Module 6 Part 2.ppt

8/14/2019 Module 6 Part 2.ppt

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Chapter Title

16/e PPT

Diversification:

Strategies for

Managing a Group

of Businesses

Screen graphics created by:

Jana F. Kuzmicki, Ph.D.

Troy University-Florida Region

McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.


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GRAND STRATEGIES

3Grand Strategies


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Diversification and

Corporate Strategy

A company is diversified when it is in two or morelines of business that operate in diverse marketenvironments

Strategy-making in a diversified companyis a biggerpicture exercisethan crafting a strategy for a singleline-of-business

A diversified company needs a multi-industry,multi-business strategy

A strategic action planmust be developedfor severaldifferent businessescompetingin diverse industry environments

4Strategic Management


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Four Main Tasks in

Crafting Corporate Strategy

Pick new industriesto enteranddecideon means of entry

Initiate actionsto boostcombined

performanceof businesses

Pursue opportunities to leverage cross-businessvalue chain relationshipsand strategic fitsinto

competitive advantage

Establish investment priorities,steeringresources into most attractive business units



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It is faced with diminishing growth prospectsinpresent

business

It has opportunities to expandinto industries whose

technologies and products complementits present business

It can leverage existing competencies and capabilitiesbyexpanding into businesses where these resource strengths are

key success factors

It can reduce costsby diversifying

into closely related businesses

It has apowerful brand nameit cantransfer to products of other businesses to

increase sales and profits of these businesses

When Should a Firm Diversify?



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Strategies for Entering

New Businesses

Acquire existing company

Internal start-up

Joint ventures/strategic partnerships



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Acquisition of an Existing Company

Most popular approach to diversification

Advantages

Quicker entry into target market

Easier to hurdle certain entry barriers Acquiring technological know-how

Establishing supplier relationships

Becoming big enough to match rivalsefficiency and costs

Having to spend large sums onintroductory advertising and promotion

Securing adequate distribution access



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Internal Startup (Innovation)

More attractive when

Parent firm already has most of needed resources to builda new business

Ample time exists to launch a new business

Internal entry has lower coststhan entry via acquisition

New start-up does not have to gohead-to-head against powerful rivals

Additional capacity will not adversely impactsupply-demand balance in industry

Incumbents are slow in responding to new entry



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Good way to diversify when Uneconomical or risky to go it alone

Pooling competencies of two partners provides morecompetitive strength

Only way to gain entry into a desirable foreign market Foreign partners are needed to

Surmount tariff barriers and import quotas

Offer local knowledge about

Market conditions Customs and cultural factors

Customer buying habits

Access to distribution outlets

Joint Ventures and Strategic Partnerships



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Related Diversification

Involves diversifying into

businesses whose value chains

possess competitively valuable

strategic fits with value

chain(s) of firms present

business(es)

Unrelated Diversification

Involves diversifying into

businesses with no

competitively valuable value

chain match-ups or strategic

fits with firms present

business(es)

Related vs. Unrelated Diversification



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Fig. 9.1: Strategy Alternatives for a Company Looking to Diversify



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Involves diversifying into businesses whose

value chainspossess competitively valuable

strategic fitswith the value chain(s) of the

present business(es)

Capturing the strategic fitsmakes related

diversification a 1 + 1 = 3 phenomenon

What Is Related Diversification?



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Exists whenever one or more activitiesin the valuechainsof different businessesare sufficiently similar topresent opportunitiesfor

Transferringcompetitively valuable

expertise or technological know-howfrom one business to another

Combiningperformance of commonvalue chain activities to achieve lower costs

Exploitinguse of a well-known brand name Cross-business collaborationto create competitively

valuable resource strengths and capabilities

Core Concept: Strategic Fit



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Fig. 9.2: Related Businesses Possess Related Value

Chain Activities and Competitively Valuable Strategic Fits



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Cross-business strategic fitscan exist anywherealong the value chain

R&D and technology activities

Supply chain activities

Manufacturing activities

Sales and marketing activities

Distribution activities

Managerial and administrative support activities

Types of Strategic Fits



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R&D and Technology Fits

Offer potential for sharing common technologyor transferring technological know-how

Potential benefits

Cost-savings in technologydevelopment and new product R&D

Shorter times in getting

new products to market

Interdependence between resultingproducts leads to increased sales



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Supply Chain Fits

Offer potentialopportunitiesfor skills transferand/or lower costs

Procuring materials

Greater bargaining power innegotiating with common suppliers

Benefits of added collaboration with

common supply chain partners

Added leverage with shippers in securingvolume discounts on incoming parts



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Manufacturing Fits

Potential source of competitive advantagewhen a diversifiers expertisecan bebeneficially transferredto another business

