Transcript Crafting & Executing Strategy 18e

CHAPTER 8
CORPORATE STRATEGY:
Diversification and the Multibusiness Company
Copyright ®2012 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
1. Understand when and how business diversification
can enhance shareholder value.
2. Gain an understanding of how related diversification
strategies can produce cross-business strategic fit
capable of delivering competitive advantage.
3. Become aware of the merits and risks of corporate
strategies keyed to unrelated diversification.
4. Gain command of the analytical tools for evaluating
a firm’s diversification strategy.
5. Understand a diversified firm’s four main corporate
strategy options for solidifying its diversification
strategy and improving company performance.
8–2
Crafting a Diversified Firm’s Overall Or
Corporate Strategy
Step 1
Picking new industries to enter and deciding on the best mode
of entry.
Step 2
Pursuing opportunities to leverage cross-business value chain
relationships and strategic fit into competitive advantage.
Step 3
Establishing investment priorities and steering corporate
resources into the most attractive business units.
Step 4
Initiating actions to boost the combined performance
of the cooperation’s collection of businesses.
8–3
WHEN TO DIVERSIFY
♦ A 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.
8–4
BUILDING SHAREHOLDER VALUE:
THE ULTIMATE JUSTIFICATION FOR
DIVERSIFYING
Testing Whether a Diversification
Move Will Add Long-Term
Value for Shareholders
The industry
attractiveness
test
The cost-of-entry
test
The better-off
test
8–5
Testing Whether Diversification Will Add
Value for Shareholders
♦ The Attractiveness Test:
●
Are the industry’s returns on investment as
good or better than present business(es)?
♦ The Cost of Entry Test:
●
Is the cost of overcoming entry barriers so
great that profitability is too long delayed?
♦ The Better-Off Test:
●
How much synergy will be gained by
diversifying into the industry?
8–6
Better Performance through Synergy
Evaluating the
Potential for
Synergy
through
Diversification
Firm A purchases Firm B in
another industry. A and B’s
profits are no greater than
what each firm could have
earned on its own.
No
Synergy
(1+1=2)
Firm A purchases Firm C in
another industry. A and C’s
profits are greater than what
each firm could have earned
on its own.
Synergy
(1+1=3)
8–7
STRATEGIES FOR ENTERING NEW
BUSINESSES
Diversifying into
New Businesses
Acquisition
Internal new
venture (start-up)
Joint venture
8–8
Acquisition of an Existing Business
♦ Advantages:
●
Quick entry into an industry
●
Barriers to entry avoided
●
Access to complementary resources and capabilities
♦ Disadvantages:
●
Cost of acquisition—whether to pay a premium for a
successful firm or seek a bargain in struggling firm
●
Underestimating costs for integrating acquired firm
●
Overestimating the acquisition’s potential to deliver
added shareholder value
8–9
Internal Development: Corporate Venturing
♦ Advantages 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.
8–10
When to Engage in Internal Development
Ample time to
develop and
launch business
Cost of acquisition
is higher than
internal entry
Availability of inhouse skills and
resources
Factors Favoring
Internal Development
Added capacity
will not affect
supply and
demand balance
No head-to-head
competition in
targeted industry
Low resistance of
incumbent firms
to market entry
8–11
When to Engage in a Joint Venture
Is the opportunity too complex, uneconomical,
or risky for one firm to pursue alone?
Evaluating
the
Potential
for a Joint
Venture
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?
8–12
Choosing a Mode of Market Entry
The Question of Critical
Resources and Capabilities
Does the firm have the resources and
capabilities for internal development?
The Question of
Entry Barriers
Are there entry barriers to overcome?
The Question of
Speed
Is speed an important factor in the
firm’s chances for successful entry?
The Question of
Comparative Cost
Which is the least costly mode of entry,
given the firm’s objectives?
8–13
CHOOSING THE DIVERSIFICATION
PATH: RELATED VERSUS
UNRELATED BUSINESSES
Which Diversification
Path to Pursue?
Related
Businesses
Unrelated
Businesses
Both Related
and Unrelated
Businesses
8–14
CHOOSING THE DIVERSIFICATION
PATH: RELATED VERSUS
UNRELATED BUSINESSES
♦ Related Businesses
●
Have 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.
8–15
STRATEGIC FIT AND DIVERSIFICATION
INTO RELATED BUSINESSES
♦ Strategic Fit Benefits
●
Occur when the value chains of the different
businesses present opportunities for:
 Transfer
of resources among businesses.
 Lowering
of costs in combining related value
chain activities or resource sharing.
 Use
of a potent brand name across businesses.
 Cross-business
collaboration to build stronger
competitive capabilities.
8–16
Pursuing Related Diversification
♦ Specialized Resources and Capabilities
●
Have very specific applications and their use
is limited to a restricted range of industry and
business types.
♦ Generalized Resources and Capabilities
●
Can be widely applied and can be deployed
across a broad range of industry and
business types.
