CORPORATE STRATEGY: DIVERSIFICATION AND THE MULTIBUSINESS COMPANY

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CORPORATE STRATEGY: DIVERSIFICATION AND THE MULTIBUSINESS COMPANY

Davison, Gary, Host has reference to this Academic Journal, PHwiki organized this Journal CHAPTER 8CORPORATE STRATEGY: DIVERSIFICATION AND THE MULTIBUSINESS COMPANY Underst in addition to when in addition to how business diversification can enhance shareholder value.Gain an underst in addition to ing of how related diversification strategies can produce cross-business strategic fit capable of delivering competitive advantage.Become aware of the merits in addition to risks of corporate strategies keyed to unrelated diversification.Gain comm in addition to of the analytical tools as long as evaluating a firm’s diversification strategy.Underst in addition to a diversified firm’s four main corporate strategy options as long as solidifying its diversification strategy in addition to improving company per as long as mance.STRATEGIC DIVERSIFICATION OPTIONSSticking closely with the existing business lineup in addition to pursuing opportunities presented by these businesses.Broadening the current scope of diversification by entering additional industries.Divesting some businesses in addition to retrenching to a narrower collection of diversified businesses with better overall per as long as mance prospects.Restructuring the entire firm by divesting some businesses in addition to acquiring others to put a whole new face on the firm’s business lineup.8–3

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APPROACHES TO DIVERSIFYING THE BUSINESS LINEUPAcquisition of an existing businessInternal new venture (start-up)Joint venture Diversifying into New Businesses8–4DIVERSIFICATION BY ACQUISITION OF AN EXISTING BUSINESSAdvantages:Quick entry into an industryBarriers to entry avoidedAccess to complementary resources in addition to capabilitiesDisadvantages:Cost of acquisition—whether to pay a premium as long as a successful firm or seek a bargain in struggling firmUnderestimating costs as long as integrating acquired firmOverestimating the acquisition’s potential to deliver added shareholder value8–5ENTERING A NEW LINE OF BUSINESS THROUGH INTERNAL DEVELOPMENTAdvantages of New Venture Development:Avoids pitfalls in addition to uncertain costs of acquisition.Allows entry into a new or emerging industry where there are no available acquisition c in addition to idates.Disadvantages of Intrapreneurship:Must overcome industry entry barriers.Requires extensive investments in developing production capacities in addition to competitive capabilities.May fail due to internal organizational resistance to change in addition to innovation.8–6

WHEN TO ENGAGE IN INTERNAL DEVELOPMENT8–7WHEN TO ENGAGE IN A JOINT VENTUREEvaluating the Potential as long as a Joint VentureIs the opportunity too complex, uneconomical, or risky as long as one firm to pursue aloneDoes the opportunity require a broader range of competencies in addition to know-how than the firm now possesses Will the opportunity involve operations in a country that requires as long as eign firms to have a local minority or majority ownership partner8–8CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSESRelated BusinessesUnrelated BusinessesBoth Related in addition to Unrelated BusinessesWhich Diversification Path to Pursue8–9

Related businesses possess competitively valuable cross-business value chain in addition to resource matchups.Unrelated businesses have dissimilar value chains in addition to resource requirements, with no competitively important cross-business relationships at the value chain level.8–10CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSESRelated BusinessesHave competitively valuable cross-business value chain in addition to resource matchups.Unrelated BusinessesHave dissimilar value chains in addition to resource requirements, with no competitively important cross-business relationships at the value chain level.8–11DIVERSIFYING INTO RELATED BUSINESSESStrategic Fit Opportunities:Transferring specialized expertise, technological know-how, or other resources in addition to capabilities from one business’s value chain to another’s.Cost sharing between businesses by combining their related value chain activities into a single operation.Exploiting common use of a well-known br in addition to name.Sharing other resources (besides br in addition to s) that support corresponding value chain activities across businesses.8–12

IDENTIFYING CROSS-BUSINESS STRATEGIC FITS ALONG THE VALUE CHAIN8–13DIVERSIFICATION INTO UNRELATED BUSINESSESEvaluating the acquisition of a new business or the divestiture of an existing businessCan it meet corporate targets as long as profitability in addition to return on investmentIs it is in an industry with attractive profit in addition to growth potentialsIs it is big enough to contribute significantly to the parent firm’s bottom line8–14BUILDING SHAREHOLDER VALUE VIA UNRELATED DIVERSIFICATIONAstute Corporate Parenting by ManagementCross-Business Allocation of Financial ResourcesAcquiring in addition to Restructuring Undervalued CompaniesUsing an Unrelated Diversification Strategy to Pursue Value8–15

