19e Section6 LN Chapter08

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company
CHAPTER 8
CORPORATE STRATEGY:
DIVERSIFICATION AND THE
MULTIBUSINESS COMPANY
CHAPTER SUMMARY
Chapter 8 moves up one level in the strategy-making hierarchy, from strategy making in a single business
enterprise to strategy making in a diversified enterprise. The chapter begins with a description of the various
paths through which a company can become diversified and provides an explanation of how a company can use
diversification to create or compound competitive advantage for its business units. The chapter also examines the
techniques and procedures for assessing the strategic attractiveness of a diversified companys business portfolio
and surveys the strategic options open to already-diversified companies.
LECTURE OUTLINE
I. What Does Crafting a Diversification Strategy Entail?
1. The task of crafting a diversified companys overall or corporate strategy falls squarely on the
shoulders of top-level corporate executives.
2. Devising a corporate strategy has four distinct facets:
a. Picking new industries to enter and deciding on the means of entry
b. Pursuing opportunities to leverage cross-business value chain relationships and strategic fits
into competitive advantage
c. Establishing investment priorities and steering corporate resources into the most attractive
business units.
d. Initiating actions to boost the combined performances of the corporations collection of
businesses.
II. When Business Diversification Becomes a Consideration
1. Diversifying into new industries always merits strong consideration whenever a single-business
company encounters diminishing market opportunities and stagnating sales in its principle business.
2. There are four other instances in which a company becomes a prime candidate for diversifying:
a. When it spots opportunities for expanding into industries whose technologies and products
complement its present business.
b. When it can leverage existing competencies and capabilities by expanding into businesses
where these same resource strengths are key success factors and valuable competitive assets.
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c. When diversifying into additional business opens new avenues for reducing costs or the transfer
of competitively valuable resources and capabilities.
d. When it has a powerful and well-known brand name that can be transferred to the products of
other businesses.
III. Building Shareholder Value: The Ultimate Justification for Diversifying
1. Diversification must do more for a company than simply spread its risk across various industries.
2. For there to be reasonable expectations that a diversification move can produce added value for
shareholders, the move must pass three tests:
a. The industry attractiveness test The industry chosen for diversification must be attractive
enough to yield consistently good returns on investment.
b. The cost of entry test The cost to enter the target industry must not be so high as to erode the
potential for profitability.
c. The better-off test Diversifying into a new business must offer potential for the companys
existing businesses and the new business to perform better together under a single corporate
umbrella than they would perform operating as independent stand-alone businesses.
3. Diversification moves that satisfy all three tests have the greatest potential to grow shareholder
value over the long term. Diversification moves that can pass only one or two tests are suspect.
CORE CONCEPT
Creating added value for shareholders via diversification requires building a
multibusiness company where the whole is greater than the sum of its parts - an
outcome known as synergy.
IV. Approaches to Diversifying the Business Lineup
A. Entry into new businesses can take any of three forms; Acquisition, Internal start-up, or Joint ventures/
strategic partnerships.
B. Diversification by Acquisition of an Existing Business
1. Acquisition is the most popular means of diversifying into another industry.
2. The big dilemma an acquisition-minded firm faces is whether to pay a premium price for a successful
firm or to buy a struggling company at a bargain price.
CORE CONCEPT
An acquisition premium is the amount by which the price offered exceeds the preacquisition market value of the target company.
C. Entering a New Line of Business through Internal Development
1. Achieving diversification through internal development involves building a new business subsidiary
from scratch and is often referred to as corporate venturing.
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CORE CONCEPT
Corporate venturing is the process of developing new businesses as an outgrowth
of a companys established business operations. It is also referred to as corporate
entrepreneurship or intrapreneurship since it requires entrepreneurial like qualities
within a larger enterprise.
2. This entry option takes longer than the acquisition option and poses some hurdles.
3. Generally, using internal development to enter a new business has appeal only when:
a. The parent company already has in-house most or all of the skills and resources it needs to
piece together a new business and compete effectively
b. There is ample time to launch the business
c. Internal entry has lower entry costs than entry via acquisition
d. The targeted industry is populated with many relatively small firms such that the new start-up
does not have to compete head-to-head against larger, more powerful rivals
e. Adding new production capacity will not adversely impact the supply-demand balance in the
industry
f. Incumbent firms are likely to be slow or ineffective in responding to a new entrants efforts to
crack the market
D. Joint Ventures
1. Joint ventures typically entail forming a new corporate entity owned by the partners.
2. A strategic partnership or joint venture can be useful in at least three types of situations:
a. To pursue an opportunity that is too complex, uneconomical, or risky for a single organization
to pursue alone
b. When the opportunities in a new industry require a broader range of competencies and knowhow than any one organization can marshal
c. To diversify into a new industry when the diversification move entails having operations in a
foreign country
3. However, partnering with another company has significant drawbacks due to the potential for
conflicting objectives, disagreements, over how to best operate the venture, culture clashes, and so
on.
4. Joint ventures are generally the least durable of the entry options, usually lasting only until the
partners decide to go their own ways.
D. Choosing a Mode of Entry
1. The choice of entry mode depends on the answer to four important questions:
a. Does the company have all the resources and capabilities it requires to enter the business
through internal development or is it lacking some critical resources?
b. Are there entry barriers to overcome?
c. Is speed an important factor in the firms chances for successful entry?
d. Which is the least costly mode of entry given the companys objectives?
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CORE CONCEPT
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.
2. The Question of Critical Resources and Capabilities
a. If a firm has all the resources it needs to start up a new business or will be able to easily purchase
or lease any missing resources, it may choose to enter the business via internal development.
b. If missing critical resources cannot be easily purchased or leased, a firm wishing to enter a new
business must obtain these missing resources through either acquisition or joint venture.
3. The Question of Entry Barriers
a. If entry barriers are low and the industry is populated by small firms, internal development may
be the preferred mode of entry.
b. If entry barriers are high, the company may still be able to enter with ease if it has the requisite
resources and capabilities for overcoming high barriers.
4. The Question of Speed
a. Acquisition is a favored mode of entry when speed is of the essence, as is the case in rapidly
changing industries where fast movers can secure long-term positioning advantages.
b. In other cases it can be better to enter a market after the uncertainties about technology or
consumer preferences through joint venture or internal development.
V. Choosing the Diversification Path: Related Versus Unrelated Businesses
1. Once the decision is made to pursue diversification, the firm must choose whether to diversify into
related businesses, unrelated businesses, or some mix of both.
2. Businesses are said to be related when their value chains possess competitively valuable crossbusiness value chain matchups or strategic fits.
3. Businesses are said to be related when their value chains possess competitively valuable crossbusiness relationships that present opportunities for the businesses to perform better under the same
corporate umbrella than they could by operating as stand-alone entities.
CORE CONCEPT
Related businesses possess competitively valuable cross-business value chain and
resource matchups; unrelated businesses have very dissimilar value chains and
resource requirements, with no competitively important cross-business relationships
at the value chain level.
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VI. Diversifying into Related Businesses

