CHAPTER 9 Strategies for Multibusiness Corporations Mc GrawHillIrwin

Four Main Tasks in Crafting Corporate Strategy § Picking new industries to enter and deciding on means of entry § Pursuing opportunities to leverage crossbusiness value chain relationships into competitive advantage § Steering resources into most attractive business units § Initiating actions to boost the combined performance of businesses 9 -2

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 9 -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 9 -4 shareholders

Acquisition of an Existing Business § Most popular approach to diversification § Advantages ü Quicker entry into target market ü Easier to hurdle certain entry barriers » Acquiring technological know-how » Establishing supplier relationships » Securing adequate distribution access 9 -5

Entering a New Business Through Internal Start-up § More attractive when ü Parent firm already has most of needed resources to build a new business ü Ample time exists to launch a new business ü Internal entry has lower costs than entry via acquisition ü New start-up does not have to go head-to-head against powerful rivals ü Additional capacity will not adversely impact supply-demand balance in industry 9 -6

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 9 -7

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 9 -8

Value Chain Relationships for Related Businesses 9 -9

Related Diversification and Competitive Advantage § Strategic fit exists when one or more activities included in the value chains of of a diversified company’s businesses present opportunities to ü Transfer expertise/capabilities/technology from one business to another ü Reduce costs by combining related activities of different businesses into a single operation ü Transfer use of firm’s brand name from one business to another 9 -10

Related Diversification and Economies of Scope § Stem from cross-business opportunities to reduce costs ü Arise when costs can be cut by operating two or more businesses under same corporate umbrella ü Cost saving opportunities can stem from interrelationships anywhere along the value chains of different businesses—R&D, manufacturing, distribution, or administrative functions 9 -11

What Is Unrelated Diversification? § Involves diversifying into businesses with ü No strategic fit ü No meaningful value chain relationships ü No unifying strategic theme § Basic approach – Diversify into any industry where potential exists to realize good financial results § While industry attractiveness and cost-ofentry tests are important, better-off test is secondary 9 -12

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? 9 -13

Building Shareholder Value via Unrelated Diversification § Corporate managers must ü Do a superior job of diversifying into businesses capable of producing good earnings and returns on investments ü Do an excellent job of negotiating favorable acquisition prices ü Shift corporate financial resources from poorly-performing businesses to those with potential for above-average earnings growth ü Discern when it is the “right” time to sell a business at the “right” price 9 -14

Combination Related-Unrelated Diversification Strategies § Dominant-business firms ü One major core business accounting for 50 - 80 percent of revenues, with several small related or unrelated businesses accounting for remainder § Narrowly diversified firms ü Diversification includes a few (2 - 5) related or unrelated businesses § Broadly diversified firms ü Diversification includes a wide collection of either related or unrelated businesses or a mixture 9 -15

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 9 -16

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 9 -17

Calculating Industry Attractiveness Scores 9 -18

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 9 -19

Calculating Competitive Strength Scores 9 -20

Nine-Cell Industry Attractiveness. Competitive Strength Matrix 9 -21

Strategy Implications of Attractiveness/Strength Matrix § Businesses in upper left corner ü Receive top investment priority ü Strategic prescription – grow and build § Businesses in three diagonal cells ü Given medium investment priority ü Some businesses in this category may have brighter or dimmer prospects than others § Businesses in lower right corner ü Candidates for divestiture or managed to take cash out of the business 9 -22

Identifying Cross-Business Strategic Fits 9 -23

Evaluating Resource Fit and Sufficiency § Good resource fit exists when ü A company’s businesses, individually, add to its collective resource strengths, either financially or strategically ü Firm has resources to adequately support its businesses without spreading itself too thin 9 -24

Determining Financial Resource Fit § Determine cash flow and investment requirements of business units ü Which are cash hogs and which are cash cows? § Aside from cash flow, financial resource fit also includes ü Assessing the individual contributions to companywide performance targets by each business unit ü Determining if the company has the financial strength to provide proper funding to its business unit and maintain a healthy credit rating 9 -25

Ranking Business Units for Resource Allocation § Factors to consider in judging business-unit performance ü Sales growth ü Profit growth ü Contribution to company earnings ü Cash flow generation ü Return on capital employed in business 9 -26

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 9 -27

Broadening the Diversification Base § Multi business companies may consider adding to the diversification base when ü Revenues and profits are growing slowly ü Opportunities exist to transfer resources and capabilities to a related business ü Unfavorable driving forces face its core business ü The market positions of one or more of its business units can be strengthened with the acquisition of a related business 9 -28

Retrenching to a Narrower Diversification Base § Retrenchment focuses corporate resources to building strong positions in a smaller number of businesses and industries § Retrenchment involves ü Divesting businesses that have become unattractive because of deteriorating market conditions ü Eliminating cash hog businesses with questionable long-term potential ü Divesting business units with weak strategic fit with other businesses in the portfolio ü Eliminating weakly positioned businesses that offer little prospect for earning a decent return on investment 9 -29

Broadly Restructuring the Business Lineup § Radically altering the business lineup may be necessary when ü Too many businesses are in unattractive industries ü The business lineup is made up of too many weak businesses ü The company is saddled with excessive debt ü Ill-chosen acquisitions have not lived up to expectations 9 -30