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DiversificationDiversificationStrategies for Managing a Group of Strategies for Managing a Group of

BusinessesBusinesses

DiversificationDiversificationStrategies for Managing a Group of Strategies for Managing a Group of

BusinessesBusinesses

9999Chapter

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Chapter RoadmapChapter RoadmapChapter RoadmapChapter Roadmap

When to Diversify Strategies for Entering New Businesses Choosing the Diversification Path: Related versus

Unrelated Businesses The Case for Diversifying into Related Businesses The Case for Diversifying into Unrelated Businesses Combination Related-Unrelated Diversification

Strategies Evaluating the Strategy of a Diversified Company After a Company Diversifies: The Four Main Strategy

Alternatives

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Diversification andDiversification andCorporate Strategy Corporate Strategy Diversification andDiversification and

Corporate Strategy Corporate Strategy A company is diversified when it is in two or more lines

of business that operate in diverse market environments

Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business

A diversified company needs a multi-industry,multi-business strategy

A strategic action plan must be developedfor several different businesses competingin diverse industry environments

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When Should a Firm When Should a Firm Diversify?Diversify?

When Should a Firm When Should a Firm Diversify?Diversify?

It is faced with diminishing growth prospects in present business

It has opportunities to expand into industries whose technologies and products complement its present business

It can leverage existing competencies and capabilities by expanding into businesses where these resource strengths are key success factors

It can reduce costs by diversifyinginto closely related businesses

It has a powerful brand name it cantransfer to products of other businesses toincrease sales and profits of these businesses

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Why Diversify?Why Diversify?Why Diversify?Why Diversify? To build shareholder value!

Diversification is capable of building shareholder value if it passes three tests:

1. Industry Attractiveness Test—the industry presents good long-term profit opportunities

2. Cost of Entry Test—the cost of entering is not so high as to spoil the profit opportunities

3. Better-Off Test—the company’s different businesses should perform better together than as stand-alone enterprises, such that company A’s diversification into business B produces a 1 + 1 = 3 effect for shareholders

1 + 1 = 31 + 1 = 3

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Strategies for EnteringStrategies for EnteringNew BusinessesNew Businesses

Strategies for EnteringStrategies for EnteringNew BusinessesNew Businesses

Acquire existing company

Internal start-up

Joint ventures/strategic partnerships

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Acquisition of anAcquisition of anExisting CompanyExisting CompanyAcquisition of anAcquisition of anExisting CompanyExisting Company

Most popular approach to diversification Advantages

Quicker entry into target market Easier to hurdle certain entry barriers

Acquiring technological know-how

Establishing supplier relationships

Becoming big enough to match rivals’efficiency and costs

Having to spend large sums onintroductory advertising and promotion

Securing adequate distribution access

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In a study of the performance of the 200 largest U.S. corporations from 1990 to 2000, McKinsey & Company found that those companies that actively managed their business portfolios through acquisitions and divestitures created substantially more shareholder value than those that kept a fixed lineup of businesses.

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Internal StartupInternal StartupInternal StartupInternal Startup

More attractive when Parent firm already has most of needed resources to build a

new business Ample time exists to launch a new business Internal entry has lower costs

than entry via acquisition New start-up does not have to go

head-to-head against powerful rivals Additional capacity will not adversely impact supply-

demand balance in industry Incumbents are slow in responding to new entry

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Joint Ventures andJoint Ventures andStrategic PartnershipsStrategic Partnerships

Joint Ventures andJoint Ventures andStrategic PartnershipsStrategic Partnerships

Good way to diversify when Uneconomical or risky to go it alone Pooling competencies of two partners provides more

competitive strength Only way to gain entry into a desirable foreign market

Foreign partners are needed to Surmount tariff barriers and import quotas Offer local knowledge about

Market conditions Customs and cultural factors Customer buying habits Access to distribution outlets

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Related vs. Unrelated Related vs. Unrelated DiversificationDiversification

Related vs. Unrelated Related vs. Unrelated DiversificationDiversification

Related Diversification

Involves diversifying into businesses whose value chains possess competitively valuable “strategic fits” with value chain(s) of firm’s present business(es)

