19e Section6 LN Chapter08

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Chapter 8 Corporate Strategy: Diversication and the Multibusiness Company 631

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CHAPTER 8

CORPORATE STRATEGY:

DIVERSIFICATION AND THEMULTIBUSINESS COMPANY

CHAPTER SUMMARY

Chapter 8 moves up one level in the strategy-making hierarchy, from strategy making in a single business

enterprise to strategy making in a diversied enterprise. The chapter begins with a description of the various

paths through which a company can become diversied and provides an explanation of how a company can use

diversication to create or compound competitive advantage for its business units. The chapter also examines thetechniques and procedures for assessing the strategic attractiveness of a diversied companys business portfolio

and surveys the strategic options open to already-diversied companies.

LECTURE OUTLINE

I. What Does Crafting a Diversication Strategy Entail?

1. The task of crafting a diversied 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 ts

into competitive advantage

c. Establishing investment priorities and 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 Diversication Becomes a Consideration

1. Diversifying into new industries always merits strong consideration whenever a single-businesscompany 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.

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.

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c. When diversifying into additional business opens new avenues for reducing costs or the transfer

of competitively valuable resources and capabilities.

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

other businesses.

III. Building Shareholder Value: The Ultimate Justication for Diversifying

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

2. For there to be reasonable expectations that a diversication move can produce added value for

shareholders, the move must pass three tests:

a. The industry attractiveness test The industry chosen for diversication 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 protability.

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 corporateumbrella than they would perform operating as independent stand-alone businesses.

3. Diversication moves that satisfy all three tests have the greatest potential to grow shareholder

value over the long term. Diversication moves that can pass only one or two tests are suspect.

CORE CONCEPT

Creating added value for shareholders via diversication requires building amultibusiness company where the whole is greater than the sum of its parts - anoutcome known as synergy.

IV. Approaches to Diversifying the Business Lineup

A. Entry into new businesses can take any of three forms; Acquisition, Internal start-up, or Joint ventures/

strategic partnerships.

B. Diversication by Acquisition of an Existing Business

1. Acquisition is the most popular means of diversifying into another industry.

2. The big dilemma an acquisition-minded rm faces is whether to pay a premium price for a successful

rm or to buy a struggling company at a bargain price.

CORE CONCEPT

An acquisition premium is the amount by which the price oered exceeds the pre-acquisition market value of the target company.

C. Entering a New Line of Business throughInternal Development

1. Achieving diversication through internal development involves building a new business subsidiary

from scratch and is often referred to as corporate venturing.




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CORE CONCEPT

Corporate venturing is the process of developing new businesses as an outgrowthof a companys established business operations. It is also referred to as corporateentrepreneurship or intrapreneurship since it requires entrepreneurial like qualitieswithin a larger enterprise.

2. This entry option takes longer than the acquisition option and poses some hurdles.

3. Generally, using internal development 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 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 rms are likely to be slow or ineffective in responding to a new entrants efforts to

crack the market

D. Joint Ventures

1. Joint ventures typically entail forming a new corporate entity owned by the partners.

2. A strategic partnership or joint venture can be useful in at least three 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

c. To diversify into a new industry when the diversication move entails having operations in a

foreign country

3. However, partnering with another company has signicant drawbacks due to the potential for

conicting objectives, disagreements, over how to best operate the venture, culture clashes, and so

on.

4. Joint ventures are generally the least durable of the entry options, usually lasting only until the

partners decide to go their own ways.

D. Choosing a Mode of Entry

1. The choice of entry mode depends on the answer to four important questions:

a. Does the company have all the resources and capabilities it requires to enter the business

through internal development or is it lacking some critical resources?

b. Are there entry barriers to overcome?

c. Is speed an important factor in the rms chances for successful entry?

d. Which is the least costly mode of entry given the companys objectives?




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CORE CONCEPT

Transaction costs are the costs of completing a business agreement or deal of somesort, over and above the price of the deal. They can include the costs of searching foran attractive target, the costs of evaluating its worth, bargaining costs, and the costsof completing the transaction.

