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Corporate Strategy:: Diversification and The Multibusiness Company

This chapter discusses corporate diversification strategies and the multibusiness company. It covers: 1) The different approaches to diversification including related and unrelated acquisitions, internal ventures, and joint ventures. 2) How related diversification can create strategic fit and competitive advantage through sharing resources across value chains. 3) The risks of unrelated diversification which may not produce strategic or competitive benefits due to dissimilar business activities.

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Farhana Mitu
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234 views18 pages

Corporate Strategy:: Diversification and The Multibusiness Company

This chapter discusses corporate diversification strategies and the multibusiness company. It covers: 1) The different approaches to diversification including related and unrelated acquisitions, internal ventures, and joint ventures. 2) How related diversification can create strategic fit and competitive advantage through sharing resources across value chains. 3) The risks of unrelated diversification which may not produce strategic or competitive benefits due to dissimilar business activities.

Uploaded by

Farhana Mitu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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CHAPTER 8

CORPORATE STRATEGY:
Diversification and
the Multibusiness Company
THIS CHAPTER WILL HELP YOU UNDERSTAND:
LO 1 When and how business diversification
can enhance shareholder value.
LO 2 How related diversification strategies can produce cross-
business strategic fit capable of delivering competitive
advantage.
LO 3 The merits and risks of unrelated diversification strategies.
WHAT DOES CRAFTING A
DIVERSIFICATION STRATEGY ENTAIL?

Picking new industries to enter and deciding on the means of


Step 1 entry.

Pursuing opportunities to leverage cross-business value chain


Step 2 relationships and strategic fit into competitive advantage.

Establishing investment priorities and steering corporate


Step 3 resources into the most attractive business units.

Initiating actions to boost the combined performance


Step 4 of the cooperation’s collection of businesses.
WHEN TO CONSIDER DIVERSIFYING

 A firm should consider diversifying when:


1. It can expand into businesses whose technologies
and products complement its present business.
2. Its resources and capabilities can be used as
valuable competitive assets in other businesses.
3. Costs can be reduced by cross-business sharing or
transfer of resources and capabilities.
4. Transferring a strong brand name to the products of
other businesses helps drive up sales and profits of
those businesses.
BUILDING SHAREHOLDER VALUE: THE ULTIMATE
JUSTIFICATION FOR DIVERSIFYING

Testing Whether Diversification


Will Add Long-Term
Value for Shareholders

The industry The The


attractiveness cost-of-entry better-off
test test test

8–5
BUILDING SHAREHOLDER VALUE: THE ULTIMATE
JUSTIFICATION FOR DIVERSIFYING

 The Attractiveness Test:


● Are the industry’s 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?

8–6
BETTER PERFORMANCE THROUGH SYNERGY

Firm A purchases Firm B in


another industry. A and B’s No
profits are no greater than Synergy
what each firm could have (1+1=2)
Evaluating the earned on its own.
Potential for
Synergy
through
Firm A purchases Firm C in
Diversification
another industry. A and C’s
Synergy
profits are greater than what
each firm could have earned (1+1=3)
on its own.

♦ Creating added value for shareholders via diversification


requires building a multibusiness company in which the
whole is greater than the sum of its parts—such 1 + 1= 3
effects are called synergy.
APPROACHES TO DIVERSIFYING
THE BUSINESS LINEUP

Diversifying into
New Businesses

Existing business Internal new Joint


acquisition venture (start-up) venture
DIVERSIFICATION BY 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
ENTERING A NEW LINE OF BUSINESS THROUGH
INTERNAL DEVELOPMENT

 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.
USING JOINT VENTURES TO ACHIEVE
DIVERSIFICATION

 Joint 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.
DIVERSIFICATION BY JOINT VENTURE

 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.
CHOOSING THE DIVERSIFICATION PATH:
RELATED VERSUS UNRELATED BUSINESSES

Which Diversification
Path to Pursue?

Both Related
Related Unrelated
and Unrelated
Businesses Businesses
Businesses
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.
 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.
DIVERSIFICATION INTO RELATED BUSINESSES

 Strategic Fit Opportunities:


● Transferring specialized expertise, technological know-how,
or other resources and capabilities from one business’s
value chain to another’s.
● Sharing costs by combining 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.
● Engaging in cross-business collaboration and knowledge
sharing to create new competitively valuable resources and
capabilities.
PURSUING RELATED DIVERSIFICATION

 Related diversification involves sharing or transferring


specialized resources and capabilities.
 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 diversification
● General 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
DIVERSIFICATION INTO
UNRELATED BUSINESSES

Can it meet corporate targets


for profitability and return on
investment?
Evaluating the
acquisition of a
Is it is in an industry with
new business or
attractive profit and growth
the divestiture of
potentials?
an existing
business
Is it is big enough to contribute
significantly to the parent firm’s
bottom line?
THE DRAWBACKS OF UNRELATED
DIVERSIFICATION

Pursuing an Limited
Demanding
Unrelated Competitive
Managerial
Diversification Advantage
Requirements
Strategy Potential

Monitoring and Potential lack of


maintaining cross-business
the parenting strategic-fit
advantage benefits

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