A. A related diversification strategy involves building the company around businesses whose value chains
possess competitively valuable strategic fits.
1. Figure 8.1, Related Businesses Possess Related Value Chain Activities and Competitively
Valuable Strategic Fits, looks at related businesses and strategic fits.
2. Strategic fit exists whenever one or more activities comprising the value chains of different
businesses are sufficiently similar as to present opportunities for:
a. Transferring specialized expertise, technological know-how, or other competitively valuable
capabilities from one business to another
b. Cost sharing between businesses by combining their related value chain activities into a single
operation.
c. Exploiting common use of a well known brand name.
d. Sharing other resources (besides brands) that support corresponding value chain activities
across businesses.
e. Engaging in cross-business collaboration and knowledge sharing to create new competitively
valuable resource strengths and capabilities.
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 crossbusiness sharing or transferring of the resources and capabilities that enable these
activities.
3. Related diversification thus has strategic appeal from several angles. It allows a firm to reap the
competitive advantage benefits of skills transfer, lower costs, common brand names, and/or stronger
competitive capabilities and still spread investor risks over a broad business base.
CORE CONCEPT
Related diversification involves sharing or transferring specialized resources and
capabilities. Specialized resources and capabilities have very specific application
and their use is limited to a restricted range of industry and business types, in
contrast to generalized resources and capabilities that can be widely applied and
can be deployed across a broad range of industry and business type.
B. Identifying Cross-Business Strategic Fits Along the Value Chain
1. Cross-business strategic fits can exist anywhere along the value chain in R&D and technology
activities, in supply chain activities and relationships with suppliers, in manufacturing, in sales and
marketing, in distribution activities, or in administrative support activities.
2. Strategic Fits in Supply Chain Activities: Businesses that have supply chain strategic fits can
perform better together because of the potential for skills transfer in procuring materials, greater
bargaining power in negotiating with common suppliers, the benefits of added collaboration with
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common supply chain partners, and/or added leverage with shippers in securing volume discounts
on incoming parts and components.
3. Strategic Fits in R&D and Technology Activities: Diversifying into businesses where there
is potential for sharing common technology, exploiting the full range of business opportunities
associated with a particular technology and its derivatives, or transferring technological know-how
from one business to another has considerable appeal.
4. Manufacturing-Related Strategic Fits: Cross-business strategic fits in manufacturing-related
activities can represent an important source of competitive advantage in situations where a
diversifiers expertise in quality manufacture and cost-efficient production methods can be
transferred to another business.
5. Strategic Fits in Sales and Marketing: Various cost-saving opportunities spring from diversifying
into businesses with closely related sales and marketing activities. Opportunities include:
a. Sales costs can be reduced by using a single sales force for the products of both businesses
rather than having separate sales forces for each business
b. After-sale service and repair organizations for the products of closely related businesses can
often be consolidated into a single operation
c. There may be competitively valuable opportunities to transfer selling, merchandising,
advertising, and product differentiation skills from one business to another
6. Distribution-Related Strategic Fits: Businesses with closely related distribution activities can
perform better together than apart because of potential cost savings in sharing the same distribution
facilities or using many of the same wholesale distributors and retail dealers to access customers.
7. Distribution-Related Strategic Fit: Businesses with closely related distribution activities can
perform better together than they can independently due to the cost savings associated with sharing
facilities, distributors, and retailers.
8. Strategic Fits in Customer Service Activities: Businesses can cut costs by consolidating after-sale
service and repair organizations for closely related products.
C. Strategic Fit, Economies of Scope, and Competitive Advantage
1. What makes related diversification an attractive strategy is the opportunity to convert the strategic
fit relationships between the value chains of different businesses into a competitive advantage.
2. Economies of Scope: Related businesses often present opportunities to consolidate certain value
chain activities or use common resources and thereby eliminate costs. Such cost savings are termed
economies of scope
3. Economies of scale are cost savings that accrue directly from a larger-sized operation. Economies
of scope stem directly from cost-saving strategic fits along the value chains of related businesses.
4. Most usually, economies of scope are the result of two or more businesses sharing technology,
performing R&D together, using common manufacturing or distribution facilities, sharing a
common sales force or distributor/dealer network, or using the same established brand name and/or
sharing the same administrative infrastructure.
5. The greater the economies associated with cost-saving strategic fits, the greater the potential for a
related diversification strategy to yield a competitive advantage based on lower costs.
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CORE CONCEPT
Economies of scope are cost reductions that flow from operating in multiple
businesses (a larger scope of operation), whereas economies of scale accrue from
a larger-size operation.
6. From Competitive Advantage to Added Profitability and Gains in Shareholder Value: The cost
advantage from economies of scope is due to the fact that resource sharing allows a multibusiness
firm to spread resource costs across its businesses and to avoid the expense of having to acquire and
maintain duplicate sets of resources
7. The competitive advantage potential that flows from economies of scope and the capture of other
strategic-fit benefits is what enables a company pursuing related diversification to achieve 1 1 1 5 3
financial performance and the hoped-for gains in shareholder value.
VII. Diversification Into Unrelated Business
A. Companies that pursue a strategy of unrelated diversification generally exhibit a willingness to diversify
into any industry where there is potential for a company to realize consistently good financial results.
1. The basic premise of unrelated diversification is that any company that can be acquired on good
financial terms and that has satisfactory earnings potential represents a good acquisition and a good
business opportunity. Such companies are frequently labeled conglomerates.
2. The company spends much time and effort screening new acquisition candidates and deciding
whether to keep or divest existing businesses, using such criteria as:
a. Whether the business can meet corporate targets for profitability and return on investment
b. Whether the business is an industry with attractive growth potential
c. Whether the business is big enough to contribute significantly to the parent firms bottom line
d. Most importantly, whether the business passes the better-off test by growing profits as well as
revenues.
3. Building Shareholder Value via Unrelated Diversification In the absence of cross-business
strategic fits by which to grow shareholder value, the company must look for unrelated avenues.
4. The Benefits of Astute Corporate Parenting The parent corporation must nurture its component
businesses through top management expertise, expert problem solving, creative strategy suggestions,
and first rate advise.
CORE CONCEPT
Corporate parenting refers to the role that a diversified corporation plays in
nurturing its component businesses through the provision of top management
expertise, disciplined control, financial resources, and other types of generalized
resources and capabilities such as long term planning systems, business
development skills, management development processes, and incentive systems.
5. Judicious Cross-Business Allocation of Financial Resources The parent corporation can serve as
an internal capital market and allocate surplus cash flows from some businesses to fund the capital
requirements of others.
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6. Acquiring and Restructuring Undervalued Companies The parent corporation can search out weak
performing companies and purchase them at bargain prices, then restructuring their operations in
ways that improve profitability.
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 a
company.
7. The Path to Greater Shareholder Value through Unrelated Diversification: Building shareholder
value via unrelated diversification ultimately hinges on the corporate level executives doing three
things:
a. Diversify into businesses that can produce consistently good earnings and returns on investment
(to satisfy the attractiveness test).
b. Negotiate favorable acquisition prices (to satisfy the cost-of-entry test).
c. Do a superior job of corporate parenting via high-level managerial oversight and resource sharing,
financial resource allocation and portfolio management, or restructuring underperforming
businesses (to satisfy the better-off test).
B. The Drawbacks of Unrelated Diversification
1. Unrelated diversification strategies have two important negatives that undercut the positives; Very
demanding managerial requirements and Limited competitive advantage potential
2. Demanding Managerial Requirements: Successfully managing a set of fundamentally different
businesses operating in fundamentally different industry and competitive environments is a very
challenging and exceptionally difficult proposition for corporate level managers.
a. The greater the number of businesses a company is in and the more diverse those businesses
are, the harder it is for corporate managers to:
1. Stay abreast of what is happening in each industry and each subsidiary and thus judge
whether a particular business has bright prospects or is headed for trouble
2. Know enough about the issues and problems facing each subsidiary to pick business-unit
heads having the requisite combination of managerial skills and know-how
b. As a rule, the more unrelated businesses that a company has diversified into, the more corporate
executives are reduced to managing by the numbers.
3. Limited Competitive Advantage: Unrelated diversification offers limited potential for competitive
advantage beyond that of what each individual business can generate on its own.
a. Relying solely on the expertise of corporate executives to wisely manage a set of unrelated
businesses is a much weaker foundation for enhancing shareholder value than it a strategy of
related diversification.
b. Without the competitive advantage potential of strategic fits, consolidated performance of an
unrelated group of businesses stands to be little or no better than the sum of what the individual
business units could achieve if they were independent.
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C. Misguided Reasons for Pursuing Unrelated Diversification