2. The Question of Critical Resources and Capabilities

a. If a rm has all the resources it needs to start up a new business or will be able to easily purchase

or lease any missing resources, it may choose to enter the business via internal development.

b. If missing critical resources cannot be easily purchased or leased, a rm wishing to enter a new

business must obtain these missing resources through either acquisition or joint venture.

3. The Question of Entry Barriers

a. If entry barriers are low and the industry is populated by small rms, internal development may

be the preferred mode of entry.

b. If entry barriers are high, the company may still be able to enter with ease if it has the requisite

resources and capabilities for overcoming high barriers.

4. The Question of Speed

a. Acquisition is a favored mode of entry when speed is of the essence, as is the case in rapidly

changing industries where fast movers can secure long-term positioning advantages.

b. In other cases it can be better to enter a market after the uncertainties about technology or

consumer preferences through joint venture or internal development.

V. ChoosingtheDiversicationPath:RelatedVersusUnrelatedBusinesses

1. Once the decision is made to pursue diversication, the rm must choose whether to diversify intorelatedbusinesses,unrelatedbusinesses,or some mix of both.

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

business value chain matchups or strategic ts.

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

business relationships that present opportunities for the businesses to perform better under the same

corporate umbrella than they could by operating as stand-alone entities.

CORE CONCEPT

Related businesses possess competitively valuable cross-business value chain andresource matchups; unrelated businesses have very dissimilar value chains andresource requirements, with no competitively important cross-business relationshipsat the value chain level.




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VI. Diversifying into Related Businesses

A. A related diversication strategy involves building the company around businesses whose value chains

possess competitively valuable strategic ts.

1. Figure 8.1, Related Businesses Possess Related Value Chain Activities and Competitively

Valuable Strategic Fits, looks at related businesses and strategic ts.

2. Strategic t exists whenever one or more activities comprising the value chains of different

businesses are sufciently similar as to present opportunities for:

a. Transferring specialized expertise, technological know-how, or other competitively valuable

capabilities from one business to another

b. Cost sharing between businesses by combining their related value chain activities into a single

operation.

c. Exploiting common use of a well known brand name.

d. Sharing other resources (besides brands) that support corresponding value chain activities

across businesses.

e. Engaging in cross-business collaboration and knowledge sharing to create new competitively

valuable resource strengths and capabilities.

CORE CONCEPT

Strategic ft exists whenever one or more activities constituting the value chainsof dierent businesses are suciently similar as to present opportunities for cross-business sharing or transferring of the resources and capabilities that enable theseactivities.

3. Related diversication thus has strategic appeal from several angles. It allows a rm to reap the

competitive advantage benets of skills transfer, lower costs, common brand names, and/or stronger

competitive capabilities and still spread investor risks over a broad business base.

CORE CONCEPT

Related diversication involves sharing or transferring specialized resources andcapabilities. Specialized resources and capabilities have very specic applicationand their use is limited to a restricted range of industry and business types, incontrast to generalized resources and capabilities that can be widely applied and

can be deployed across a broad range of industry and business type.

B. IdentifyingCross-BusinessStrategicFitsAlongtheValueChain

1. Cross-business strategic ts can exist anywhere along the value chain in R&D and technology

activities, in supply chain activities and relationships with suppliers, in manufacturing, in sales and

marketing, in distribution activities, or in administrative support activities.

2. Strategic Fits in Supply Chain Activities: Businesses that have supply chain strategic ts can

perform better together because of the potential for skills transfer in procuring materials, greater

bargaining power in negotiating with common suppliers, the benets of added collaboration with




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common supply chain partners, and/or added leverage with shippers in securing volume discounts

on incoming parts and components.

3. Strategic Fits in R&D and Technology Activities: Diversifying into businesses where there

is potential for sharing common technology, exploiting the full range of business opportunities

associated with a particular technology and its derivatives, or transferring technological know-how

from one business to another has considerable appeal.

