SESSION X ( CAPTER 8 )
MULTIBUSINESS
CORPORATION
1
Four Main Tasks in
Crafting 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
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When Business Diversification
Becomes 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
3
Building Shareholder Value Through
Business 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
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Acquisition of an Existing Business
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
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Entering a New Business
Through Internal 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
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Joint Ventures and
Strategic 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
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Corporate Strategy Options:
Related vs. Unrelated Diversification
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
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Value Chain Relationships for Related
Businesses
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Related Diversification and
Competitive Advantage
Strategic fit exists when one or more
activities included in the value chains 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
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Related Diversification and
Economies 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
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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
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Acquisition Criteria For Unrelated
Diversification 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? 13
Building Shareholder Value
via 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
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Combination Related-Unrelated
Diversification 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
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How to Evaluate a
Diversified Company’s Strategy
Step 1: Assess the long-term attractiveness of
each industry the company has
diversified into
Step 2: Assess competitive strength of each of the
company’s business units
Step 3: Check potential for cross-business
strategic fits among business units
Step 4: Check whether the firm’s resources fit the
requirements of its business units
Step 5: Rank performance and determine priority
for resource allocation
Step 6: Craft new strategic moves to improve
overall company performance
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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
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Calculating Industry Attractiveness Scores
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Factors to Use in Evaluating
Competitive 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
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Calculating Competitive Strength Scores
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Nine-Cell Industry Attractiveness-
Competitive Strength Matrix
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Strategy Implications of
Attractiveness/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
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Identifying Cross-Business Strategic
Fits
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Evaluating Resource Fit
and Sufficiency
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
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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
25
Examining a Company’s
Nonfinancial Resource Fits
Diversified companies must ensure a good fit
between its collection of resources 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?
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Ranking Business Units for
Resource 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
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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
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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
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Retrenching to a Narrower
Diversification 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
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Broadly Restructuring the Business
Lineup
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
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