Bài giảng Crafting & Executing Strategy - Ch 8: Corporate strategy: diversification and the multibusiness company

CHAPTER 8CORPORATE STRATEGY: DIVERSIFICATION AND THE MULTIBUSINESS COMPANYSTUDENT VERSIONSTRATEGIC DIVERSIFICATION OPTIONSSticking closely with the existing business lineup and pursuing opportunities presented by these businesses.Broadening the current scope of diversification by entering additional industries.Divesting some businesses and retrenching to a narrower collection of diversified businesses with better overall performance prospects.Restructuring the entire firm by divesting some businesses and acquiring others to put a whole new face on the firm’s business lineup.BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYINGThe industry attractiveness testThe cost-of-entry testThe better-off testTesting Whether Diversification Will Add Long-Term Value for Shareholders8–3BETTER PERFORMANCE THROUGH SYNERGYEvaluating the Potential for Synergy through DiversificationFirm A purchases Firm B in another industry. A and B’s profits are no greater than what each firm could have earned on its own.Firm A purchases Firm C in another industry. A and C’s profits are greater than what each firm could have earned on its own.No Synergy(1+1=2)Synergy(1+1=3)8–4APPROACHES TO DIVERSIFYING THE BUSINESS LINEUPAcquisition of an existing businessInternal new venture (start-up)Joint venture Diversifying into New Businesses8–5WHEN TO ENGAGE IN INTERNAL DEVELOPMENTAvailability of in-house skills and resourcesAmple time to develop and launch businessCost of acquisition is higher than internal entryAdded capacity will not affect supply and demand balanceLow resistance of incumbent firms to market entryNo head-to-head competition in targeted industry Factors Favoring Internal Development8–6WHEN TO ENGAGE IN A JOINT VENTUREEvaluating the Potential for a Joint VentureIs the opportunity too complex, uneconomical, or risky for one firm to pursue alone?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?8–7CHOOSING A MODE OF MARKET ENTRYThe Question of Critical Resources and CapabilitiesDoes the firm have the resources and capabilities for internal development?The Question of Entry BarriersAre there entry barriers to overcome?The Question of SpeedIs speed of the essence in the firm’s chances for successful entry?The Question of Comparative CostWhich is the least costly mode of entry, given the firm’s objectives?8–8CHOOSING THE DIVERSIFICATION PATH: RELATED VERSUS UNRELATED BUSINESSESRelated BusinessesUnrelated BusinessesBoth Related and Unrelated BusinessesWhich Diversification Path to Pursue?8–9IDENTIFYING CROSS-BUSINESS STRATEGIC FITS ALONG THE VALUE CHAINR&D and Technology ActivitiesSupply Chain ActivitiesManufacturing-Related ActivitiesDistribution-Related ActivitiesCustomer Service ActivitiesSales and Marketing ActivitiesPotential Cross-Business Fits8–10STRATEGIC FIT, ECONOMIES OF SCOPE, AND COMPETITIVE ADVANTAGETransferring specialized and generalized skills and\or knowledgeCombining related value chain activities to achieve lower costsLeveraging brand names and other differentiation resourcesUsing cross-business collaboration and knowledge sharingUsing Economies of Scope to Convert Strategic Fit into Competitive Advantage8–11FROM STRATEGIC FIT TO COMPETITIVE ADVANTAGE, ADDED PROFITABILITY AND GAINS IN SHAREHOLDER VALUEBuilds more shareholder value than owning a stock portfolio Is only possible via a strategy of related diversificationYields value in the application of specialized resources and capabilitiesRequires that management take internal actions to realize themCapturing the Cross-Business Benefits of Related Diversification8–12DIVERSIFICATION INTO UNRELATED BUSINESSESEvaluating the acquisition of a new business or the divestiture of an existing businessCan 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?8–13BUILDING SHAREHOLDER VALUE VIA UNRELATED DIVERSIFICATIONAstute Corporate Parenting by ManagementCross-Business Allocation of Financial ResourcesAcquiring and Restructuring Undervalued CompaniesUsing an Unrelated Diversification Strategy to Pursue Value8–14BUILDING SHAREHOLDER VALUE VIA UNRELATED DIVERSIFICATIONAstute Corporate Parenting by ManagementProvide leadership, oversight, expertise, and guidance.Provide generalized or parenting resources that lower operating costs and increase SBU efficiencies.Cross-Business Allocation of Financial ResourcesServe as an internal capital market.Allocate surplus cash flows from businesses