4. Manufacturing-Related Strategic Fits: Cross-business strategic ts in manufacturing-related

activities can represent an important source of competitive advantage in situations where a

diversiers expertise in quality manufacture and cost-efcient production methods can be

transferred to another business.

5. Strategic Fits in Sales and Marketing: Various cost-saving opportunities spring from diversifying

into businesses with closely related sales and marketing activities. Opportunities include:

a. Sales costs can be reduced by using a single sales force for the products of both businesses

rather than having separate sales forces for each business

b. After-sale service and repair organizations for the products of closely related businesses can

often be consolidated into a single operation

c. There may be competitively valuable opportunities to transfer selling, merchandising,

advertising, and product differentiation skills from one business to another

6. Distribution-Related Strategic Fits: Businesses with closely related distribution activities can

perform better together than apart because of potential cost savings in sharing the same distribution

facilities or using many of the same wholesale distributors and retail dealers to access customers.

7. Distribution-Related Strategic Fit: Businesses with closely related distribution activities can

perform better together than they can independently due to the cost savings associated with sharing

facilities, distributors, and retailers.

8. Strategic Fits in Customer Service Activities: Businesses can cut costs by consolidating after-saleservice and repair organizations for closely related products.

C. Strategic Fit, Economies of Scope, and Competitive Advantage

1. What makes related diversication an attractive strategy is the opportunity to convert the strategic

t relationships between the value chains of different businesses into a competitive advantage.

2. Economies of Scope: Related businesses often present opportunities to consolidate certain value

chain activities or use common resources and thereby eliminate costs. Such cost savings are termed

economies of scope

3. Economies of scale are cost savings that accrue directly from a larger-sized operation. Economies

of scope stem directly from cost-saving strategic ts along the value chains of related businesses.

4. Most usually, economies of scope are the result of two or more businesses sharing technology,

performing R&D together, using common manufacturing or distribution facilities, sharing a

common sales force or distributor/dealer network, or using the same established brand name and/or

sharing the same administrative infrastructure.

5. The greater the economies associated with cost-saving strategic ts, the greater the potential for a

related diversication strategy to yield a competitive advantage based on lower costs.




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CORE CONCEPT

Economies of scope are cost reductions that ow from operating in multiplebusinesses (a larger scopeof operation), whereas economies of scale accrue froma larger-size operation.

6. FromCompetitiveAdvantagetoAddedProtabilityandGainsinShareholderValue:The cost

advantage from economies of scope is due to the fact that resource sharing allows a multibusiness

rm to spread resource costs across its businesses and to avoid the expense of having to acquire and

maintain duplicate sets of resources

7. The competitive advantage potential that ows from economies of scope and the capture of other

strategic-t benets is what enables a company pursuing related diversication to achieve 1 1 1 5 3

nancial performance and the hoped-for gains in shareholder value.

VII. Diversication Into Unrelated Business

A. Companies that pursue a strategy of unrelated diversication generally exhibit a willingness to diversify

into any industry where there is potential for a company to realize consistently good nancial results.

1. The basic premise of unrelated diversication is that any company that can be acquired on good

nancial terms and that has satisfactory earnings potential represents a good acquisition and a good

business opportunity. Such companies are frequently labeled conglomerates.

2. The company spends much time and effort screening new acquisition candidates and deciding

whether to keep or divest existing businesses, using such criteria as:

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

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

c. Whether the business is big enough to contribute signicantly to the parent rms bottom line

d. Most importantly, whether the business passes the better-off test by growing prots as well as

revenues.

3. Building Shareholder Value via Unrelated Diversication In the absence of cross-business

strategic ts by which to grow shareholder value, the company must look for unrelated avenues.

4. The Benets of Astute Corporate Parenting The parent corporation must nurture its component

businesses through top management expertise, expert problem solving, creative strategy suggestions,

and rst rate advise.

CORE CONCEPT

Corporate parenting refers to the role that a diversied corporation plays innurturing its component businesses through the provision of top managementexpertise, disciplined control, nancial resources, and other types of generalizedresources and capabilities such as long term planning systems, businessdevelopment skills, management development processes, and incentive systems.