8–17
8.1
Related Businesses Provide Opportunities to Benefit
from Competitively Valuable Strategic Fit
8–18
Identifying Cross-Business Strategic Fit
along the Value Chain
Supply Chain
Activities
R&D and
Technology
Activities
ManufacturingRelated Activities
Potential
Cross-Business Fits
Sales and
Marketing
Activities
DistributionRelated Activities
Customer
Service Activities
8–19
Strategic Fit, Economies of Scope,
and Competitive Advantage
Using Economies of Scope to Convert
Strategic Fit into Competitive Advantage
Transferring
specialized and
generalized
skills and\or
knowledge
Combining
related value
chain activities
to achieve
lower costs
Leveraging
brand names
and other
differentiation
resources
Using crossbusiness
collaboration
and knowledge
sharing
8–20
Economies of Scope Differ from
Economies of Scale
♦ Economies of Scope
●
Are cost reductions that flow from crossbusiness resource sharing in the activities
of the multiple businesses of a firm.
♦ Economies of Scale
●
Accrue when unit costs are reduced due
to the increased output of larger-size
operations of a firm.
8–21
From Competitive Advantage to Added
Profitability and Gains in Shareholder Value
Capturing the Cross-Business Benefits
of Related Diversification
Builds 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
capabilities
Requires that
management
take internal
actions to
realize them
8–22
DIVERSIFICATION INTO UNRELATED
BUSINESSES
Can it meet corporate targets
for profitability and return on
investment?
Evaluating the
acquisition of a
new business or
the divestiture of
an existing
business
Is it is in an industry with
attractive profit and growth
potentials?
Is it is big enough to contribute
significantly to the parent firm’s
bottom line?
8–23
Building Shareholder Value via
Unrelated Diversification
Using an Unrelated Diversification
Strategy to Pursue Value
Astute Corporate
Parenting by
Management
Cross-Business
Allocation of
Financial
Resources
Acquiring and
Restructuring
Undervalued
Companies
8–24
Building Shareholder Value via
Unrelated Diversification
Astute Corporate
Parenting by
Management
Cross-Business
Allocation of
Financial
Resources
Acquiring and
Restructuring
Undervalued
Companies
• Provide leadership, oversight, expertise, and guidance.
• Provide generalized or parenting resources that lower
operating costs and increase SBU efficiencies.
• Serve as an internal capital market.
• Allocate surplus cash flows from businesses to fund
the capital requirements of other businesses.
• Acquire weakly performing firms at bargain prices.
• Use turnaround capabilities to restructure them to
increase their performance and profitability.
8–25
The Path to Greater Shareholder Value
through Unrelated Diversification
Do a superior job of diversifying into
businesses that produce good
earnings and returns on investment.
Actions taken by
upper management
to create value and
gain a parenting
advantage
Do an excellent job of negotiating
favorable acquisition prices.
Provide managerial oversight and
resource sharing, financial resource
allocation and portfolio management,
and restructure underperforming
businesses.
8–26
The Drawbacks of Unrelated Diversification
Demanding
Managerial
Requirements
Monitoring and
maintaining
the parenting
advantage
Pursuing an
Unrelated
Diversification
Strategy
Limited
Competitive
Advantage
Potential
Potential lack of
cross-business
strategic-fit
benefits
8–27
Inadequate Reasons for Pursuing
Unrelated Diversification
Poor Rationales for
Unrelated Diversification
Seeking
reduction of
business
investment risk
Pursuing rapid
or continuous
growth for its
own sake
Seeking
stabilization to
avoid cyclical
swings in
businesses
Pursuing
personal
managerial
motives
8–28
COMBINATION RELATED-UNRELATED
DIVERSIFICATION STRATEGIES
Related-Unrelated Business
Portfolio Combinations
DominantBusiness
Enterprises
Narrowly
Diversified
Firms
Broadly
Diversified
Firms
Multibusiness
Enterprises
8–29
STRUCTURES OF COMBINATION RELATEDUNRELATED DIVERSIFIED FIRMS
♦ Dominant-Business Enterprises
●
Have 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 Firms
●
Are comprised of a few related or unrelated businesses.
♦ Broadly Diversified Firms
●
Have a wide-ranging collection of related businesses,
unrelated businesses, or a mixture of both.
♦ Multibusiness Enterprises
●
Have a business portfolio consisting of several unrelated
groups of related businesses.
8–30
EVALUATING THE STRATEGY
OF A DIVERSIFIED COMPANY
Attractiveness
of industries
Strength of
Business Units
Cross-business
strategic fit
Diversified
Strategy
Fit of firm’s
resources
Allocation of
resources
New Strategic
Moves
8–31
EVALUATING THE STRATEGY
OF A DIVERSIFIED COMPANY
1. Assessing the attractiveness of the industries the firm has
diversified into, both individually and as a group.
2. Assessing the competitive strength of the firm’s business
units within their respective industries.
3. Checking the competitive advantage potential of crossbusiness strategic fit among the firm’s various business
units.
4. Checking whether the firm’s resources fit the requirements of
its present business lineup.
5. Ranking performance prospects of the businesses and
determining the parent firm’s priority for allocating resources
to its businesses.
