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Crafting a Corporate Diversification Strategy

Crafting a diversification strategy involves four facets: picking new industries, leveraging cross-business relationships, establishing investment priorities, and boosting corporate performance. Consider diversifying to reduce risk, explore new markets, adapt to changes, capitalize on synergies, and enhance growth. To add shareholder value through diversification, a move must pass three tests: industry attractiveness, cost of entry, and being better off. Approaches include acquisition, internal development, and joint ventures. Choosing the approach depends on resources, barriers, speed needs, and costs. Diversifying into related businesses allows transferring expertise, sharing costs and brands, and collaborating. Diversifying unrelated businesses requires astute parenting, resource allocation

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32 views4 pages

Crafting a Corporate Diversification Strategy

Crafting a diversification strategy involves four facets: picking new industries, leveraging cross-business relationships, establishing investment priorities, and boosting corporate performance. Consider diversifying to reduce risk, explore new markets, adapt to changes, capitalize on synergies, and enhance growth. To add shareholder value through diversification, a move must pass three tests: industry attractiveness, cost of entry, and being better off. Approaches include acquisition, internal development, and joint ventures. Choosing the approach depends on resources, barriers, speed needs, and costs. Diversifying into related businesses allows transferring expertise, sharing costs and brands, and collaborating. Diversifying unrelated businesses requires astute parenting, resource allocation

Uploaded by

rakibulislammbstu01
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter - 8

Corporate Strategy

WHAT DOES CRAFTING A DIVERSIFICATION STRATEGY ENTAIL? ?

The task of crafting a diversified company’s overall corporate strategy falls squarely in the lap of top-
level executives and involves four distinct facets:

 Picking new industries to enter and deciding on the means of entry.


 Pursuing opportunities to leverage cross-business value chain relationships, where
there is strategic fit, into competitive advantage.
 Establishing investment priorities and steering corporate resources into the most
attractive business units.
 Initiating actions to boost the combined performance of the corporation’s collection of
businesses.

WHEN TO CONSIDER DIVERSIFYING?

Corporations consider diversification when they seek to:

1. Reduce Risk

2. Explore New Markets

3. Adapt to Industry Changes

4. Capitalize on Synergies

5. Enhance Growth

6. Exploit Core Competencies

LO 1BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING

To add shareholder value, a move to diversify into a new business must pass the three Tests of
Corporate Advantage:

1. The Industry Attractiveness Test

2. The Cost of Entry Test

3. The Better-off Test

APPROACHES TO DIVERSIFYING THE BUSINESS LINEUP

 Diversifying by Acquisition of an Existing Business


 Entering a New Line of Business through Internal Development
 Using Joint Ventures to Achieve Diversification
Choosing a Mode of Entry
—depends on the answers to four important questions:
Does the company have all of the resources and capabilities it requires to enter the

business through internal development, or is it lacking some critical resources?

• Are there entry barriers to overcome?

• Is speed an important factor in the firm’s chances for successful entry?

• Which is the least costly mode of entry, given the company’s objectives?

CHOOSING THE DIVERSIFICATION PATH:

 RELATED
 UNRELATED BUSINESSES

DIVERSIFICATION INTO RELATED BUSINESSES

 Transferring specialized expertise, technological know-how, or other competitively valuable


strategic assets from one business’s value chain to another’s.

• Sharing costs between businesses by combining their related value chain activities into a single
operation.

• Exploiting the common use of a well-known brand name.

• Sharing other resources (besides brands) that support corresponding value chain activities across
businesses.

• Engaging in cross-business collaboration and knowledge sharing to create new

competitively valuable resources and capabilities.

Identifying Cross-Business Strategic Fit along the Value Chain

 Strategic Fit in Supply Chain Activities


 Strategic Fit in R&D and Technology Activities
 Manufacturing-Related Strategic Fit
 Strategic Fit in Sales and Marketing Activities
 Distribution-Related Strategic Fit
 Strategic Fit in Customer Service Activities
 Strategic Fit, Economies of Scope, and Competitive Advantage
 From Strategic Fit to Competitive Advantage, Added Profitability, and Gains in Shareholder Value

DIVERSIFICATION INTO UNRELATED BUSINESSES

company managers spend much time and effort screening acquisition candidates and evaluating the pros
and cons of keeping or divesting existing businesses, using such criteria as:

• Whether the business can meet corporate targets for profitability and return on investment.

• Whether the business is in an industry with attractive growth potential.

• Whether the business is big enough to contribute significantly to the parent firm’s bottom line.