5. Judicious Cross-Business Allocation of Financial Resources The parent corporation can serve as

an internal capital market and allocate surplus cash ows from some businesses to fund the capital

requirements of others.




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6. Acquiring and Restructuring Undervalued Companies The parent corporation can search out weak

performing companies and purchase them at bargain prices, then restructuring their operations in

ways that improve protability.

CORE CONCEPT

Restructuringrefers to overhauling and streamlining the activities of a business combining plants with excess capacity, selling o underutilized assets, reducingunnecessary expenses, and otherwise improving the productivity and protability of acompany.

7. The Path to Greater Shareholder Value through Unrelated Diversication: Building shareholder

value via unrelated diversication ultimately hinges on the corporate level executives doing three

things:

a. Diversify into businesses that can produce consistently good earnings and returns on investment

(to satisfy the attractiveness test).

b. Negotiate favorable acquisition prices (to satisfy the cost-of-entry test).

c. Do a superior job of corporate parenting via high-level managerial oversight and resource sharing,

nancial resource allocation and portfolio management, or restructuring underperforming

businesses (to satisfy the better-off test).

B. TheDrawbacksofUnrelatedDiversication

1. Unrelated diversication strategies have two important negatives that undercut the positives; Very

demanding managerial requirements and Limited competitive advantage potential

2. DemandingManagerialRequirements:Successfully managing a set of fundamentally different

businesses operating in fundamentally different industry and competitive environments is a very

challenging and exceptionally difcult proposition for corporate level managers.

a. 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:

1. Stay abreast of what is happening in each industry and each subsidiary and thus judge

whether a particular business has bright prospects or is headed for trouble

2. Know enough about the issues and problems facing each subsidiary to pick business-unit

heads having the requisite combination of managerial skills and know-how

b. As a rule, the more unrelated businesses that a company has diversied into, the more corporate

executives are reduced to managing by the numbers.

3. Limited Competitive Advantage: Unrelated diversication offers limited potential for competitive

advantage beyond that of what each individual business can generate on its own.

a. 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 it a strategy of

related diversication.

b. Without the competitive advantage potential of strategic ts, consolidated performance of an

unrelated group of businesses stands to be little or nobetter than the sum of what the individual

business units could achieve if they were independent.




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C. Misguided ReasonsforPursuingUnrelatedDiversication

1. Rationales for unrelated diversication that are not likely to increase shareholder value include:

a. Risk reduction reducing perceived risk by spreading the companys investments over a set of

truly diverse industries whose technologies and markets are largely disconnected.

b. Growth pursuing growth for the sake of growth.

c. Stabilization offsetting market downtrends in some businesses by upswings in others.

d. Managerial Motives unrelated diversication that results only in benets to managers such as

higher compensation and reduced employment risk.

VIII. Combination Related-Unrelated Diversication Strategies

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

2. Indeed, in actual practice the business makeup of diversied 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 diversied 2 to 5 related or unrelated businesses

c. Broadly diversied wide ranging collection of related businesses, unrelated businesses, or a

mixture of both

3. Figure 8.2, Three Strategy Alternatives for Pursuing Diversication, provides guidance on

what strategy might be most effective in various situations.

IX. Evaluating the Strategy of a Diversied Company

A. The procedure for evaluating a diversied companys strategy and deciding how to improve the

companys performance involves six steps:

1. Assessing industry attractiveness individually and as a group

2. Assessing competitive strength of each business-unit in its industry

3. Checking the competitive advantage potential of cross-business strategic ts

4. Checking for resources t

5. Ranking the business units on the basis of performance and priority for resource allocation

6. Crafting new strategic moves to improve overall corporate performance

B. Step 1: Evaluating Industry Attractiveness

1. A principal consideration in evaluating a diversied companys business makeup and the caliber

of its strategy is the attractiveness of the industries in which it has business operations. Answers to

several questions are required:

a. Does each industry the company has diversied into represent a good business for the company

to be in?

b. Which of the companys industries are most attractive and which are least attractive?

c. How appealing is the whole group of industries in which the company has invested?