6. Crafting strategic moves to improve corporate performance.
8–32
8.2
Strategy Alternatives for
a Company Pursuing
Diversification
8–33
Step 1: Evaluating Industry Attractiveness
How attractive are the
industries in which the firm
has business operations?
Does 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?
8–34
Key Indicators of Industry Attractiveness
♦ Social, political, regulatory, environmental factors
♦ Seasonal and cyclical factors
♦ Industry uncertainty and business risk
♦ Market size and projected growth rate
♦ Industry profitability
♦ The intensity of competition among market rivals
♦ Emerging opportunities and threats
8–35
Gauging Industry Attractiveness from
the Multibusiness Perspective
The Question of CrossIndustry Strategic Fit
How well do the industry’s 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 Requirements
Do the resource requirements for an industry
match those of the parent firm or are they
otherwise within the company’s reach?
8–36
8.1
Calculating Weighted Industry Attractiveness Scores*
* Rating scale: 1 = very unattractive to the firm; 10 = very attractive to the firm.
Remember: The more intensely competitive an industry is,
the lower the attractiveness rating for that industry!
8–37
The Difficulties of Calculating
Industry Attractiveness Scores
Deciding on appropriate weights for
the industry attractiveness measures.
Evaluating
Industry
Attractiveness
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.
8–38
Step 2: Evaluating Business-Unit
Competitive Strength
♦ Relative market share
♦ Costs relative to competitors’ costs.
♦ Ability to match or beat rivals on key product attributes.
♦ Brand image and reputation.
♦ Other competitively valuable resources and capabilities.
♦ Strategic fit with the firm’s other businesses.
♦ Bargaining leverage with key suppliers or customers.
♦ Alliances and partnerships with suppliers and/or buyers.
♦ Profitability relative to competitors
8–39
8.2
Calculating Weighted Competitive Strength Scores
for a Diversified Company’s Business Units*
* Rating scale: 1 = very weak; 10 = very strong.
Relative market share: the ratio of a business unit’s market share to the market
share of its largest industry rival as measured in unit volumes, not dollars.
8–40
8.3
A Nine-Cell Industry
Attractiveness–
Competitive Strength
Matrix
Star
Cash
cow
Note: Circle sizes are scaled to
reflect the percentage of
companywide revenues
generated by the business unit.
8–41
8.4
Identifying the Competitive Advantage Potential
of Cross-Business Strategic Fit
8–42
Step 4: Checking for Resource Fit
♦ Financial Resource Fit
●
State of the internal capital market
● Using 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 cow
8–43
Step 4: Checking for Resource Fit
♦ Does the firm have (or can it develop) the
specific resources and capabilities needed
to be successful in each of its businesses?
♦ Are the firm’s resources being stretched too
thinly by the resource requirements of one
or more of its businesses?
8–44
Step 5: Ranking Business Unit Performance
and Assigning Resource Allocation Priorities
♦ Ranking Factors:
●
●
●
●
●
Sales growth
Profit growth
Contribution to company earnings
Return on capital invested in the business
Cash flow
♦ Steer resources to business units with the
brightest profit and growth prospects and
solid strategic and resource fit.
8–45
8.5
The Chief Strategic and Financial Options for Allocating
a Diversified Company’s Financial Resources
8–46
Step 6: Crafting New Strategic Moves to
Improve Overall Corporate Performance
Strategy Options for a Firm
That Is Already Diversified
Stick with
the Existing
Business
Lineup
Broaden the
Diversification
Base with New
Acquisitions
Divest and
Retrench to
a Narrower
Diversification
Base
Restructure
through
Divestitures
and
Acquisitions
8–47
8.6
A Company’s Four Main
Strategic Alternatives
After It Diversifies
8–48
Broadening a Diversified
Firm’s Business Base
♦ Factors 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 firm’s present businesses.
●
Extension of the scope of the firm’s operations
into additional country markets.
8–49
Divesting Businesses and Retrenching
to a Narrower Diversification Base
♦ Factors 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.
8–50
♦ What does the growth in both revenues and
profits reveal about the success of J&J’s
diversification through acquisition strategy?
♦ To what extent is decentralization required
when seeking cross-business strategic fit?
♦ What should J&J do to ensure the continued
success of its diversification strategy?
8–51
Using Divestitures and Acquisitions to
Restructure the Business Lineup
♦ Factors Leading to Corporate Restructuring:
●
Too many businesses in unattractive industries
●
Too many competitively weak businesses
●
Ongoing declines in the market shares of business
units due to more market-savvy competitors
●
Debt and interest costs that sap profitability
●
Acquisitions that haven’t lived up to expectations
●
Reallocation of assets to strengthen the lineup
●
Businesses with poor resource or strategic fit
8–52
♦ Is VF’s corporate restructuring strategy
narrowing or broadening its diversification
base?
♦ How did restructuring ensure that VF was
better prepared to weather the economic
downturn than its competitors?
♦ What actions did VF take after making
acquisitions to ensure the success of those
acquisitions?
8–53