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  • 1. CHAPTER 8 Strategies for Multi-business CorporationsMcGraw-Hill/Irwin Copyright © 2011 The McGraw-Hill Companies, All Rights
  • 2. Four Main Tasks inCrafting Corporate Strategy  Picking new industries to enter and deciding on means of entry  Pursuing opportunities to leverage cross- business value chain relationships into competitive advantage  Steering resources into most attractive business units  Initiating actions to boost the combined performance of businesses 8-2
  • 3. When Business DiversificationBecomes a Consideration  It is faced with diminishing growth prospects in present business  When an expansion opportunity exists in an industry whose technologies and products complement its present business  It can leverage existing competencies and capabilities by expanding into an industry that requires similar resource strengths  It can reduce costs by diversifying into closely related businesses  It has a powerful brand name it can transfer to products of other businesses 8-3
  • 4. Building Shareholder Value ThroughBusiness Diversification 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, thereby producing a 1 + 1 = 3 effect for shareholders 8-4
  • 5. Acquisition of an ExistingBusiness  Most popular approach to diversification  Advantages  Quicker entry into target market  Easier to hurdle certain entry barriers » Acquiring technological know-how » Establishing supplier relationships » Securing adequate distribution access 8-5
  • 6. Entering a New Business ThroughInternal Start-up  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 8-6
  • 7. Joint Ventures andStrategic Partnerships  Good way to diversify when 1. The expansion opportunity is too complex, uneconomical, or risky to go it alone 2. The opportunity in a new industry requires a range of competencies and know-how that is greater than an expansion-minded company can marshal 8-7
  • 8. Corporate Strategy Options:Related vs. UnrelatedDiversification  Related diversification attempts to increase shareholder value by capturing cross-business strategic fits along value chain segments  Unrelated diversification attempts to build shareholder value by doing a superior job of choosing businesses to diversify into and managing the whole collection of businesses 8-8
  • 9. Value Chain Relationships for RelatedBusinesses 8-9
  • 10. Related Diversification andCompetitive Advantage Strategic fit exists when one or more activities included in the value chains of of a diversified company’s businesses present opportunities to  Transfer expertise/capabilities/technology from one business to another  Reduce costs by combining related activities of different businesses into a single operation  Transfer use of firm’s brand name from one business to another 8-10
  • 11. Related Diversification andEconomies of Scope Stem from cross-business opportunities to reduce costs  Arise when costs can be cut by operating two or more businesses under same corporate umbrella  Cost saving opportunities can stem from interrelationships anywhere along the value chains of different businesses—R&D, manufacturing, distribution, or administrative functions 8-11
  • 12. What Is Unrelated Diversification?  Involves diversifying into businesses with No strategic fit No meaningful value chain relationships No unifying strategic theme  Basic approach – Diversify into any industry where potential exists to realize good financial results  While industry attractiveness and cost-of- entry tests are important, better-off test is secondary 8-12
  • 13. Acquisition Criteria For UnrelatedDiversification Strategies  Can business meet corporate targets for profitability and ROI?  Is business in an industry with growth potential?  Is business big enough to contribute to parent firm’s bottom line?  Does the business have burdensome capital requirements?  Is industry vulnerable to inflation, tough government regulations or other negative factors? 8-13
  • 14. Building Shareholder Valuevia Unrelated Diversification Corporate managers must  Do a superior job of diversifying into businesses capable of producing good earnings and returns on investments  Do an excellent job of negotiating favorable acquisition prices  Shift corporate financial resources from poorly-performing businesses to those with potential for above-average earnings growth  Discern when it is the “right” time to sell a business at the “right” price 8-14
  • 15. Combination Related-UnrelatedDiversification 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 8-15