1. Rationales for unrelated diversification that are not likely to increase shareholder value include:
a. Risk reduction reducing perceived risk by spreading the companys investments over a set of
truly diverse industries whose technologies and markets are largely disconnected.
b. Growth pursuing growth for the sake of growth.
c. Stabilization offsetting market downtrends in some businesses by upswings in others.
d. Managerial Motives unrelated diversification that results only in benefits to managers such as
higher compensation and reduced employment risk.
VIII. Combination Related-Unrelated Diversification Strategies
1. There is nothing to preclude a company from diversifying into both related and unrelated businesses.
2. Indeed, in actual practice the business makeup of diversified companies varies considerably:
a. Dominant-business enterprises one major core business accounts for 50 to 80 percent of total
revenues and a collection of small related or unrelated businesses accounts for the remainder
b. Narrowly diversified 2 to 5 related or unrelated businesses
c. Broadly diversified wide ranging collection of related businesses, unrelated businesses, or a
mixture of both
3. Figure 8.2, Three Strategy Alternatives for Pursuing Diversification, provides guidance on
what strategy might be most effective in various situations.
IX. Evaluating the Strategy of a Diversified Company
A. The procedure for evaluating a diversified companys strategy and deciding how to improve the
companys performance involves six steps:
1. Assessing industry attractiveness individually and as a group
2. Assessing competitive strength of each business-unit in its industry
3. Checking the competitive advantage potential of cross-business strategic fits
4. Checking for resources fit
5. Ranking the business units on the basis of performance and priority for resource allocation
6. Crafting new strategic moves to improve overall corporate performance
B. Step 1: Evaluating Industry Attractiveness
1. A principal consideration in evaluating a diversified companys business makeup and the caliber
of its strategy is the attractiveness of the industries in which it has business operations. Answers to
several questions are required:
a. Does each industry the company has diversified into represent a good business for the company
to be in?
b. Which of the companys industries are most attractive and which are least attractive?
c. How appealing is the whole group of industries in which the company has invested?
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2. Calculating Industry Attractiveness Scores for Each Industry into Which the Company
Has Diversified: A simple and reliable analytical tool involves calculating quantitative industry
attractiveness scores, which can then be used to gauge each industrys attractiveness, rank the
industries from most to least attractive, and make judgments about the attractiveness of all the
industries as a group.
3. Each factor should be given a weight (with all weights adding up to 1.0) and each industry should be
ranked between 1 and 10 for each factor. Multiplying the rank by the weight provides the score for
each factor for each industry. Table 8.1, Calculating Weighted Industry Attractiveness Scores,
provides a sample calculation. The following measures of industry attractiveness are likely to come
into play for most companies:
a. Social, political, regulatory, and environmental factors
b. Seasonal and cyclical factors
c. Industry uncertainty and business risk
d. Market size and projected growth rate
e. Industry profitability
f. The intensity of competition
g. Emerging opportunities and threats
4. It is critically important to consider those aspects of industry attractiveness that pertain specifically
to a companys diversification strategy:
a. The presence of cross-industry strategic fits
b. Resource requirements
5. Interpreting the Industry Attractiveness Scores: Industries with a score much below 5.0 probably
do not pass the attractiveness test. For a diversified company to be a strong performer, a substantial
portion of its revenues and profits must come from business units with relatively high attractiveness
scores.
C. Step 2: Evaluating Business-Unit Competitive Strength
1. The second step in evaluating a diversified company is to appraise how strongly positioned each of
its business units are in their respective industry.
2. Calculating Competitive Strength Scores for Each Business Unit: Quantitative measures of
each business units competitive strength can be calculated using a procedure similar to that for
measuring industry attractiveness by looking at factors that impact competitiveness.
3. Each factor should be given a weight (with all weights adding up to 1.0) and each industry should be
ranked between 1 and 10 for each factor. Multiplying the rank by the weight provides the score for
each factor for each industry. Table 8.2, Calculating Weighted Competitive Strength Scores for
a Diversified Companys Business Units, provides a sample calculation. The following measures
of competitive strength are likely to come into play for most companies:
a. Relative market share
b. Costs relative to competitors costs
c. Ability to match or beat rivals on key product attributes
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d Brand image and reputation

