Solution Manual For Contemporary Strategy Analysis 10th by Grant

Solution Manual for Contemporary Strategy Analysis
10th by Grant
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Solution Manual for Contemporary Strategy Analysis 10th by Grant
Instructors’ Manual to Accompany Contemporary Strategy Analysis (10th edn. Wiley, 2019)
CHAPTER 12. DIVERSIFICATION STRATEGY
Introduction
Diversification—a firm’s broadening of its business scope—is an essential feature of business
adaptation; yet, diversification has been the source of more destruction of shareholder value than
almost any other type of strategy. Hence, its study is important!
Diversification decisions require an appraisal of a firm’s resources and capabilities of the firm and
assessment of their potential to establish competitive advantage through deploying them beyond
the firm’s existing boundaries. This requires applying the following concepts:
• Economies of scope in resources and capabilities.
• Transaction costs in deploying resources and capabilities across different product markets.
• Costs of entry into a different product market.
• The nature and types of relatedness between different businesses.
It also requires recognition of circumstances where diversification does not create value – for
example, where diversification is directed towards reducing risk rather than creating value, and
where economies of scale can be exploited efficiently through market transactions.
During the past two decades, the predominant direction of firm development has been
specialization rather than diversification. Hence, an important strategic question for many
companies is not so much where to diversify, but which existing businesses should be divested?
Class Outline
To get quickly to the core issue of diversification—whether owning different businesses creates
value (“synergy”)—it is useful to kick off with a case that involves a diversified company or one
that is considering diversification. I particularly like companies whose diversification decisions
involve a questionable business logic. My cases on the Virgin Group, General Electric, and
Alphabet work well for this purpose, though each emphasizes different issues:
• Discussion of Virgin directs attention to the resources and capabilities that Virgin possesses
(the brand, Branson himself, the Group’s capabilities in launching new business ventures,
etc.). This raises the issue of domain –over what types and what range of businesses can
Virgin add value. This then has implications for the type of organizational structure and
management systems Virgin needs to possess to best realize that value.
• The General Electric case is concerned with the proposed breakup of the group in 2018
which addresses the issue of whether and to what extent GE’s corporate structure adds
value to the individual businesses.
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• The Alphabet case directs attention to the particular types of business relatedness that
characterize the e-commerce sector. This relatedness extends beyond supply-side
economies of scope (from deploying resources and capabilities across multiple businesses)
and demand-side economies of scope (from consumers buying bundled products), to
include the complex complementarities that exist between hardware and software and
different types of software.
The principal issues that arise from these cases are:
• The conditions under which diversification creates value. Diversification directed towards
growth and risk spreading is more likely to destroy rather than create value. As Porter’s
“essential tests” of the potential for diversification to create value, the tendency for the
“cost of entry” to offset “industry attractiveness”, means that the essential criterion is the
“better off” test—Does the diversification create competitive advantage?
• The conditions under which diversification can create competitive advantage are primarily
where economies of scope exist in resources and capabilities and where these economies
of scope cannot be efficiently exploited by market transactions ( e.g. licensing) due to
transaction costs.
• Different types of resources and capabilities give rise to very different patterns of
diversification: technical capabilities are likely to support narrow-spectrum diversification
(Microsoft diversifying from operating systems to applications software during the early
1980s); general management capabilities support much wider diversification (GE spread
from jet engines and plastics to financial services and TV broadcasting). This raises some
interesting issues concerning what we mean by industries being “related”.
• The analysis of diversification among industries based upon digital technologies requires
looking beyond the conventional sources of synergy. These industries tend to form
“ecosystems” of complementary and technically-dependent industry sectors. In these
circumstances’ diversification can exploit complementarities, build bargaining power, and
deter rivals.
Cases
The Virgin Group in 2018 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 10th edn.,
Wiley, 2019).
In 2018, the Virgin Group was no longer a collection of young, entrepreneurial, start-up
companies. It was a mature holding company with investments mainly in consumer service
industries such as travel, leisure, healthcare, and financial services. Although it continued to
diversify through new ventures, these initiatives were heavily outnumbered by divestments—
selling businesses to other owners or flotations through initial public offerings.

Solution Manual for Contemporary Strategy Analysis 10th by Grant
Yet, despite consolidation and refocusing, the strategic rationale for the group remained unclear.
The task, therefore, for students is to provide a strategic appraisal of this loose-knit corporate
empire; to determine which logic, if any, links together the motley collection of business ventures;
to determine whether any of the businesses should be divested; to establish clear criteria to guide
future new diversification; and to recommend changes in the financial and management structure
of the Virgin companies.
Google Is Now Alphabet—But What’s the Corporate Strategy? (R. M. Grant, Contemporary
Strategy Analysis: Text and Cases, 10th edn., Wiley, 2019).
Google’s transformation into a holding company called Alphabet in August 2015 did little to clarify
its corporate strategy. Although its highly successful web search engine still generates most of its
revenues, Google has expanded into a bewildering variety of technology-based business—many of
them with little linkage to online information services, computer software, and advertising
management. The challenge of the case is to identify the strategic logic, if any, linking Alphabet’s
array of different businesses and to consider, in the light of the challenges Alphabet currently
faces, whether and how the company should define its corporate strategy.
Restructuring General Electric (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 10th
edn., Wiley, 2019)
For decades General Electric’s status as the “world’s most admired company” allowed it to defy
the prevailing wisdom that widely-diversified corporations are a source of value subtraction rather
than value addition. However, a collapse in financial performance during 2017-18 and the
appointment of the first outsider ever to lead the company was a prelude to an extensive radical
corporate restructuring. The case describes the development of GE under its long-serving CEOs,
Jack Welch and Jeff Immelt, and outlines the measures they took to exploit synergies among its
diverse businesses.
This case was written primarily in order to explore issues in implementing corporate strategy (see
Chapter 13), particularly the mechanisms through which the corporate headquarters of a
multibusiness firm creates value for its constituent businesses. However, the case also provides an
opportunity for addressing the types of relatedness between GE’s different businesses and, on this
basis, the current proposal for reconfiguring GE’s business portfolio, as compared to alternative
restructuring proposals.

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CHAPTER 12. DIVERSIFICATION STRATEGY

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