Bài giảng Crafting and Executing Strategy - Chapter 8: Diversification: Strategies for Managing a Group of Businesses

Chapter 8: Diversification: Strategies for Managing aGroup of BusinessesScreen graphics created by:Jana F. Kuzmicki, Ph.D.Troy UniversityChapter Learning ObjectivesUnderstand when and how business diversification can enhance shareholder value.Gain an understanding of how related diversification strategies can produce cross-business strategic fits capable of delivering competitive advantage.Become aware of the merits and risks of corporate strategies keyed to unrelated diversification.Gain command of the analytical tools for evaluating a company’s diversification strategy.Become familiar with a company’s five main corporate strategy options after it has diversified.Chapter RoadmapWhen to DiversifyBuilding Shareholder Value: The Ultimate Justification for DiversifyingStrategies for Entering New BusinessesChoosing the Diversification Path: Related versus Unrelated BusinessesThe Case for Diversifying into Related BusinessesThe Case for Diversifying into Unrelated BusinessesCombination Related-Unrelated Diversification StrategiesEvaluating the Strategy of a Diversified CompanyDiversification and Corporate Strategy A company is diversified when it is in two or more lines of business that operate in diverse market environmentsStrategy-making in a diversifiedcompany is a bigger pictureexercise than crafting a strategyfor a single line-of-business A diversified company needs amulti-industry, multi-business strategyA strategic action plan must be developedfor several different businesses competingin diverse industry environmentsIt is faced with diminishing growthprospects in present businessIt has opportunities to expand intoindustries whose technologies andproducts complement its present businessIt can leverage existing competencies and capabilities by expanding into businesses where these resource strengths are key success factorsIt can reduce costs by diversifying into closely related businessesIt has a powerful brand name it can transfer to products of other businesses to increase sales and profits of these businessesWhen Should a Firm Diversify?Why Diversify?To build shareholder value!Diversification is capable of buildingshareholder value if it passes three tests:Industry Attractiveness Test — The industry being entered presents good long-term profit opportunitiesCost of Entry Test — Cost of entering is not so high as to spoil the ability to earn attractive profitsBetter-Off Test — A company’s different businesses should perform better together than as stand-alone enterprises, such that company A’s diversification into business B produces a 1 + 1 = 3 effect for shareholders1 + 1 = 3Four Main Tasks inCrafting Corporate StrategyPick new industries to enterand decide on means of entryInitiate actions to boost combinedperformance of businesses Pursue opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantageEstablish investment priorities, steering resources into most attractive business unitsStrategies for EnteringNew BusinessesAcquire existing companyInternal start-upJoint ventures/strategic partnerships8-8Acquisition of an Existing CompanyMost popular approach to diversificationAdvantages Quicker entry into target marketEasier to hurdle certain entry barriersAcquiring technological know-howEstablishing supplier relationshipsBecoming big enough to match rivals’efficiency and costsHaving to spend large sums onintroductory advertising and promotionSecuring adequate distribution access Internal StartupMore attractive whenParent firm already has most of needed resources to build a new businessAmple time exists to launch a new businessInternal entry has lower coststhan entry via acquisitionNew start-up does not have to gohead-to-head against powerful rivalsAdditional capacity will not adversely impactsupply-demand balance in industry Incumbents are slow in responding to new entryGood way to diversify whenUneconomical or risky to go it alonePooling competencies of two partners provides more competitive strengthOnly way to gain entry into a desirable foreign marketForeign partners are needed toSurmount tariff barriers and import quotasOffer local knowledge aboutMarket conditionsCustoms and cultural factorsCustomer buying habitsAccess to distribution outletsJoint Ventures and Strategic PartnershipsRelated vs. Unrelated DiversificationRelated DiversificationInvolves diversifying into businesses whose value chains possess competitively valuable “strategic fits” with value chain(s) of firm’s present business(es)Unrelated DiversificationInvolves diversifying into businesses with no competitively valuable value chain match-ups or strategic fits with firm’s present business(es)8-12Involves diversifying into businesses whose value chains possess competitively valuable “strategic fits” with the value chain(s) of the present business(es)Capturing the “strategic fits” makes related diversification a 1 + 1 = 3 phenomenonWhat Is Related Diversification?Exists whenever one or more activities in the value chains of different businesses are sufficiently similar to present opportunities for Transferring competitively valuableexpertise or technological know-howfrom one business to anotherCombining performance of commonvalue chain activities to achieve lower costsExploiting use of a well-known brand nameCross-business collaboration to create competitively valuable resource strengths and capabilitiesCore Concept: Strategic FitFigure 8.2: Related Businesses Possess Related ValueChain Activities and Competitively Valuable Strategic