Crafting & Executing Strategy 20e

Crafting & Executing Strategy 20e

CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 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 crossbusiness strategic fit capable of delivering competitive advantage. LO 3 The merits and risks of unrelated diversification strategies. LO 4 The analytic tools for evaluating a companys diversification strategy. LO 5 What four main corporate strategy options a diversified company can employ for solidifying its strategy and improving company performance. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

82 WHAT DOES CRAFTING A DIVERSIFICATION STRATEGY ENTAIL? Step 1 Picking new industries to enter and deciding on the means 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 cooperations collection of businesses. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 83 STRATEGIC DIVERSIFICATION OPTIONS Sticking closely with the existing business lineup and pursuing opportunities presented by these businesses. Broadening the current scope of diversification by entering additional industries. Retrenching to a narrower scope of diversification by divesting poorly performing businesses

Broadly restructuring the entire firm by divesting some businesses and acquiring others to put a whole new face on the firms business lineup. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 84 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 85 BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING Testing Whether Diversification Will Add Long-Term Value for Shareholders The industry attractiveness test The cost-of-entry test The

better-off test (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 86 BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING The Attractiveness Test: Are the industrys 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? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 87 CORE CONCEPT To add shareholder value, a move to diversify into a new business must pass the three Tests of Corporate Advantage: 1. The Industry Attractiveness Test 2. The Cost of Entry Test 3. The Better-off Test (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 88 CORE CONCEPT 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 89 BETTER PERFORMANCE THROUGH SYNERGY Evaluating the Potential for Synergy through Diversification Firm A purchases Firm B in another industry. A and Bs 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 Cs profits are greater than what each firm could have earned on its own. Synergy (1+1=3) (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 810 APPROACHES TO DIVERSIFYING THE BUSINESS LINEUP Diversifying into

New Businesses Existing business acquisition Internal new venture (start-up) Joint venture (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 811 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 acquisitionwhether to pay a premium for a successful firm or seek a bargain in struggling firm Underestimating costs for integrating acquired firm

Overestimating the acquisitions potential to deliver added shareholder value (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 812 CORE CONCEPT An acquisition premium is the amount by which the price offered exceeds the preacquisition market value of the target firm. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 813 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 814 CORE CONCEPT Corporate venturing (or new venture development) is the process of developing new businesses as an outgrowth of a firms established business operations. It is also referred to as corporate entrepreneurship or intrapreneurship since it requires entrepreneurial-like qualities within a larger enterprise. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

815 WHEN TO ENGAGE IN INTERNAL DEVELOPMENT Availability of in-house skills and resources Ample time to develop and launch business Cost of acquisition is higher than internal entry Factors Favoring Internal Development Low resistance of incumbent firms to market entry

Added capacity does affect supply and demand balance Low resistance of incumbent firms to market entry (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 816 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? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 817 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 818 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 819 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 The Question of Comparative Cost Is speed of the essence in the firms chances for successful entry? Which is the least costly mode of entry, given the firms objectives?

(c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 820 STRATEGIC MANAGEMENT PRINCIPLE Transaction costs are the costs of completing a business agreement or deal of some sort, over and above the price of the deal. They can include the costs of searching for an attractive target, the costs of evaluating its worth, bargaining costs, and the costs of completing the transaction. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 821 CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSES Which Diversification

Path to Pursue? Related Businesses Unrelated Businesses Both Related and Unrelated Businesses (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 822 CORE CONCEPTS Related businesses possess competitively valuable cross-business value chain and resource matchups. Unrelated businesses have dissimilar value chains and resource requirements,

with no competitively important crossbusiness relationships at the value chain level. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 823 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 824 CORE CONCEPT 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 825

DIVERSIFICATION INTO RELATED BUSINESSES Strategic Fit Opportunities: Transferring specialized expertise, technological know-how, or other resources and capabilities from one businesss value chain to anothers. 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 826 PURSUING RELATED DIVERSIFICATION Related diversification involves sharing or transferring specialized 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 827 CORE CONCEPTS 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 (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 828 FIGURE 8.1 Related Businesses Provide Opportunities to Benefit from Competitively Valuable Strategic Fit (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 829

IDENTIFYING CROSS-BUSINESS STRATEGIC FITS ALONG THE VALUE CHAIN R&D and Technology Activities Supply Chain Activities ManufacturingRelated Activities Potential Cross-Business Fits Sales and Marketing Activities DistributionRelated Activities

Customer Service Activities (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 830 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 (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 831 CORE CONCEPT Economies of scope are cost reductions that flow from operating in multiple

businesses (a larger scope of operation). Economies of scale accrue from a larger-size operation. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 832 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 833 FROM STRATEGIC FIT TO COMPETITIVE ADVANTAGE, ADDED PROFITABILITY AND GAINS IN SHAREHOLDER VALUE Capturing the Cross-Business Strategicfit 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 (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 834 STRATEGIC MANAGEMENT PRINCIPLE