e. Other competitively valuable resources and capabilities
f. Ability to benefit from strategic fits with sister businesses
g. Ability to exercise bargaining leverage with key suppliers or customers
h. Profitability relative to competitors
4. Interpreting the Competitive Strength Scores: Business units with competitive strength ratings
above 6.7 on a rating scale of 1 to 10 are strong market contenders in their industries.
5. Using a Nine-Cell Matrix to Simultaneously Portray Industry Attractiveness and Competitive
Strength: The industry attractiveness and business strength scores can be used to portray the
strategic positions of each business in a diversified company. Industry attractiveness is plotted on
the vertical axis and competitive strength on the horizontal axis.
a. A nine-cell grid emerges from dividing the vertical axis into three regions and the horizontal axis
into three regions. Figure 8.3, A Nine-Cell Industry Attractiveness-Competitive Strength
Matrix, depicts this tool. Each business unit is plotted on the nine-cell matrix according to its
overall attractiveness score and strength score and then shown as a bubble.
b. The location of the business units on the attractiveness-strength matrix provides valuable
guidance in deploying corporate resources to the various business units.
c. In general, a diversified companys prospects for good overall performance are enhanced by
concentrating corporate resources and strategic attention on those business units having the
greatest competitive strength and positioned in highly attractive industries.
6. The nine-cell attractiveness-strength matrix provides clear, strong logic for why a diversified
company needs to consider both the industry attractiveness and business strength in allocating
resources and investment capital to its different businesses.
D. Step 3: Checking the Competitive Advantage Potential of Cross-Business Strategic Fits
1. Checking the competitive advantage potential of cross-business strategic fits involves searching
and evaluating how much benefit a diversified company can gain from four types of value chain
matchups:
a. Opportunities to combine the performance of certain activities thereby reducing costs
b. Opportunities to transfer skills, technology, or intellectual capital from one business to another
c. Opportunities to share the use of a well-respected brand name
d. Opportunities for sister businesses to collaborate in creating valuable new competitive
capabilities
2. Figure 8.4, Identifying the Competitive Advantage Potential of Cross-Business Strategic Fits,
illustrates the process of searching for competitively valuable cross-business strategic-fits and value
chain matchups.
3. More than just strategic fit identification is needed. The real test is what competitive value can be
generated from these fits.
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E. Step 4: Checking for Resource Fit