Unrelated Diversification

Involves diversifying into businesses with no competitively valuable value chain match-ups or strategic fits with firm’s present business(es)

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Fig. 9.1: Strategy Alternatives forFig. 9.1: Strategy Alternatives fora Company Looking to Diversifya Company Looking to Diversify

Fig. 9.1: Strategy Alternatives forFig. 9.1: Strategy Alternatives fora Company Looking to Diversifya Company Looking to Diversify

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Diversification Diversification Diversification Diversification

Diversification processDiversification process Types of businessesTypes of businesses

Heavy reliance on Heavy reliance on acquisitionacquisition

Many seemingly Many seemingly unrelated businessesunrelated businesses

Primarily organicPrimarily organic Many businesses Many businesses clustered in a few related clustered in a few related industriesindustries

CompanyCompany

Product extensions/Product extensions/new product linesnew product lines

Few related product linesFew related product lines

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Examples…Examples…Examples…Examples…

Berkshire Hathaway is a holding company pursuing unrelated Berkshire Hathaway is a holding company pursuing unrelated diversification (Dairy Queen, Borsheim’s Fine Jewelry, NetJets, and diversification (Dairy Queen, Borsheim’s Fine Jewelry, NetJets, and GEICO). GEICO).

News Corporation pursues a related diversification (TV Guide, News Corporation pursues a related diversification (TV Guide, Fox Sports, DirecTV). Fox Sports, DirecTV).

Dow Jones & Company pursues a related diversification (print Dow Jones & Company pursues a related diversification (print publishing, electronic publishing, newspapers). publishing, electronic publishing, newspapers).

Kimberly Clark (K-C) pursues both related diversification and unrelated. Its Kimberly Clark (K-C) pursues both related diversification and unrelated. Its related company groups include consumer care products (Kleenex, related company groups include consumer care products (Kleenex, Huggies, Cottonelle), hotel, workplace, and washroom products (Scott, Huggies, Cottonelle), hotel, workplace, and washroom products (Scott, ShopPro), and health care products like medical gloves, surgical drapes ShopPro), and health care products like medical gloves, surgical drapes and gowns, and medical devices. These three groups are not necessarily and gowns, and medical devices. These three groups are not necessarily all related, but within the groups, there are significant value chain all related, but within the groups, there are significant value chain synergies to be achieved, as well as, in some cases (health care synergies to be achieved, as well as, in some cases (health care products), the leveraging of a brand name. products), the leveraging of a brand name.

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What Is Related What Is Related Diversification?Diversification?

What Is Related What Is Related Diversification?Diversification?

Involves diversifying into businesses whose valuechains possess competitively valuable “strategic fits” with the value chain(s) of the present business(es)

Capturing the “strategic fits” makes related diversification a 1 + 1 = 3 phenomenon

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Core Concept: Strategic FitCore Concept: Strategic FitCore Concept: Strategic FitCore Concept: Strategic Fit

Exists whenever one or more activities in the value chains of different businesses are sufficiently similar to present opportunities for Transferring competitively valuable

expertise or technological know-howfrom one business to another

Combining performance of commonvalue chain activities to achieve lower costs

Exploiting use of a well-known brand name

Cross-business collaboration to create competitively valuable resource strengths and capabilities

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Fig. 9.2: Value ChainFig. 9.2: Value ChainRelationships for Related Relationships for Related

BusinessesBusinesses

Fig. 9.2: Value ChainFig. 9.2: Value ChainRelationships for Related Relationships for Related

BusinessesBusinesses

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Types of Strategic FitsTypes of Strategic FitsTypes of Strategic FitsTypes of Strategic Fits

Cross-business strategic fits can exist anywhere along the value chain

R&D and technology activities

Supply chain activities

Manufacturing activities

Distribution activities

Sales and marketing activities

Managerial and administrative support activities

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L’OrE9al is a good example of a company establishing cross-business collaboration to create new strengths and capabilities. In some cases it also combined value chain activities, including, perhaps, manufacturing and R&D.