Diversifying into related businesses where competitively valuable strategic-fit benefits can be captured puts a firms businesses in position to perform better financially as part of the firm than they could have performed as independent enterprises, thus providing a clear avenue for boosting shareholder value and satisfying the better-off test. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 835 ILLUSTRATION CAPSULE 8.1 Microsofts Acquisition of Skype: Pursuing the Benefits of Cross-Business Strategic Fit What does the acquisition of Skype reveal about the importance of Microsofts efforts to execute a successful cross-business

acquisition strategy? To what extent is decentralization required when seeking cross-business strategic fit? What should Microsoft do to ensure the continued success of its strategy? How will Microsoft keep Skypes user base from moving to competing providers? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 836 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 firms bottom line? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 837 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 (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 838 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 839

CORE CONCEPT Corporate parenting is the role that a diversified corporation plays in nurturing its component businesses through the provision of: top management expertise disciplined control financial resources Other types of generalized resources and capabilities such as long-term planning systems, business development

skills, management development processes, and incentive systems. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 840 CORE CONCEPT A diversified firm has a parenting advantage when it is more able than other firms to boost the combined performance of its individual businesses through high-level guidance, general oversight, and other corporate-level contributions. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 841 STRATEGIC MANAGEMENT PRINCIPLE

An umbrella brand is a corporate brand name that can be applied to a wide assortment of business types. As such, it is a generalized resource that can be leveraged in unrelated diversification. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 842 CORE CONCEPT Restructuring refers to overhauling and streamlining the activities of a business combining plants with excess capacity, selling off underutilized assets, reducing unnecessary expenses, and otherwise improving the productivity and profitability of the firm. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

843 THE PATH TO GREATER SHAREHOLDER VALUE THROUGH UNRELATED DIVERSIFICATION The attractiveness test Actions taken by upper management to create value and gain a parenting advantage Diversify into businesses that can produce consistently good earnings and returns on investment The cost-of-entry test The better-off test Negotiate favorable acquisition prices Provide managerial oversight and

resource sharing, financial resource allocation and portfolio management, and restructure underperforming businesses (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 844 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 (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 845 MISGUIDED REASONS FOR PURSUING UNRELATED DIVERSIFICATION Poor Rationales for

Unrelated Diversification Seeking a 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

(c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 846 STRATEGIC MANAGEMENT PRINCIPLE Relying solely on leveraging general resources and the expertise of corporate executives to wisely manage a set of unrelated businesses is a much weaker foundation for enhancing shareholder value than is a strategy of related diversification. Only profitable growththe kind that comes from creating added value for shareholders can justify a strategy of unrelated diversification. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 847 COMBINATION RELATED-UNRELATED DIVERSIFICATION STRATEGIES

Related-Unrelated Business Portfolio Combinations DominantBusiness Enterprises Narrowly Diversified Firms Broadly Diversified Firms Multibusiness Enterprises (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 848 STRUCTURES OF COMBINATION RELATEDUNRELATED DIVERSIFIED FIRMS

Dominant-Business Enterprises Narrowly Diversified Firms Are comprised of a few related or unrelated businesses. Broadly Diversified Firms 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.

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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 849 EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY Attractiveness of industries Strength of Business Units Cross-business

strategic fit Diversified Strategy Fit of firms resources Allocation of resources New Strategic Moves (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 850 EVALUATING THE STRATEGY OF A DIVERSIFIED FIRM 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 firms business units within their respective industries. 3. Evaluating the extent of cross-business strategic fit along the value chains of the firms various business units. 4. Checking whether the firms resources fit the requirements of its present business lineup. 5. Ranking the performance prospects of the businesses from best to worst and determining a priority for allocating resources. 6. Crafting strategic moves to improve corporate performance. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 851 FIGURE 8.2 Three Strategy Options for Pursuing Diversification (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 852

STEP 1: EVALUATING INDUSTRY ATTRACTIVENESS How attractive are the industries in which the firm has business operations? 1. Does each industry represent a good market for the firm to be in? 2. Which industries are most attractive, and which are least attractive? 3. How appealing is the whole group of industries? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 853 CALCULATING INDUSTRY-ATTRACTIVENESS SCORES: KEY MEASURES Market size and projected growth rate

The intensity of competition among market rivals Emerging opportunities and threats The presence of cross-industry strategic fit. Resource requirements. Social, political, regulatory, environmental factors Industry profitability

(c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 854 CALCULATING INDUSTRY ATTRACTIVENESS FROM THE MULTIBUSINESS PERSPECTIVE The Question of CrossIndustry Strategic Fit How well do the industrys 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 companys reach?