Quality manufacture

Cost-efficient production methods

Cost-saving opportunitiesarise from ability toperform manufacturing/assembly activities

jointly in same facility, making it feasible to Consolidate production into fewer plants

Significantly reduce overall manufacturing costs



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Offer potential cost-saving opportunities

Share same distribution facilities

Use many of same wholesaledistributors and retail dealersto access customers

Distribution Fits



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Managerial and

Administrative Support Fits

Emerge when different business unitsrequire comparabletypes of

Entrepreneurial know-how

Administrative know-how Operating know-how

Different businessesoften entail sametypesof administrative support facilities

Customer data network

Billing and customer accounting systems

Customer service infrastructure



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Involves diversifyinginto businesses with

Nostrategic fit

Nomeaningful value chainrelationships

Nounifying strategic theme

Basic approachDiversifyintoany industrywhere potential exists

to realize good financial results While industry attractiveness and cost-of-entry

tests are important, better-off test is secondary

What Is Unrelated Diversification?



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Fig. 9.3: Unrelated Businesses Have Unrelated Value Chains and No StrategicFits



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Acquisition Criteria For Unrelated

Diversification Strategies

Can business meet corporate targetsfor profitability and ROI?

Is business in an industry with growth potential?

Is business big enough to contributeto parent firms bottom line?

Will business require substantialinfusions of capital?

Is there potential for union difficultiesor adverse government regulations?

Is industry vulnerable to recession, inflation, highinterest rates, or shifts in government policy?



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Attractive Acquisition Targets

Companies with undervalued assets

Capital gains may be realized

Companies infinancial distress May be purchased at bargain prices and turned around

Companies with bright growth prospectsbut

short on investment capital Cash-poor, opportunity-rich companies are coveted

acquisition candidates



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Business risk scattered over different industries

Financial resources can be directed to

those industries offering best profit prospects

If bargain-priced firms with big profit potential arebought, shareholder wealth can be enhanced

Stability of profitsHard times in one industrymay be offset by good times in another industry

Appeal of Unrelated Diversification



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Diversification and Shareholder Value

Related Diversification

A strategy-driven approach

to creating shareholder value

Unrelated Diversification

Afinance-driven approach

to creating shareholder value



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How to Evaluate a

Diversified Companys Strategy

Step 1: Assess long-term attractiveness of each industry firm isin

Step 2: Assess competitive strength of firms business units

Step 3: Check competitive advantage potential of cross-business strategic fits among business units

Step 4: Check whether firms resources fit requirements ofpresent businesses

Step 5: Rank performance prospects of businesses anddetermine priority for resource allocation

Step 6: Craft new strategic moves to improve overall companyperformance



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Step 1: Evaluate Industry

Attractiveness

Attractiveness of each

industry in portfolio

Each industrys attractiveness

relativeto the others

Attractiveness of all

industries as a group



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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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Procedure: Calculating Attractiveness

Scores for Each Industry

Step 1: Select industry attractiveness factors

Step 2: Assign weights to each factor

(sum of weights = 1.0)

Step 3: Rate each industry on eachfactor, using a scale of 1 to 10

Step 4: Calculate weighted ratings; sum to get an overallindustry attractiveness rating for each industry



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Difficulties in Calculating

Industry Attractiveness Scores

Deciding on appropriate weights for industry attractiveness

factors

Different analysts may have different views about which weights are

appropriate for the industry attractiveness factors

Different weights may be appropriate for different companies

Gaining sufficient command of an industry to assign accurate

and objective ratings

Gathering statistical data to assign objective ratings is straightforward

for some factorsmarket size, growth rate, industry profitability

Assessing the intensity of competition factor is more difficult due to

the different types of competitive influences



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Objectives

Appraise how well eachbusiness is positioned inits industry relative to rivals

Evaluate whether it is or can becompetitively strong enough tocontend for market leadership

Step 2: Evaluate Each Business-

Units Competitive Strength



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Relative market share

Costs relative to competitors

Ability to match/beat rivals on key product attributes

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

Factors to Use in

Evaluating Competitive Strength



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Procedure: Calculating Competitive

Strength Scores for Each Business

Step 1: Select competitive strength factors

Step 2: Assign weights to each factor

(sum of weights = 1.0)

Step 3: Rate each business on eachfactor, using a scale of 1 to 10

Step 4: Calculate weighted ratings; sum to get an overallstrength rating for each business



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Interpreting Competitive Strength Scores

Business units with ratings above 6.7are strong marketcontenders

Businesses with ratings in the 3.3 to 6.7 rangehave

moderate competitive strength vis--vis rivals

Business units with ratings below 3.3are incompetitively weak market positions

If a diversified firms businesses allhave scores above5.0,its business units are all fairly strong marketcontenders