1. The businesses in a diversified companys lineup need to exhibit good resource fit.
CORE CONCEPT
A diversified company exhibits resource fit when its business add to a companys
overall resource strengths and have matching resource requirements and/or when
the parent company has adequate corporate resources to support its businesses
needs and add value.
2. Resource fit exists when:
a. Businesses add to a companys resource strengths, either financially or strategically
b. A company has the resources to adequately support its businesses as a group without spreading
itself too thin
3. Financial Resource Fits: A diversified company must generate sufficient cash flows to fund the
capital requirements of it business while remaining financially healthy. As discussed previously, a
diversified firm must have a healthy internal capital market. A portfolio approach to managing the
diversified firm focuses on two general categories of businesses, cash hogs and cash cows.
a. Business units in rapidly growing industries are often cash hogsthe annual cash flows they
are able to generate from internal operations are not big enough to fund their expansion.
b. Business units with leading market positions in mature industries may be cash cows
businesses that generate substantial cash surpluses over what is needed for capital reinvestment
and competitive maneuvers to sustain their present market position.
CORE CONCEPT
A strong internal capital market allows a diversified company 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.
CORE CONCEPT
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.
CORE CONCEPT
A cash hog business generates cash flows that are too small to fully fund its
operations and growth; a cash hog requires cash infusion to provide additional
working capital and finance new capital investment.
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CORE CONCEPT
A cash cow generates cash flows over and above its internal requirements, thus
providing a corporate parent with funds for investing in cash hogs, financing new
acquisitions, or paying dividends.
4. Viewing the diversified group of businesses as a collection of cash flows and cash requirements is a
major step forward in understanding what the financial ramifications of diversification are and why
having businesses with good financial resource fit is so important.
5. Star businesses have strong or market-leading competitive positions in attractive, high-growth
markets and high levels of profitability and are often the cash cows of the future.
F. Nonfinancial Resource Fit.
1. Does the company have (or can it develop) the specific resources and capabilities needed to be
successful in each of its businesses?
2. Are the companys resources being stretched too thinly by the resource requirements of one or more
of its businesses?
G. Step 5: Ranking the Performance Prospects of Business Unites and Assigning a Priority for
Resource Allocation
1. Once a diversified companys strategy has been evaluated from the perspectives of industry
attractiveness, competitive strength, strategic fit, and resource fit, the next step is to rank the
performance prospects of the businesses.
2. The most important considerations in judging business-unit performance are sales growth, profit
growth, contribution to companys earnings, and the return on capital.
3. As a rule, business subsidiaries with the brightest profit and growth prospects, attractive positions
in the nine-cell matrix, and solid strategic and resource fit should receive top priority for allocation
of corporate resources.
4. The rankings of future performance generally determine what priority the corporate parent should
give to each business in terms of resource allocation.
5. Figure 8.5, The Chief Strategic and Financial Options for Allocating a Diversified Companys
Financial Resources, shows the chief strategic and financial options for allocating a diversified
companys financial resources.
H. Step 6: Crafting New Strategic Moves to Improve Overall Corporate Performance
1. The diagnosis and conclusions flowing from the five preceding analytical steps set the agenda for
crafting strategic moves to improve a diversified companys overall performance. The strategic
options boil down to four broad categories of actions: (pictured in Figure 8.6, A Companys Four
Main Strategic Alternatives after it Diversifies)
a. Sticking closely with the existing business lineup and pursuing the opportunities it presents
b. Broadening the companys diversification base by making new acquisitions in new industries
c. Divesting certain businesses and retrenching to a narrower diversification base
d. Restructuring the companys business lineup and putting a whole new face on the companys
business makeup
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2. Sticking Closely with the Existing Business Lineup makes sense when the companys present
businesses offer attractive growth opportunities and can be counted on to generate good earnings
and cash flow.
3. In the event that corporate executives are not entirely satisfied with the opportunities they see in
the companys present set of businesses and conclude that changes in the companys direction and
business makeup are in order, they can opt for any of the four strategic alternatives listed above.
4 Broadening a Diversified Companys Business BaseMotivating factors to build positions in
new industries
a. The potential for transferring resources and capabilities to other related or complementary
businesses
b. Rapidly changing conditions in one or more of a companys core businesses brought on by
technological, legislative or new product innovations
c. Strengthen the market position and competitive capabilities of one or more of its present
businesses.
d. To strengthen the market position and competitive capabilities of one or more of its present
businesses.
5. Divesting Some Businesses and Retrenching to a Narrower Diversification Base:
a. Retrenching to a narrower diversification base is usually undertaken when top management
concludes that its diversification strategy has ranged too far afield and that the company can
improve long term performance by concentrating on a smaller number of core businesses and
industries.
b. Market conditions in a once-attractive business have badly deteriorated
c. A business lacks adequate strategic or resource fit, either because its a cash cow or it is weakly
positioned in the industry.
d. A diversification move that seems sensible from a strategic-fit stand-point turns out to be a poor
cultural fit.
e. To complement and strengthen the market position and competitive capabilities of one or more
of its present businesses.
ILLUSTRATION CAPSULE
8.1, Managing Diversification at Johnson & Johnson - The Benefits of CrossBusiness Strategic Fits
Discussion Question: Discuss the view held by Johnson & Johnsons corporate management about
the benefits of collaboration with others in its various business lines.
Answer: J&Js 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 companys breadth and
depth of expertise.
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6. Restructuring a Companys Business Lineup through a Mix of Divestitures and New Acqui
sition; Restructuring strategies involve divesting some businesses and acquiring others to put a
whole new face on the companys business lineup.
ILLUSTRATION CAPSULE 8.2
Growth through Restructuring at Kraft Foods

