STRATEGIC MANAGEMENT

1. CORPORATE
STRATEGY:
DIVERSIFICATION AND
THE MULTIBUSINESS
COMPANYKHAIRUN NISAA BINTI AB RASHID
HAFLIDA BINTI OMAR

2. 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 cooperation’s collection of businesses.

3. 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.
WHEN BUSINESS
DIVERSIFICATION BECOMES A
CONSIDERATION

4. TESTING WHETHER DIVERSIFICATION
ADDS VALUE FOR SHAREHOLDERS
The Industry
Attractiveness Test
The Cost of Entry
Test
The Better-Off Test
Are the industry’s profits and return
on investment as good or better than
present business(es)?
Is the cost of overcoming entry
barriers so great as to long delay or
reduce the potential for profitability?
How much synergy** (stronger
overall performance) will be gained
by diversifying into the industry?
**Creating added value for shareholders via diversification requires
building a multibusiness company where the whole is greater than the
sum of its parts

5. APPROACHES TO DIVERSIFYING
THE BUSINESS LINEUP
Internal Line Business
through Internal
Development
Diversifying into
New Businesses

6. +
=

7. Internal Line
Business through
Internal Development
Company Name Operator/Services
KL Airport Hotel Sdn. Bhd.
The hotel operator of Sama
Sama Hotel & Sama Sama
Express
MA Agriculture-Horticulture Sdn. Bhd.
(MAAH)
Malaysia Airports Sdn. Bhd.
The operator of all airports in
Malaysia except KLIA & KLIA2
MA Consultancy Services Sdn. Bhd.
(MACS)
MA Technologies Sdn Bhd.
Malaysia Airports (Niaga) Sdn. Bhd.
The duty-free operator of
Eraman Duty Free
MA Properties Sdn. Bhd.
Malaysia Airports (Sepang) Sdn. Bhd. The operator of the KLIA & KLIA2
Urusan Teknologi Wawasan Sdn.
Bhd. (UTW)
Malaysia International Aerospace
Centre Sdn. Bhd. (MIAC)

9. 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
Added capacity
will not affect
supply and
demand balanceLow resistance of
incumbent firms
to market entry
No head-to-head
competition in
targeted industry
Factors Favoring
Internal Development

10. CHOOSING THE DIVERSIFICATION PATH:
RELATED VS UNRELATED BUSINESSES
Related
Businesses
Unrelated
Businesses
Both Related
and Unrelated
Businesses
Which Diversification
Path to Pursue?

11. CHOOSING THE DIVERSIFICATION PATH:
RELATED VS UNRELATED BUSINESSES
Related
Businesses
Unrelated
Businesses
Have competitively valuable cross-
business value chain and resource
matchups.
Have dissimilar value chains and
resource requirements, with no
competitively important cross-business
relationships at the value chain level.

12. DIVERSIFYING INTO
RELATED BUSINESSES
Strategic Fit Opportunities:
 Transferring specialized expertise, technological know-
how, or other resources and capabilities from one
business’s value chain to another’s.
 Cost sharing between businesses by combining their
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.

13. Company Type Principal activities Incorporated in
Group's Equity
Shareholding
Malaysia Airlines Cargo Sdn. Bhd Subsidiary Cargo Malaysia 100%
GE Engine Services Malaysia Joint Venture Engine Overhaul Malaysia 30%
MASwings Sdn. Bhd. Subsidiary Airline Malaysia 100%
Firefly Sdn. Bhd. Subsidiary Airline Malaysia 100%
MAS Aerotechnologies Sdn Bhd Subsidiary MRO Malaysia 100%
MAS Golden Holidays Sdn Bhd Subsidiary Tour operator Malaysia 100%
Malaysian Aerospace Engineering
Sdn Bhd
Subsidiary Engineering Malaysia 100%
MAS Academy Sdn Bhd Subsidiary Flight school Malaysia 100%
Abacus Distribution Systems
(Malaysia) Sdn Bhd
Subsidiary
Computer reservation
system
Malaysia 80%
Taj Madras Air Catering Limited Associate Catering India 20%
MAS Catering (Sarawak) Sdn Bhd Subsidiary Catering Malaysia 60%
LSG Sky Chefs Associate Holding company Malaysia 30%

14. Related Businesses Provide Opportunities to
Benefit from Competitively Valuable Strategic Fit
FIGURE 8.1

15. Evaluating the
acquisition of a
new business or
the divestiture of
an existing
business
Can it meet corporate targets
for profitability and return on
investment?
Is it is in an industry with
attractive profit and growth
potentials?
Is it is big enough to contribute
significantly to the parent firm’s
bottom line?
DIVERSIFYING INTO
UNRELATED BUSINESSES

16. BUILDING SHAREHOLDER VALUE
VIA UNRELATED DIVERSIFICATION
Astute Corporate
Parenting by
Management
• Provide leadership, oversight, expertise, and guidance.
• Provide generalized or parenting resources that lower
operating costs and increase SBU efficiencies.
Cross-Business
Allocation of
Financial
Resources
• Serve as an internal capital market.
• Allocate surplus cash flows from businesses to fund
the capital requirements of other businesses.
Acquiring and
Restructuring
Undervalued
Companies
• Acquire weakly performing firms at bargain prices.
• Use turnaround capabilities to restructure them to
increase their performance and profitability.