to fund the capital requirements of other businesses.Acquiring and Restructuring Undervalued CompaniesAcquire weakly performing firms at bargain prices.Use turnaround capabilities to restructure them to increase their performance and profitability.8–15THE PATH TO GREATER SHAREHOLDER VALUE THROUGH UNRELATED DIVERSIFICATIONDiversify into businesses that can produce consistently good earnings and returns on investmentNegotiate favorable acquisition pricesProvide managerial oversight and resource sharing, financial resource allocation and portfolio management, and restructure underperforming businessesThe attractiveness testThe cost-of-entry testActions taken by upper management to create value and gain a parenting advantageThe better-off test8–16THE DUAL DRAWBACKS OF UNRELATED DIVERSIFICATIONPursuing an Unrelated Diversification StrategyLimited Competitive Advantage PotentialDemanding Managerial RequirementsMonitoring and maintaining the parenting advantagePotential lack of cross-business strategic-fit benefits8–17MISGUIDED REASONS FOR PURSUING UNRELATED DIVERSIFICATIONSeeking a reduction of business investment riskPursuing rapid or continuous growth for its own sakeSeeking stabilization to avoid cyclical swings in businessesPursuing personal managerial motivesPoor Rationales for Unrelated Diversification8–18COMBINATIONS OF RELATED-UNRELATED DIVERSIFICATION STRATEGIESDominant-Business EnterprisesNarrowly Diversified FirmsBroadly Diversified FirmsMultibusiness EnterprisesRelated-Unrelated Business Portfolio Combinations 8–19EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANYDiversified StrategyAttractiveness of industriesStrength of Business UnitsCross-business strategic fitFit of firm’s resourcesAllocation of resourcesNew Strategic Moves8–20STEP 1: EVALUATING INDUSTRY ATTRACTIVENESSDoes each industry represent a good market for the firm to be in?Which industries are most attractive, and which are least attractive?How appealing is the whole group of industries?How attractive are the industries in which the firm has business operations?8–21CALCULATING INDUSTRY ATTRACTIVENESS FROM THE MULTIBUSINESS PERSPECTIVEThe Question of Cross-Industry Strategic FitHow well do the industry’s 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 RequirementsDo the resource requirements for an industry match those of the parent firm or are they otherwise within the company’s reach?8–22CALCULATING INDUSTRY ATTRACTIVENESS SCORESEvaluating Industry AttractivenessDeciding on appropriate weights for the industry attractiveness measures.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.8–23STEP 2: EVALUATING BUSINESS-UNIT COMPETITIVE STRENGTHRelative market shareCosts relative to competitors’ costsAbility to match or beat rivals on key product attributesBrand image and reputationOther competitively valuable resources and capabilities and partnerships and alliances with other firmsBenefit from strategic fit with firm’s other businessesBargaining leverage with key suppliers or customersProfitability relative to competitors8–24STEP 3: DETERMINING THE COMPETITIVE VALUE OF STRATEGIC FIT IN DIVERSIFIED COMPANIESAssessing the degree of strategic fit across its businesses is central to evaluating a company’s related diversification strategy.The real test of a diversification strategy is what degree of competitive value can be generated from strategic fit.8–25STEP 4: CHECKING FOR RESOURCE FITFinancial Resource FitState of the internal capital marketUsing 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 cowSTEP 4: CHECKING FOR RESOURCE FITNonfinancial Resource FitDoes the firm have (or can it develop) the specific resources and capabilities needed to be successful in each of its businesses?Are the firm’s resources being stretched too thinly by the resource requirements of one or more of its businesses? STEP 5: RANKING BUSINESS UNITS AND ASSIGNING A PRIORITY FOR RESOURCE ALLOCATION Ranking Factors:Sales growthProfit growthContribution to company earningsReturn on capital invested in the businessCash flowSteer resources to business units with the brightest profit and growth prospects and solid strategic and resource fit.8–28STEP 6: CRAFTING NEW STRATEGIC MOVES TO IMPROVE OVERALL CORPORATE PERFORMANCEStick with the Existing Business LineupBroaden the Diversification Base with New AcquisitionsDivest and Retrench to a Narrower Diversification BaseRestructure through Divestitures and AcquisitionsStrategy Options for a Firm That Is Already Diversified8–29