Discussion Question: Describe the restructuring strategy used by Kraft Foods to turn around
company performance.
Answer: Kraft Foods restructuring plan trimmed operations and divided the company into two units;
a global snacks business and a North American grocery unit. The fundamental differences between
these two large market segments made it difficult for Kraft Foods to effectively manage them jointly.
Following the restructuring, both business units were better able to position themselves in their
respective markets.
7. Performing radical surgery on the group of businesses a company is in becomes an appealing strategy
alternative when a diversified companys financial performance is being squeezed or eroded by:
a. A serious mismatch between the companys resources and capabilities and the type of
diversification that it has pursued.
b. Too many businesses in slow-growth, declining, low-margin, or otherwise unattractive
industries
c. Too many competitively weak businesses
d. Ongoing declines in the market share of one or more major business units that are falling prey
to more market-savvy competitors
e. An excessive debt burden with interest costs that eat deeply into profitability
f. Ill-chosen acquisitions that have not lived up to expectations
8. Companywide restructuring can also be mandated by the emergence of new technologies that
threaten the survival of one or more of a diversified companys important businesses or by the
appointment of a new CEO who decides to redirect the company.
CORE CONCEPT
Companywide restructuring involves divesting some businesses and acquiring
others so as to put a whole new face on the companys business lineup.
645
ASSURANCE OF LEARNING EXERCISES