17. MISGUIDED REASONS FOR PURSUING
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
Poor Rationales for
Unrelated Diversification

18. STRUCTURES OF COMBINATION
RELATED-UNRELATED DIVERSIFIED FIRMS
Dominant-
Business
Enterprises
Narrowly
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
Are comprised of a few related or unrelated
businesses
Broadly
Diversified
Firms
Have a wide-ranging collection of related
businesses, unrelated businesses, or a mixture of
both
Multibusiness
Enterprises
Have a business portfolio consisting of several
unrelated groups of related businesses

20. EVALUATING THE STRATEGY
OF A DIVERSIFIED FIRM
Step 1 : Assessing the attractiveness of the industries the firm has
diversified into, both individually and as a group.
Does each industry the
company has diversified into
represent a good market for
the company to be in. Does
it pass the industry
attractiveness test?
Which of the company’s
industries are most attractive
and which are least
attractive?
How appealing is the whole
group of industries in which
the company has invested?

21. 8.1 Calculating Weighted Industry Attractiveness Scores*
* Rating scale: 1 = very unattractive to the firm; 10 = very attractive to the firm.
Remember: The more intensely competitive an industry is,
the lower the attractiveness rating for that industry!

22. Step 2: Evaluating Business-Unit
Competitive Strength
♦ Relative market share
♦ Costs relative to competitors’ costs.
♦ Ability to match or beat rivals on key product attributes.
♦ Brand image and reputation.
♦ Other competitively valuable resources and capabilities.
♦ Strategic fit with the firm’s other businesses.
♦ Bargaining leverage with key suppliers or customers.
♦ Alliances and partnerships with suppliers and/or buyers.
♦ Profitability relative to competitors

23. 8.2 Calculating Weighted Competitive Strength Scores
for a Diversified Company’s Business Units*
* Rating scale: 1 = very weak; 10 = very strong.
Relative market share: the ratio of a business unit’s market share to the market
share of its largest industry rival as measured in unit volumes, not dollars.

24. A Nine-Cell Industry
Attractiveness–
Competitive
Strength Matrix
Note: Circle sizes are scaled to
reflect the percentage of
companywide revenues
generated by the business unit.
FIGURE 8.3

25. Step 3: Determining the Competitive
Value of Strategic Fit in Diversified
Companies.
 To what extent can cost savings be realized?
 How much competitive value will come from the cross-
business transfer of skills, technology, or intellectual
capital?
 Will transferring a potent brand name to the products of
other businesses increase sales significantly?
 Will cross-business collaboration to create or strengthen
competitive capabilities lead to significant gains in the
marketplace or in financial performance?

26. Step 4: Checking for Resource Fit
• Generate the internal
cash flows sufficient
• Healthy capital market
Financial
Resource Fit
• Strong of managerial,
administrative &
competitive capabilities
to support.
Nonfinancial
Resource Fit

27. Step 5: Ranking Business Unit &
Assigning a Priority for Resource
Allocation
 Help top level executives assign each business a priority for
resource support and capital investment.
 Best ways of generate additional funds for redeployment to
businesses with better opportunities and better strategic and
resource fit.
 Ranking Factors: Sales growth, Profit growth, Contribution to
company earnings, Return on capital invested in the business,
Cash flow
 Financial resources are limited - Steer resources to business units
with the brightest profit and growth prospects and solid strategic
and resource fit

28. The Chief Strategic and Financial Options for Allocating
a Diversified Company’s Financial Resources
FIGURE 8.5

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

30. A Firm’s Four Main
Strategic Alternatives
After It Diversifies
FIGURE 8.6

31. Broadening a Diversified
Firm’s Business Base
♦ Factors Motivating the Adding of Businesses:
● The transfer of resources and capabilities
to related or complementary businesses.
● Rapidly changing technology, legislation, or new
product innovations in core businesses.
● Shoring up the market position and competitive
capabilities of the firm’s present businesses.
● Extension of the scope of the firm’s operations
into additional country markets.

32. 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
andor 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.

33. Using Divestitures and Acquisitions to
Restructure the Business Lineup
♦ Factors Leading to Corporate Restructuring:
● Too many businesses in unattractive industries
● Too many competitively weak businesses
● Ongoing declines in the market shares of business
units due to more market-savvy competitors
● Debt and interest costs that sap profitability
● Acquisitions that haven’t lived up to expectations
● Businesses with poor resource or strategic fit