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2. Calculating Industry Attractiveness Scores for Each Industry into Which the Company

Has Diversied: A simple and reliable analytical tool involves calculating quantitative industry

attractiveness scores, which can then be used to gauge each industrys attractiveness, rank the

industries from most to least attractive, and make judgments about the attractiveness of all the

industries as a group.

3. Each factor should be given a weight (with all weights adding up to 1.0) and each industry should beranked between 1 and 10 for each factor. Multiplying the rank by the weight provides the score for

each factor for each industry. Table8.1,CalculatingWeightedIndustryAttractivenessScores,

provides a sample calculation. The following measures of industry attractiveness are likely to come

into play for most companies:

a. Social, political, regulatory, and environmental factors

b. Seasonal and cyclical factors

c. Industry uncertainty and business risk

d. Market size and projected growth rate

e. Industry protability

f. The intensity of competition

g. Emerging opportunities and threats

4. It is critically important to consider those aspects of industry attractiveness that pertainspecifcally

to a companys diversication strategy:

a. The presence of cross-industry strategic ts

b. Resource requirements

5. InterpretingtheIndustryAttractivenessScores:Industries with a score much below 5.0 probably

do not pass the attractiveness test. For a diversied company to be a strong performer, a substantialportion of its revenues and prots must come from business units with relatively high attractiveness

scores.

C. Step2:EvaluatingBusiness-UnitCompetitiveStrength

1. The second step in evaluating a diversied company is to appraise how strongly positioned each of

its business units are in their respective industry.

2. CalculatingCompetitiveStrengthScores forEachBusinessUnit:Quantitative measures of

each business units competitive strength can be calculated using a procedure similar to that for

measuring industry attractiveness by looking at factors that impact competitiveness.

3. Each factor should be given a weight (with all weights adding up to 1.0) and each industry should beranked between 1 and 10 for each factor. Multiplying the rank by the weight provides the score for

each factor for each industry. Table8.2,CalculatingWeightedCompetitiveStrengthScoresfor

a Diversied Companys Business Units,provides a sample calculation. The following measures

of competitive strength are likely to come into play for most companies:

a. Relative market share

b. Costs relative to competitors costs

c. Ability to match or beat rivals on key product attributes




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d Brand image and reputation

e. Other competitively valuable resources and capabilities

f. Ability to benet from strategic ts with sister businesses

g. Ability to exercise bargaining leverage with key suppliers or customers

h. Protability relative to competitors

4. InterpretingtheCompetitiveStrengthScores: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 Simultaneously Portray Industry Attractiveness and Competitive

Strength: The industry attractiveness and business strength scores can be used to portray the

strategic positions of each business in a diversied company. Industry attractiveness is plotted on

the vertical axis and competitive strength on the horizontal axis.

a. A nine-cell grid emerges from dividing the vertical axis into three regions and the horizontal axis

into three regions. Figure8.3,ANine-CellIndustryAttractiveness-CompetitiveStrength

Matrix, depicts this tool. Each business unit is plotted on the nine-cell matrix according to itsoverall attractiveness score and strength score and then shown as a bubble.

b. The location of the business units on the attractiveness-strength matrix provides valuable

guidance in deploying corporate resources to the various business units.

c. In general, a diversied 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 positioned in highly attractive industries.

6. The nine-cell attractiveness-strength matrix provides clear, strong logic for why a diversied

company needs to consider both the industry attractiveness and business strength in allocating

resources and investment capital to its different businesses.

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

1. Checking the competitive advantage potential of cross-business strategic ts involves searching

and evaluating how much benet a diversied company can gain from four types of value chain

matchups:

a. Opportunities to combine the performance of certain activities thereby reducing costs

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

d. Opportunities for sister businesses to collaborate in creating valuable new competitive

capabilities

2. Figure8.4,IdentifyingtheCompetitiveAdvantagePotentialofCross-BusinessStrategicFits,

illustrates the process of searching for competitively valuable cross-business strategic-ts and value

chain matchups.