  • 16. How to Evaluate aDiversified Company’s StrategyStep 1: Assess the long-term attractiveness of each industry the company has diversified intoStep 2: Assess competitive strength of each of the company’s business unitsStep 3: Check potential for cross-business strategic fits among business unitsStep 4: Check whether the firm’s resources fit the requirements of its business unitsStep 5: Rank performance and determine priority for resource allocationStep 6: Craft new strategic moves to improve overall company performance 8-16
  • 17. Industry Attractiveness Factors  Market size and projected growth  Intensity of competition  Emerging opportunities and threats  Presence of cross-industry strategic fits  Resource requirements  Seasonal and cyclical factors  Social, political, regulatory, and environmental factors  Industry profitability  Degree of uncertainty and business risk 8-17
  • 18. Calculating Industry AttractivenessScores 8-18
  • 19. Factors to Use in EvaluatingCompetitive Strength Relative market share Costs relative to competitors Products or services that satisfy buyer expectations Ability to benefit from strategic fits with sister businesses Ability to exercise bargaining leverage with key suppliers or customers Caliber of alliances and collaborative partnerships Brand image and reputation Competitively valuable capabilities Profitability relative to competitors 8-19
  • 20. Calculating Competitive StrengthScores 8-20
  • 21. Nine-Cell Industry Attractiveness-Competitive Strength Matrix 8-21
  • 22. Strategy Implications ofAttractiveness/Strength Matrix  Businesses in upper left corner  Receive top investment priority  Strategic prescription – grow and build  Businesses in three diagonal cells  Given medium investment priority  Some businesses in this category may have brighter or dimmer prospects than others  Businesses in lower right corner  Candidates for divestiture or managed to take cash out of the business 8-22
  • 23. Identifying Cross-BusinessStrategic Fits 8-23
  • 24. Evaluating Resource Fit andSufficiency  Good resource fit exists when  A company’s businesses, individually, add to its collective resource strengths, either financially or strategically  Firm has resources to adequately support its businesses without spreading itself too thin 8-24
  • 25. Determining Financial Resource Fit  Determine cash flow and investment requirements of business units  Which are cash hogs and which are cash cows?  Aside from cash flow, financial resource fit also includes  Assessing the individual contributions to companywide performance targets by each business unit  Determining if the company has the financial strength to provide proper funding to its business unit and maintain a healthy credit rating 8-25
  • 26. Examining a Company’sNonfinancial Resource Fits  Diversified companies must ensure a good fit between its collection of resources and the KSFs of each industry it has diversified into  Does the company have or can it develop specific resources and capabilities needed to be successful in each of its businesses?  Do recent acquisitions strengthen the collection of resources or cause them to be stretched too thinly? 8-26
  • 27. Ranking Business Units forResource Allocation  Factors to consider in judging business-unit performance Sales growth Profit growth Contribution to company earnings Cash flow generation Return on capital employed in business 8-27
  • 28. Crafting New Strategic Moves Stick closely with existing business lineup and pursue opportunities it presents Broaden company’s business scope by making new acquisitions in new industries Divest certain businesses and retrench to a narrower base of business operations Restructure company’s business lineup, putting a whole new face on business makeup 8-28
  • 29. Broadening the Diversification Base  Multi-business companies may consider adding to the diversification base when  Revenues and profits are growing slowly  Opportunities exist to transfer resources and capabilities to a related business  Unfavorable driving forces face its core business  The market positions of one or more of its business units can be strengthened with the acquisition of a related business 8-29
  • 30. Retrenching to a NarrowerDiversification Base  Retrenchment focuses corporate resources to building strong positions in a smaller number of businesses and industries  Retrenchment involves  Divesting businesses that have become unattractive because of deteriorating market conditions  Eliminating cash hog businesses with questionable long-term potential  Divesting business units with weak strategic fit with other businesses in the portfolio  Eliminating weakly positioned businesses that offer little prospect for earning a decent return on investment 8-30
  • 31. Broadly Restructuring the BusinessLineup  Radically altering the business lineup may be necessary when  Too many businesses are in unattractive industries  The business lineup is made up of too many weak businesses  The company is saddled with excessive debt  Ill-chosen acquisitions have not lived up to expectations 8-31