MISGUIDED REASONS FOR PURSUING UNRELATED DIVERSIFICATION8–16COMBINATIONS OF RELATED-UNRELATED DIVERSIFICATION STRATEGIESDominant-Business EnterprisesNarrowly Diversified FirmsBroadly Diversified FirmsMultibusiness EnterprisesRelated-Unrelated Business Portfolio Combinations 8–17STRUCTURES OF COMBINATION RELATED-UNRELATED DIVERSIFIED FIRMSDominant-Business EnterprisesHave a major “core” firm that accounts as long as 50 to 80% of total revenues in addition to a collection of small related or unrelated firms that accounts as long as 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.8–18

EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY8–19Three Strategy Alternatives as long as Pursuing DiversificationFIGURE 8.28–20STEP 1: EVALUATING INDUSTRY ATTRACTIVENESSDoes each industry represent a good market as long as the firm to be inWhich industries are most attractive, in addition to which are least attractiveHow appealing is the whole group of industriesHow attractive are the industries in which the firm has business operations8–21

Key Indicators of Industry AttractivenessSocial, political, regulatory, environmental factorsSeasonal in addition to cyclical factorsIndustry uncertainty in addition to business riskMarket size in addition to projected growth rateIndustry profitabilityThe intensity of competition among market rivalsEmerging opportunities in addition to threatshttp://www.theatlantic.com/business/archive/2012/03/newspapers-are-americas-fastest-shrinking-industry/254307/CALCULATING INDUSTRY ATTRACTIVENESS SCORESEvaluating Industry AttractivenessDeciding on appropriate weights as long as the industry attractiveness measures.Gaining sufficient knowledge of the industry to assign accurate in addition to objective ratings.Whether to use different weights as long as different business units whenever the importance of strength measures differs significantly from business to business.8–24

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Calculating Weighted Industry Attractiveness ScoresRemember: The more intensely competitive an industry is, the lower the attractiveness rating as long as that industry!TABLE 8.1[Rating scale: 1 = very unattractive to the firm; 10 = very attractive to the firm.]8–25STEP 2: EVALUATING BUSINESS-UNIT COMPETITIVE STRENGTHRelative market shareCosts relative to competitors’ costsAbility to match or beat rivals on key product attributesBr in addition to image in addition to reputationOther competitively valuable resources in addition to capabilities in addition to partnerships in addition to alliances with other firmsBenefit from strategic fit with firm’s other businessesBargaining leverage with key suppliers or customersProfitability relative to competitors8–26Calculating Weighted Competitive Strength Scores as long as a Diversified Company’s Business UnitsTABLE 8.2[Rating scale: 1 = very weak; 10 = very strong.]8–27

A Nine-Cell Industry Attractiveness–Competitive Strength MatrixNote: Circle sizes are scaled to reflect the percentage of companywide revenues generated by the business unit.StarCash cowFIGURE 8.38–28STEP 3: DETERMINING THE COMPETITIVE VALUE OF STRATEGIC FIT IN DIVERSIFIED COMPANIESAssessing the degree of strategic fit across its businesses is central to evaluating a company’s related diversification strategy.The real test of a diversification strategy is what degree of competitive value can be generated from strategic fit.8–29STEP 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 cow8–30

RESTRUCTURING A DIVERSIFIED COMPANY’S BUSINESS LINEUPFactors Leading to Corporate Restructuring:A serious mismatch between the firm’s resources in addition to capabilities in addition to the type of diversification that it has pursued.Too many businesses in slow-growth, declining, low-margin, or otherwise unattractive industries.Too many competitively weak businesses.Ongoing declines in the market shares of major business units that are falling prey to more market-savvy competitors.An excessive debt burden with interest costs that eat deeply into profitability.Ill-chosen acquisitions that haven’t lived up to expectations.8–37Is Kraft Food’s corporate restructuring strategy narrowing or broadening its diversification baseHow will restructuring help ensure that Kraft Foods will be better prepared to adapt to changing market conditions than its competitorsWhat actions did Kraft Foods take after making acquisitions to ensure the success of those acquisitionsILLUSTRATION CAPSULE 8.2Growth through Restructuring at Kraft Foods8–38

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