Building Shareholder Value via Unrelated Diversification

The Benefits of Astute Corporate Parenting Astute corporate parenting refers to a business strategy where a parent company effectively manages and
supports its subsidiaries or business units
Judicious Cross-Business Allocation of Financial Resources

Acquiring and Restructuring Undervalued Companies

The Path to Greater Shareholder Value through Unrelated Diversification

For a strategy of unrelated diversification to produce companywide financial results above and beyond
what the businesses could generate operating as stand-alone entities, corporate executives must do three
things to pass the three tests of corporate advantage:

1. Diversify into industries where the businesses can produce consistently good earnings and returns on
investment (to satisfy the industry-attractiveness test).

2. Negotiate favorable acquisition prices (to satisfy the cost of entry test).

3. Do a superior job of corporate parenting via high-level managerial oversight and resource sharing,
financial resource allocation and portfolio management, and/or the restructuring of underperforming
businesses (to satisfy the better-off test).

The Drawbacks of Unrelated Diversification


 Demanding Managerial Requirements
 Limited Competitive Advantage Potential

Misguided Reasons for Pursuing Unrelated Diversification


Companies sometimes pursue unrelated diversification for reasons that are misguided. These include the
following:

• Risk reduction.

• Growth.

• Stabilization.

• Managerial motives.

EVALUATING THE STRATEGY OF A DIVERSIFIED COMPANY


The procedure for evaluating the pluses and minuses of a diversified company’s strategy and deciding
what actions to take to improve the company’s performance involves six steps:

1. Assessing the attractiveness of the industries the company has diversified into, both individually and
as a group.

2. Assessing the competitive strength of the company’s business units and drawing a nine-cell matrix to
simultaneously portray industry attractiveness and business unit competitive strength.

3. Evaluating the extent of cross-business strategic fit along the value chains of the company’s various
business units.

4. Checking whether the firm’s resources fit the requirements of its present business lineup.

5. Ranking the performance prospects of the businesses from best to worst and determining what the
corporate parent’s priorities should be in allocating resources to its various businesses.

6. Crafting new strategic moves to improve overall corporate performance.

Common questions

Powered by AI

To justify diversification in terms of shareholder value, a company must pass the Industry Attractiveness Test, assessing if the new industry offers consistent good earnings and ROI; the Cost of Entry Test, evaluating entry cost adequacy; and the Better-off Test, ensuring superior corporate management and potential for improved performance across units .

Strategic fit in related diversification involves aligning value chain activities across businesses, such as in supply chain, R&D, manufacturing, and marketing, to exploit synergies. This alignment enhances economies of scope, simplifies resource sharing, fosters collaboration, and strengthens competitive advantage, ultimately leading to increased profitability and shareholder value .

Corporate parenting enhances unrelated diversification by providing high-level managerial oversight, effectively allocating financial resources, restructuring underperforming businesses, and fostering conditions where subsidiary businesses perform better as part of the corporate portfolio than they would as standalone entities .

A company might pursue diversification despite potential drawbacks to reduce risk, explore new markets, adapt to industry changes, capitalize on synergies, enhance growth, and exploit core competencies, especially if these actions align with long-term strategic goals and the benefits surpass managerial challenges .

Potential risks of unrelated diversification include complex managerial demands and limited competitive advantage. These risks can be mitigated by ensuring strong corporate management practices, performing thorough industry attractiveness evaluations, and focusing on strategic resource allocation and restructuring to enhance business unit performance .

Companies could be misguided by overemphasizing risk reduction, growth, stabilization, or managerially driven motives without clear value creation. To realign, firms should ensure diversification moves exceed standalone performance through strategic industry assessment, effective corporate parenting, and a focus on achieving superior corporate advantage .

Diversification enhances growth and adaptation by expanding into new markets, spreading risk, and maximizing existing competencies. It allows companies to capitalize on dynamic industry trends and economic shifts while using existing strengths such as brand reputation, technology, or operational efficiency to gain a competitive edge and access additional revenue channels .

A nine-cell industry attractiveness-competitive strength matrix helps evaluate diversification by simultaneously portraying the attractiveness of industries and the competitive strength of business units, guiding resource allocation, identifying cash cows and stars for investment, and indicating areas for potential divestiture or restructuring .

When deciding to enter a new industry, a company should analyze strategic factors such as resource and capability availability for internal development, potential entry barriers, the importance of speed in market entry, and the least costly mode of entry aligning with the company’s objectives .

Leveraging cross-business value chain relationships in related diversification can provide competitive advantage through transferring strategic assets, sharing costs, exploiting brand strength, and engaging in cross-business collaboration, which can lead to creating new resources and capabilities, thus enhancing competitive position and profitability .

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