3. More than just strategic t identication is needed. The real test is what competitive value can be

generated from these ts.




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E. Step 4: Checking for Resource Fit

1. The businesses in a diversied companys lineup need to exhibit good resource t.

CORE CONCEPT

A diversied company exhibits resource t when its business add to a companysoverall resource strengths and have matching resource requirements and/or whenthe parent company has adequate corporate resources to support its businessesneeds and add value.

2. Resource t exists when:

a. Businesses add to a companys resource strengths, either nancially or strategically

b. A company has the resources to adequately support its businesses as a group without spreading

itself too thin

3. FinancialResourceFits:A diversied company must generate sufcient cash ows to fund thecapital requirements of it business while remaining nancially healthy. As discussed previously, a

diversied rm must have a healthy internal capital market. A portfolio approach to managing the

diversied rm focuses on two general categories of businesses, cash hogs and cash cows.

a. Business units in rapidly growing industries are often cash hogsthe annual cash ows they

are able to generate from internal operations are not big enough to fund their expansion.

b. Business units with leading market positions in mature industries may be cash cows

businesses that generate substantial cash surpluses over what is needed for capital reinvestment

and competitive maneuvers to sustain their present market position.

CORE CONCEPT

A strong internal capital market allows a diversied company to add value by shiftingcapital from business units generating free cash ow to those needing additionalcapital to expand and realize their growth potential.

CORE CONCEPT

A portfolio approach to ensuring nancial t among a rms businesses is basedon the fact that dierent businesses have dierent cash ow and investmentcharacteristics.

CORE CONCEPT

A cash hogbusiness generates cash ows that are too small to fully fund itsoperations and growth; a cash hog requires cash infusion to provide additionalworking capital and nance new capital investment.




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CORE CONCEPT

A cash cowgenerates cash ows over and above its internal requirements, thusproviding a corporate parent with funds for investing in cash hogs, nancing newacquisitions, or paying dividends.

4. Viewing the diversied group of businesses as a collection of cash ows and cash requirements is a

major step forward in understanding what the nancial ramications of diversication are and why

having businesses with good nancial resource t is so important.

5. Star businesses have strong or market-leading competitive positions in attractive, high-growth

markets and high levels of protability and are often the cash cows of the future.

F. NonnancialResourceFit.

1. Does the company have (or can it develop) the specic resources and capabilities needed to be

successful in each of its businesses?

2. Are the companys resources being stretched too thinly by the resource requirements of one or more

of its businesses?

G. Step 5: Ranking the Performance Prospects of Business Unites and Assigning a Priority for

Resource Allocation

1. Once a diversied companys strategy has been evaluated from the perspectives of industry

attractiveness, competitive strength, strategic t, and resource t, the next step is to rank the

performance prospects of the businesses.

2. The most important considerations in judging business-unit performance are sales growth, prot

growth, contribution to companys earnings, and the return on capital.

3. As a rule, business subsidiaries with the brightest prot and growth prospects, attractive positions

in the nine-cell matrix, and solid strategic and resource t should receive top priority for allocationof corporate resources.

4. The rankings of future performance generally determine what priority the corporate parent should

give to each business in terms of resource allocation.

5. Figure8.5,TheChiefStrategicandFinancialOptionsforAllocatingaDiversiedCompanys

Financial Resources, shows the chief strategic and nancial options for allocating a diversied

companys nancial resources.

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

1. The diagnosis and conclusions owing from the ve preceding analytical steps set the agenda for

crafting strategic moves to improve a diversied companys overall performance. The strategic

options boil down to four broad categories of actions: (pictured in Figure8.6,ACompanysFour

Main Strategic Alternatives after it Diversies)

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

b. Broadening the companys diversication base by making new acquisitions in new industries

c. Divesting certain businesses and retrenching to a narrower diversication base

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

business makeup




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2. Sticking Closely with the Existing Business Lineupmakes sense when the companys present

businesses offer attractive growth opportunities and can be counted on to generate good earnings

and cash ow.