1. See if you can identify the value chain relationships that make the businesses of the following companies
related in competitively relevant ways. In particular, you should consider whether there are cross-business
opportunities for (1) transferring skills/technology, (2) combining related value chain activities to achieve
economies of scope, and/or (3) leveraging the use of a well-respected brand name or other resources that
enhance differentiation.
OSI Restaurant Partners

Outback Steakhouse
Carrabbas Italian Grill
Roys Restaurant (Hawaiian fusion cuisine)
Bonefish Grill (market-fresh fine seafood)
Flemings Prime Steakhouse & Wine Bar
Answer 1: The student should identify the companys overall strategy is to differentiate its restaurants by
emphasizing consistently high-quality food and service, generous portions at moderate prices and a casual
atmosphere. This is a good example of two strategic fit opportunities: transferring skills and combining the
related value chain activities to achieve lower costs, especially in the administrative functions.
LOral

Maybelline, Lancme, Helena Rubinstein, Kiehls, Garner, and Shu Uemura cosmetics
LOral and Soft Sheen/Carson hair care products
Redken, Matrix, LOral Professional, and Kerastase Paris professional hair care and skin care products
Ralph Lauren and Giorgio Armani fragrances
Biotherm skincare products
La RochePosay and Vichy Laboratories dermocosmetics
Answer 2: The student should identify the companys overall strategy is to differentiate its beauty products
by emphasizing high-quality cosmetics delivered via retail distribution networks. This is a good example of
two strategic fit opportunities: transferring skills and combining the related value chain activities to achieve
lower costs, especially in the development, production, and distribution functions.
Johnson & Johnson

Baby products (powder, shampoo, oil, lotion)
Band-Aids and other first-aid products
Womens health and personal care products (Stayfree, Carefree, Sure & Natural)
Neutrogena and Aveeno skin care products
Nonprescription drugs (Tylenol, Motrin, Pepcid AC, Mylanta, Monistat)
Prescription drugs
Prosthetic and other medical devices
646
Surgical and hospital products
Acuvue contact lenses
Answer 3: The student should identify the companys overall strategy is to supply a broad range of personal
hygene and medical products to a wide range of customers. This is a good example of two strategic fit
opportunities: leveraging the use of a well respected brand name and combining the related value chain
activities to achieve lower costs, especially in the product development and distribution functions.
2. Peruse the business group listings for United Technologies shown below and listed at its website (www.utc.
com). How would you characterize the companys corporate strategy? Related diversification, unrelated
diversification, or a combination related-unrelated diversification strategy? Explain your answer.
Answer:
Carrierthe worlds largest provider of air-conditioning, heating, and refrigeration solutions.
Hamilton Sundstrandtechnologically advanced aerospace and industrial products.
Otisthe worlds leading manufacturer, installer and maintainer of elevators, escalators and moving
walkways.
Pratt & Whitneydesigns, manufactures, services and supports aircraft engines, industrial gas turbines
and space propulsion systems.
Sikorskya world leader in helicopter design, manufacture and service.
UTC Fire & Securityfire and security systems developed for commercial, industrial, and residential
customers.
UTC Powera full-service provider of environmentally advanced power solutions.
The student should be able to identify that United Technologies pursues unrelated diversification, allowing
each business unit to develop an independent competitive approach and strategy that is best suited to its
individual market space.
3. The Walt Disney Company is in the following businesses:

Theme parks
Disney Cruise Line
Resort properties
Movie, video, and theatrical productions (for both children and adults)
Television broadcasting (ABC, Disney Channel, Toon Disney, Classic Sports Network, ESPN and
ESPN2, E!, Lifetime, and A&E networks)
Radio broadcasting (Disney Radio)
Musical recordings and sales of animation art
Anaheim Mighty Ducks NHL franchise
Anaheim Angels major league baseball franchise (25 percent ownership)
Books and magazine publishing
647
Interactive software and Internet sites
The Disney Store retail shops
Based on the above listing, would you say that Walt Disneys business lineup reflects a strategy of related
diversification, unrelated diversification, or a combination of related and unrelated diversification? Be
prepared to justify and explain your answer in terms of the extent to which the value chains of Disneys
different businesses seem to have competitively valuable cross-business relationships.
Answer: Students are likely to choose related diversification in one broad category: the entertainment
industry. The theme parts, cruise line, and resorts all build off the Disney brand name. Disneys ownership
of companies like ESPN and ABC gives it another avenue for pursuing the entertainment industry in broad
terms. There are some strong links, also, between movie production, TV broadcasting, radio broadcasting,
and musical recordings. Publishing and ownership of Internet sites and software are also related in terms of
the editing function, and administrative functions, including marketing as a value chain activity. Lastly, the
sports franchises provide Disney with another means to generate growth and revenues from the day-to-day
entertainment needs of the public.
4. ITT Corporation has had a long history as a conglomerate enterprise. In recent years, however, the company
has undergone some significant changes. How would you describe these changes and what do you think
were the drivers? Explain. (You can find lots of information about this company and its recent strategic
moves on the Web.)
Answer: The student should be able to identify the long history of ITT and its history of growth and
acquisition followed by a breakup. In 1995 the company was split into three separate companies with
separate market focus including hotels and resorts, insurance, and defense.
The defense company later changed its name to ITT Corporation in 2006 and began to grow via acquisition.
Once again, in 2011, the company separated itself into three independent publicly traded companies focused
in three markets including Industrial Process & Flow Control, Water & Waste Water, and Defense. The
drivers for change seem to be restructuring in order to allow better focus in the newly formed companies.
While most corporations might have elected to keep three separate operating divisions such as United
Technologies, ITT has a proven track record in spinning off separate companies and providing shareholders
with ownership in each company.
648

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What are the different approaches to diversifying a company's business lineup?

What are the different approaches to diversifying a company's business lineup?

What three tests must a diversification move pass for there to be reasonable expectations that it can produce added value for shareholders?

What three tests must a diversification move pass for there to be reasonable expectations that it can produce added value for shareholders?

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

VI. Diversifying into Related Businesses

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

C. Misguided Reasons for Pursuing Unrelated Diversification

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

d Brand image and reputation

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

E. Step 4: Checking for Resource Fit

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

ILLUSTRATION CAPSULE 8.2

Growth through Restructuring at Kraft Foods

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

ASSURANCE OF LEARNING EXERCISES

Carrabbas Italian Grill

Roys Restaurant (Hawaiian fusion cuisine)

Bonefish Grill (market-fresh fine seafood)

Flemings Prime Steakhouse & Wine Bar

LOral and Soft Sheen/Carson hair care products

Ralph Lauren and Giorgio Armani fragrances

Biotherm skincare products

La RochePosay and Vichy Laboratories dermocosmetics

Baby products (powder, shampoo, oil, lotion)

Band-Aids and other first-aid products

Neutrogena and Aveeno skin care products

Nonprescription drugs (Tylenol, Motrin, Pepcid AC, Mylanta, Monistat)

Prosthetic and other medical devices

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

Surgical and hospital products

Acuvue contact lenses

Disney Cruise Line

Radio broadcasting (Disney Radio)

Musical recordings and sales of animation art

Anaheim Mighty Ducks NHL franchise

Anaheim Angels major league baseball franchise (25 percent ownership)

Books and magazine publishing

Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company

Interactive software and Internet sites

The Disney Store retail shops

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