J&J is a great example of leveraging a well-respected brand name.

PepsiCo provides a good example of combining related value chain activities, especially in production and distribution of its products.

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Core Concept:Core Concept:Economies of ScopeEconomies of Scope

Core Concept:Core Concept:Economies of ScopeEconomies of Scope

Stem from cross-business opportunities to reduce costs

Arise when costs can be cutby operating two or more businessesunder same corporate umbrella

Cost saving opportunities can stem from interrelationships anywhere along the value chains of differentbusinesses

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J&J’s corporate management believes close collaboration among people in diagnostics, medical devices, and pharmaceuticals businesses, where numerous cross-business strategic fits exist, will give it an edge on competitors, most of whom cannot match the company’s breadth and depth of expertise.

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What Is Unrelated What Is Unrelated Diversification?Diversification?

What Is Unrelated What Is Unrelated Diversification?Diversification?

Involves diversifying into businesses withNo strategic fitNo meaningful value chain

relationshipsNo unifying strategic theme

Basic approach – Diversify intoany industry where potential existsto realize good financial results

While industry attractiveness and cost-of-entry tests are important, better-off test is secondary

General Electric, United Technologies, American Standard, and Lancaster Colony

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Fig. 9.3: Value ChainsFig. 9.3: Value Chainsfor Unrelated Businessesfor Unrelated BusinessesFig. 9.3: Value ChainsFig. 9.3: Value Chains

for Unrelated Businessesfor Unrelated Businesses

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Appeal of Unrelated Appeal of Unrelated DiversificationDiversification

Appeal of Unrelated Appeal of Unrelated DiversificationDiversification

Business risk scattered over different industries

Financial resources can be directed to thoseindustries offering best profit prospects

If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced

Stability of profits – Hard times in one industrymay be offset by good times in another industry

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Key Drawbacks ofKey Drawbacks ofUnrelated DiversificationUnrelated Diversification

Key Drawbacks ofKey Drawbacks ofUnrelated DiversificationUnrelated Diversification

Demanding Demanding Managerial Managerial

RequirementsRequirements

LimitedLimitedCompetitive Competitive

Advantage PotentialAdvantage Potential

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Combination Related-Unrelated Combination Related-Unrelated Diversification StrategiesDiversification Strategies

Combination Related-Unrelated Combination Related-Unrelated Diversification StrategiesDiversification Strategies

Dominant-business firms One major core business accounting for 50 - 80 percent of

revenues, with several small related or unrelated businesses accounting for remainder

Narrowly diversified firms Diversification includes a few (2 - 5) related or unrelated

businesses Broadly diversified firms

Diversification includes a wide collection of either related or unrelated businesses or a mixture

Multibusiness firms Diversification portfolio includes several unrelated groups of

related businesses

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

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

— Theme parks. — Disney Cruise Line. — Resort Properties. — Movie, video, and theatrical productions. — Television broadcasting. — Radio broadcasting. — Musical recordings and sales of animation art. — Anaheim Mighty Ducks NHL franchise. — Anaheim Angels major league baseball franchise. — Books and magazine publishing. — Interactive software and Internet sites. — The Disney Store retail shops.

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Related Diversification

A strategy-driven approachto creating shareholder value

Unrelated Diversification

A finance-driven approachto creating shareholder value

Diversification andDiversification andShareholder ValueShareholder ValueDiversification andDiversification andShareholder ValueShareholder Value

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Fig. 9.4: Identifying aFig. 9.4: Identifying aDiversified Company’s StrategyDiversified Company’s Strategy

Fig. 9.4: Identifying aFig. 9.4: Identifying aDiversified Company’s StrategyDiversified Company’s Strategy

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How to Evaluate aHow to Evaluate aDiversified Company’s StrategyDiversified Company’s Strategy

How to Evaluate aHow to Evaluate aDiversified Company’s StrategyDiversified Company’s Strategy

Step 1: Assess long-term attractiveness of each industry firm is in

Step 2: Assess competitive strength of firm’s business units

Step 3: Check competitive advantage potential of cross-business strategic fits among business units