3. In the event that corporate executives are not entirely satised with the opportunities they see in

the companys present set of businesses and conclude that changes in the companys direction and

business makeup are in order, they can opt for any of the four strategic alternatives listed above.

4 BroadeningaDiversiedCompanysBusinessBaseMotivating factors to build positions in

new industries

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

businesses

b. Rapidly changing conditions in one or more of a companys core businesses brought on by

technological, legislative or new product innovations

c. Strengthen the market position and competitive capabilities of one or more of its present

businesses.

d. To strengthen the market position and competitive capabilities of one or more of its presentbusinesses.

5. DivestingSomeBusinessesandRetrenchingtoaNarrowerDiversicationBase:

a. Retrenching to a narrower diversication base is usually undertaken when top management

concludes that its diversication strategy has ranged too far aeld and that the company can

improve long term performance by concentrating on 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 t, either because its a cash cow or it is weakly

positioned in the industry.

d. A diversication move that seems sensible from a strategic-t stand-point turns out to be a poor

cultural t.

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

of its present businesses.

ILLUSTRATION CAPSULE

8.1, Managing Diversification at Johnson & Johnson - The Benefits of Cross-Business Strategic Fits

Discussion Question: Discuss the view held by Johnson & Johnsons corporate management aboutthe benets of collaboration with others in its various business lines.

Answer:J&Js corporate management believes close collaboration among people in diagnostics,medical devices, and pharmaceuticals businesses, where numerous cross-business strategic tsexist, will give it an edge on competitors, most of whom cannot match the companys breadth anddepth of expertise.




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6. RestructuringaCompanysBusinessLineupthroughaMixofDivestituresandNewAcqui-

sition; Restructuring strategies involve divesting some businesses and acquiring others to put a

whole new face on the companys business lineup.

ILLUSTRATION CAPSULE 8.2

Growth through Restructuring at Kraft Foods

Discussion Question: Describe the restructuring strategy used by Kraft Foods to turn aroundcompany performance.

Answer:Kraft Foods restructuring plan trimmed operations and divided the company into two units;a global snacks business and a North American grocery unit. The fundamental dierences betweenthese two large market segments made it dicult for Kraft Foods to eectively manage them jointly.Following the restructuring, both business units were better able to position themselves in theirrespective markets.

7. Performing radical surgery on the group of businesses a company is in becomes an appealing strategy

alternative when a diversied companys nancial performance is being squeezed or eroded by:

a. A serious mismatch between the companys resources and capabilities and the type of

diversication that it has pursued.

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

industries

c. Too many competitively weak businesses

d. Ongoing declines in the market share of one or more major business units that are falling prey

to more market-savvy competitors

e. An excessive debt burden with interest costs that eat deeply into protability

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

8. Companywide restructuring can also be mandated by the emergence of new technologies that

threaten the survival of one or more of a diversied companys important businesses or by the

appointment of a new CEO who decides to redirect the company.

CORE CONCEPT

Companywide restructuringinvolves divesting some businesses and acquiringothers so as to put a whole new face on the companys business lineup.




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ASSURANCE OF LEARNING EXERCISES

1. See if you can identify the value chain relationships that 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) transferring skills/technology, (2) combining related value chain activities to achieve

economies of scope, and/or (3) leveraging the use of a well-respected brand name or other resources that

enhance differentiation.

OSI Restaurant Partners

Outback Steakhouse

Carrabbas Italian Grill

Roys Restaurant (Hawaiian fusion cuisine)

Bonesh Grill (market-fresh ne seafood)

Flemings Prime Steakhouse & Wine Bar

Answer 1:The student should identify the companys overall strategy is to differentiate its restaurants byemphasizing consistently high-quality food and service, generous portions at moderate prices and a casual

atmosphere. This is a good example of two strategic t opportunities: transferring skills and combining the

related value chain activities to achieve lower costs, especially in the administrative functions.

LOral

Maybelline, Lancme, Helena Rubinstein, 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 dermocosmetics

Answer 2:The student should identify the companys overall strategy is to differentiate its beauty products

by emphasizing high-quality cosmetics delivered via retail distribution networks. This is a good example of

two strategic t opportunities: transferring skills and combining the related value chain activities to achieve

lower costs, especially in the development, production, and distribution functions.