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Use industry attractiveness(see Table 9.1) and

competitive strength scores(see Table 9.2) to

plot location of each business in matrix

Industry attractiveness plotted on vertical axis

Competitive strength plotted on horizontal axis

Each business unitappears as a bubble

Size of each bubble is scaled to percentage of revenues the

business generates relative to total corporate revenues

Plotting Industry Attractiveness and Competitive

Strength in a Nine-Cell Matrix


Fi 9 5 A Ni C ll I d t Att ti C titi St th M t i


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Fig. 9.5: A Nine-Cell Industry Attractiveness-Competitive Strength Matrix



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A l f Att ti /St th


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Appeal of Attractiveness/Strength

Matrix

Incorporates a wide varietyofstrategically relevant variables

Strategy implications

Concentrate corporate resourcesin businessesthat enjoy high degree of industryattractiveness and high degree of competitive strength

Make selective investmentsin businesseswith

intermediate positions on grid Withdraw resourcesfrom businesseslow in attractiveness

and strength unless they offer exceptional potential



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Test Your Knowledge

The 9-cell industry attractiveness-competitive strength matrix

A. is a valuable tool for ranking a companys different businesses from most

profitable to least profitable.

B. shows which of a diversified companys businesses have good/poor

strategic fit.

C. indicates which businesses have the highest/lowest economies of scope.

D. is a helpful tool for allocating a diversified companys resourcesthe basic

idea is to give top investment priority to those businesses in the upper left

portion of the matrix and to give low priority or perhaps even divest

businesses in the lower right portion of the matrix.

E. pinpoints which of a diversified companys businesses are resource-rich and

which are resource-poor.



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Objective

Determine competitive advantage potentialof cross-business strategic fits among portfolio businesses

Examine strategic fitbased on

Whether one or more businesseshave valuable strategic fits with

other businesses in portfolio

Whether each business meshes wellwith firms long-term strategic direction

Step 3: Check Competitive Advantage Potential

of Cross-Business Strategic Fits



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Identify businesses which have valuechain match-upsoffering opportunities to

Reduce costs

Purchasing

Manufacturing

Distribution

Transfer skills / technology / intellectual capital fromone business to another

Share use of a well-known, competitively powerfulbrand name

Create valuable new competitive capabilities

Evaluate Portfolio for Competitively Valuable

Cross-Business Strategic Fits


Fig. 9.6: Identifying Competitive Advantage


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Fig. 9.6: Identifying Competitive Advantage

Potential of Cross-Business Strategic Fits



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Objective

Determine how well firms resourcesmatch business unit requirements

Good resource fitexists when

A business adds to a firms resource strengths,either financially or strategically

Firm has resources to adequately support requirementsof its businesses as a group

Step 4: Check Resource Fit



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Determine cash flowand investmentrequirementsof business units Which are cash hogs and which are

cash cows?

Assess cash flowof each business Highlights opportunities to shift financial resources

between businesses

Explains why priorities for resource allocation

can differ from business to business Provides rationalization for both

invest-and-expand and divestiturestrategies

Check for Financial Resource Fits



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BCG Matrix

Relative Market Share

Indus

trySalesGrow

thRate(%)

Quadrant 1Quadrant 2

Quadrant 3 Quadrant 4

51Choosing a Strategy


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Internal cash flowsare inadequateto fully fund needsfor working capital and new capital investment

Parent company has to continually pump in capitalto feed the hog

Strategic options

Aggressively investinattractive cash hogs

Divestcash hogs lackinglong-term potential

Characteristics of Cash Hog Businesses



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Generate cash surplusesover what is needed tosustain present market position

Such businesses are valuable because surplus cashcanbe used to

Pay corporate dividends

Finance new acquisitions

Invest in promising cash hogs

Strategic objectives

Fortify and defend present market position

Keep the business healthy

Characteristics of Cash Cow Businesses


S 5 R k B i U i B d


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Step 5: Rank Business Units Based on

Performance and Priority for Resource Allocation

Factors to consider injudgingbusiness-unit performance

Sales growth

Profit growth Contribution to company earnings

Return on capital employed in business

Economic value added

Cash flow generation

Industry attractiveness and business strength ratings


St 6 C ft N St t i


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Stick closelywith existing business lineupand pursue opportunities it presents

Broadencompanys business scopebymaking new acquisitions in new industries

Divestcertain businesses and retrenchto a narrower base of business operations

Restructurecompanys business lineup, putting a whole newface on business makeup

Pursue multinational diversification,striving to globalizeoperations of several business units

Step 6: Craft New Strategic

MovesStrategic Options

Documents

Module 6 Part 2.ppt