Step 4: Check whether firm’s resources fit requirements of present businesses

Step 5: Rank performance prospects of businesses and determine priority for resource allocation

Step 6: Craft new strategic moves to improve overall company performance

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9-32

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Fig. 9.5: Industry Attractiveness-Competitive Fig. 9.5: Industry Attractiveness-Competitive Strength MatrixStrength Matrix

Fig. 9.5: Industry Attractiveness-Competitive Fig. 9.5: Industry Attractiveness-Competitive Strength MatrixStrength Matrix

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Fig. 9.6: Identify Competitive Advantage Fig. 9.6: Identify Competitive Advantage Potential of Cross-Business Strategic FitsPotential of Cross-Business Strategic FitsFig. 9.6: Identify Competitive Advantage Fig. 9.6: Identify Competitive Advantage Potential of Cross-Business Strategic FitsPotential of Cross-Business Strategic Fits

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Fig. 9.7: Strategic and Financial Fig. 9.7: Strategic and Financial Options for Allocating Financial Options for Allocating Financial

ResourcesResources

Fig. 9.7: Strategic and Financial Fig. 9.7: Strategic and Financial Options for Allocating Financial Options for Allocating Financial

ResourcesResources

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Fig. 9.8: Strategy Options for Fig. 9.8: Strategy Options for aa

Company Already DiversifiedCompany Already Diversified

Fig. 9.8: Strategy Options for Fig. 9.8: Strategy Options for aa

Company Already DiversifiedCompany Already Diversified

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Strategies to Broaden a Strategies to Broaden a Diversified Company’s Business Diversified Company’s Business

BaseBase

Strategies to Broaden a Strategies to Broaden a Diversified Company’s Business Diversified Company’s Business

BaseBase Conditions making this approach attractive

Slow grow in current businesses

Vulnerability to seasonal or recessionary influences or to threats from emerging new technologies

Potential to transfer resources and capabilities to other related businesses

Rapidly-changing conditions in one or more core industries alter buyer requirements

Complement and strengthen market position of one or more current businesses

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Divestiture Strategies Aimed at Divestiture Strategies Aimed at Retrenching to a Narrower Diversification Retrenching to a Narrower Diversification

Base Base

Divestiture Strategies Aimed at Divestiture Strategies Aimed at Retrenching to a Narrower Diversification Retrenching to a Narrower Diversification

Base Base Strategic options

Retrenchment

Divestiture

Sell it

Spin it off asindependent company

Liquidate it (close it downbecause no buyers can be found)

Retrench ?Divest ?

Sell ?Close ?

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Retrenchment StrategiesRetrenchment StrategiesRetrenchment StrategiesRetrenchment Strategies

Objective

Reduce scope of diversification to smaller number of “core “ businesses

Strategic options involvedivesting businesses

Having little strategic fitwith core businesses

Too small to contributeto earnings

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Strategies to Restructure a Strategies to Restructure a Company’s Business LineupCompany’s Business LineupStrategies to Restructure a Strategies to Restructure a Company’s Business LineupCompany’s Business Lineup

Objective

Make radical changes in mixof businesses in portfolio via both

Divestitures and

New acquisitions

in order to put on whole new face on the company’s business makeup

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Conditions That Make Conditions That Make Portfolio Restructuring Portfolio Restructuring

AttractiveAttractive

Conditions That Make Conditions That Make Portfolio Restructuring Portfolio Restructuring

AttractiveAttractive Too many businesses in unattractive industries Too many competitively weak businesses Ongoing declines in market shares of one

or more major business units Excessive debt load Ill-chosen acquisitions performing worse than expected New technologies threaten survival of one or more core

businesses Appointment of new CEO who decides to redirect company “Unique opportunity” emerges and existing businesses must

be sold to finance new acquisition

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MultinationalMultinationalDiversification StrategiesDiversification Strategies

MultinationalMultinationalDiversification StrategiesDiversification Strategies

Distinguishing characteristic

Diversity of businesses and diversity of national markets

Presents a big strategy-making challenge

Strategies must be conceived and executedfor each business, with as manymultinational variations as appropriate