEP 5: RANKING BUSINESS UNITS AND ASSIGNING A PRIORITY FOR RESOURCE ALLOCATION Ranking Factors:Sales growthProfit growthContribution to company earningsReturn on capital invested in the businessCash flowSteer resources to business units with the brightest profit and growth prospects and solid strategic and resource fit.8*

The Chief Strategic and Financial Options for Allocating a Diversified Companys Financial ResourcesFIGURE 8.58*

STEP 6: CRAFTING NEW STRATEGIC MOVES TO IMPROVE OVERALL CORPORATE PERFORMANCEStick with the Existing Business LineupBroaden the Diversification Base with New AcquisitionsDivest and Retrench to a Narrower Diversification BaseRestructure through Divestitures and AcquisitionsStrategy Options for a Firm That Is Already Diversified8*

A Firms Four Main Strategic Alternatives After It DiversifiesFIGURE 8.68*

BROADENING A DIVERSIFIED FIRMS BUSINESS BASEFactors Motivating the Adding of Businesses:The transfer of resources and capabilities to related or complementary businesses.Rapidly changing technology, legislation, or new product innovations in core businesses.Shoring up the market position and competitive capabilities of the firms present businesses.Extension of the scope of the firms operations into additional country markets.8*

DIVESTING BUSINESSES AND RETRENCHING TO A NARROWER DIVERSIFICATION BASEFactors 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*

CORE CONCEPT

A spinoff is an independent company created when a corporate parent divests a business by distributing to its stockholders new shares in this business.8*

What do the problems which developed from the M&A strategy reveal?To what extent is centralization of core processes required?What other measures could Posco undertake to capitalize on its past M&A strategy? ILLUSTRATION CAPSULE 8.1Poscos Strategic Moves to Resolve Challenges from Aggressive Mergers and Acquisitions8*

STRATEGIC MANAGEMENT PRINCIPLE

Diversified companies need to divest low-performing businesses or businesses that do not fit in order to concentrate on expanding existing businesses and entering new ones where opportunities are more promising.8*

RESTRUCTURING A DIVERSIFIED COMPANYS BUSINESS LINEUPFactors Leading to Corporate Restructuring:A serious mismatch between the firms 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 havent lived up to expectations.8*

CORE CONCEPT

Companywide restructuring (corporate restructuring) involves making major changes in a diversified company by divesting some businesses and/or acquiring others, so as to put a whole new face on the companys business lineup.8*

Is Kraft Foods 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?ILLUSTRATION CAPSULE 8.2Growth through Restructuring at Kraft Foods8*

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