(c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 855 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution

in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 856 TABLE 8.1 Calculating Weighted Industry Attractiveness Scores Remember: The more intensely competitive an industry is, the lower the attractiveness rating for that industry! [Rating scale: 1 = very unattractive to the firm; 10 = very attractive to the firm.] (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

857 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 Benefits from strategic fit with firms other businesses Bargaining leverage with key suppliers or customers Profitability relative to competitors (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 858 STRATEGIC MANAGEMENT PRINCIPLE Using relative market share to measure competitive strength is analytically superior to using straight-percentage market share.

Relative market share is the ratio of a business units market share to the market share of its largest industry rival as measured in unit volumes, not dollars. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 859 TABLE 8.2 Calculating Weighted CompetitiveStrength Scores for a Diversified Companys Business Units [Rating scale: 1 = very weak; 10 = very strong.] (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

860 FIGURE 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 861

STEP 3: DETERMINING THE COMPETITIVE VALUE OF STRATEGIC FIT IN DIVERSIFIED COMPANIES Assessing the degree of strategic fit across its businesses is central to evaluating a companys related diversification strategy. The real test of a diversification strategy is what degree of competitive value can be generated from strategic fit. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 862 STRATEGIC MANAGEMENT PRINCIPLE The greater the value of cross-business strategic fit in enhancing a firms performance

in the marketplace or on the bottom line, the more competitively powerful is its strategy of related diversification. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 863 FIGURE 8.4 Identifying the Competitive Advantage Potential of Cross-Business Strategic Fit (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 864 CORE CONCEPT A company pursuing related diversification exhibits resource fit when its businesses have matching specialized resource requirements along their value chains

A company pursuing unrelated diversification has resource fit when the parent company has adequate corporate resources (parenting and general resources) to support its businesses needs and add value. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 865 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 (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 866

CORE CONCEPTS A strong internal capital market allows a diversified firm to add value by shifting capital from business units generating free cash flow to those needing additional capital to expand and realize their growth potential. A portfolio approach to ensuring financial fit among a firms businesses is based on the fact that different businesses have different cash flow and investment characteristics. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 867 CORE CONCEPTS A cash cow business generates cash flows over and above its internal requirements, thus providing a corporate parent with funds for investing in cash hog businesses, financing new

acquisitions, or paying dividends. A cash hog business generates cash flows that are too small to fully fund its operations and growth and requires cash infusions to provide additional working capital and finance new capital investment. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 868 STEP 4: CHECKING FOR RESOURCE FIT (cont'd) Nonfinancial 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 firms resources being stretched too thinly by the resource requirements of one or more of its businesses? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 869 STEP 5: RANKING BUSINESS UNITS AND ASSIGNING A PRIORITY FOR RESOURCE ALLOCATION 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 870

FIGURE 8.5 The Chief Strategic and Financial Options for Allocating a Diversified Companys Financial Resources (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 871 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 (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 872 FIGURE 8.6

A Firms Four Main Strategic Alternatives After It Diversifies (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 873 BROADENING A DIVERSIFIED FIRMS 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 firms present businesses. Extension of the scope of the firms operations into additional country markets. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 874 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. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 875

CORE CONCEPT A spinoff is an independent company created when a corporate parent divests a business either by selling shares to the public via an initial public offering or by distributing shares in the new company to shareholders of the corporate parent. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 876 STRATEGIC MANAGEMENT PRINCIPLE Diversified companies need to divest lowperforming businesses or businesses that do not fit in order to concentrate on expanding existing businesses and entering new ones where opportunities are more promising. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

877 RESTRUCTURING A DIVERSIFIED COMPANYS BUSINESS LINEUP Factors Leading to Corporate Restructuring: A serious mismatch between the firms resources and capabilities and the type of diversification that it has pursued. Too many businesses in slow-growth, declining, low-margin, or otherwise unattractive industries. Too many competitively weak businesses.

Ongoing declines in the market shares of major business units that are falling prey to more market-savvy competitors. An excessive debt burden with interest costs that eat deeply into profitability. Ill-chosen acquisitions that havent lived up to expectations. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 878 CORE CONCEPT Companywide restructuring (corporate restructuring) involves making major changes in a diversified company by divesting some businesses and/or acquiring others, so as to put a whole

new face on the companys business lineup. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 879 STRATEGIC MANAGEMENT PRINCIPLE Diversified companies need to divest lowperforming businesses or businesses that dont fit in order to concentrate on expanding existing businesses and entering new ones where opportunities are more promising. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 880 ILLUSTRATION CAPSULE 8.2 Growth through Restructuring

at Kraft Foods How is Kraft Foods corporate restructuring strategy affecting its operational base? Which competitive advantages were gained and which were lost by the splitting Kraft Foods into two separate entities? What restructuring actions did Kraft Foods Group take after the spinoff to strengthen itself? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 881

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