Johnson & Johnson

Baby products (powder, shampoo, oil, lotion)

Band-Aids and other 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




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Surgical and hospital products

Acuvue contact lenses

Answer 3:The student should identify the companys overall strategy is to supply a broad range of personal

hygene and medical products to a wide range of customers. This is a good example of two strategic t

opportunities: leveraging the use of a well respected brand name and combining the related value chainactivities to achieve lower costs, especially in the product development and distribution functions.

2. Peruse the business group listings for United Technologies shown below and listed at its website (www.utc.

com). How would you characterize the companys corporate strategy? Related diversication, unrelated

diversication, or a combination related-unrelated diversication strategy? Explain your answer.

Answer:

Carrierthe worlds largest provider of air-conditioning, heating, and refrigeration solutions.

Hamilton Sundstrandtechnologically advanced aerospace and industrial products.

Otisthe worlds leading manufacturer, installer and maintainer of elevators, escalators and moving

walkways.

Pratt & Whitneydesigns, manufactures, services and supports aircraft engines, industrial gas turbines

and space propulsion systems.

Sikorskya world leader in helicopter design, manufacture and service.

UTC Fire & Securityre and security systems developed for commercial, industrial, and residential

customers.

UTC Powera full-service provider of environmentally advanced power solutions.

The student should be able to identify that United Technologies pursues unrelated diversication, allowing

each business unit to develop an independent competitive approach and strategy that is best suited to its

individual market space.

3. The Walt Disney Company is in the following businesses:

Theme parks

Disney Cruise Line

Resort properties

Movie, video, and theatrical productions (for both children and adults)

Television broadcasting (ABC, Disney Channel, Toon Disney, Classic Sports Network, ESPN and

ESPN2, E!, Lifetime, and A&E networks)

Radio broadcasting (Disney Radio)

Musical recordings and sales of animation art

Anaheim Mighty Ducks NHL franchise

Anaheim Angels major league baseball franchise (25 percent ownership)

Books and magazine publishing




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Interactive software and Internet sites

The Disney Store retail shops

Based on the above listing, would you say that Walt Disneys business lineup reects a strategy of related

diversication, unrelated diversication, or a combination of related and unrelated diversication? Be

prepared to justify and explain your answer in terms of the extent to which the value chains of Disneysdifferent businesses seem to have competitively valuable cross-business relationships.

Answer: Students are likely to choose related diversication in one broad category: the enter tainment

industry. The theme parts, cruise line, and resorts all build off the Disney brand name. Disneys ownership

of companies like ESPN and ABC gives it another avenue for pursuing the entertainment industry in broad

terms. There are some strong links, also, between movie production, TV broadcasting, radio broadcasting,

and musical recordings. Publishing and ownership of Internet sites and software are also related in terms of

the editing function, and administrative functions, including marketing as a value chain activity. Lastly, the

sports franchises provide Disney with another means to generate growth and revenues from the day-to-day

entertainment needs of the public.

4. ITT Corporation has had a long history as a conglomerate enterprise. In recent years, however, the company

has undergone some signicant changes. How would you describe these changes and what do you thinkwere the drivers? Explain. (You can nd lots of information about this company and its recent strategic

moves on the Web.)

Answer:The student should be able to identify the long history of ITT and its history of growth and

acquisition followed by a breakup. In 1995 the company was split into three separate companies with

separate market focus including hotels and resorts, insurance, and defense.

The defense company later changed its name to ITT Corporation in 2006 and began to grow via acquisition.

Once again, in 2011, the company separated itself into three independent publicly traded companies focused

in three markets including Industrial Process & Flow Control, Water & Waste Water, and Defense. The

drivers for change seem to be restructuring in order to allow better focus in the newly formed companies.

While most corporations might have elected to keep three separate operating divisions such as United

Technologies, ITT has a proven track record in spinning off separate companies and providing shareholderswith ownership in each company.

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