Fits8-15Strategic Appeal of Related DiversificationReap competitive advantage benefits ofSkills transferLower costsCommon brand name usageStronger competitive capabilitiesSpread investor risks over a broader basePreserve strategic unity across businesses Achieve consolidated performance greater than the sum of what individual businesses can earn operating independently (1 + 1 = 3 outcomes)Cross-business strategic fits can exist anywhere along the value chainR&D and technology activitiesSupply chain activitiesManufacturing activitiesDistribution activitiesSales and marketing activitiesManagerial and administrative support activitiesTypes of Strategic FitsRelated Diversificationand Competitive AdvantageCompetitive advantage can result from related diversification when a company captures cross-business opportunities toTransfer expertise/capabilities/technologyfrom one business to anotherReduce costs by combiningrelated activities of differentbusinesses into a single operationTransfer use of firm’s brand name reputation from one business to anotherCreate valuable competitive capabilities via cross-business collaboration in performing related value chain activitiesCore Concept: Economies of ScopeStem from cross-business opportunities to reduce costsArise when costs can be cutby operating two or more businessesunder same corporate umbrellaCost saving opportunities can stem from strategic fits anywhere along the value chains of differentbusinessesFrom Competitive Advantage toAdded Gains in Shareholder ValueCapturing cross-business strategic fitsIs possible only via a strategy of related diversificationBuilds shareholder value in ways shareholders cannot achieve by owning a portfolio of stocks of companies in unrelated industriesIs not something that happens “automatically” when a company diversifies into related businessesStrategic fit benefits materialize onlyafter management has successfully pursued internal actions to capture them!Involves diversifying into businesses withNo strategic fitNo meaningful value chainrelationshipsNo unifying strategic themeBasic approach – Diversify intoany industry where potential existsto realize good financial results While industry attractiveness and cost-of-entry tests are important, better-off test is secondaryWhat Is Unrelated Diversification?Figure 8.3: Unrelated Businesses Have UnrelatedValue Chains and No Strategic Fits8-22Acquisition Criteria For Unrelated Diversification StrategiesCan business meet corporate targetsfor profitability and ROI?Is business in an industry with growth potential?Is business big enough to contributeto parent firm’s bottom line?Will business require substantialinfusions of capital?Is there potential for union difficultiesor adverse government regulations?Is industry vulnerable to recession, inflation, high interest rates, or shifts in government policy?Attractive Acquisition TargetsCompanies with undervalued assetsCapital gains may be realized Companies in financial distressMay be purchased at bargainprices and turned aroundCompanies with bright growth prospects but short on investment capitalCash-poor, opportunity-rich companies are coveted acquisition candidates Business risk scattered over different industriesFinancial resources can be directed tothose industries offering best profit prospectsIf bargain-priced firms with big profit potential are bought, shareholderwealth can be enhancedStability of profits – Hard times in one industry may be offset by good times in another industryAppeal of Unrelated DiversificationBuilding Shareholder Valuevia Unrelated DiversificationCorporate managers mustDo a superior job of diversifying into new businesses capable of producing good earnings and returns on investmentsDo an excellent job of negotiating favorable acquisition pricesDo a good job overseeing businesses so they perform at a higher level than otherwise possibleShift corporate financial resources from poorly-performing businesses to those with potential for above-average earnings growthDiscern when it is the “right” time to sell a business at the “right” priceThe greater the number and diversity of businesses, the harder it is for managers toDiscern good acquisitions from bad onesSelect capable managers to managethe diverse requirements of each businessJudge soundness of strategicproposals of business-unit managersKnow what to do if a businesssubsidiary stumblesUnrelated Diversification HasDemanding Managerial RequirementsLikely effect is 1 + 1 = 2,rather than 1 + 1 = 3!Lack of cross-business strategic fits means unrelated diversification offers no competitive advantage potential beyond what each business can generate on its own Consolidated performance of unrelated businesses tends to be no better than sum of individual businesses on their own (and it may be worse)Promise of greater sales-profit stability over business cycles is seldom realizedUnrelated Diversification Lacks Competitive Advantage PotentialDiversification and Shareholder ValueRelated DiversificationA strategy-driven approachto creating shareholder valueUnrelated DiversificationA finance-driven approachto creating shareholder valueDominant-business firmsOne major core business accounting for 50 - 80 percent of revenues, with several small related or unrelated businesses accounting for remainderNarrowly diversified firmsDiversification includes a few (2 - 5) related or unrelated businessesBroadly diversified firmsDiversification includes a wide collection of either related or unrelated businesses or a mixtureMultibusiness firmsDiversification portfolio includes several unrelated groups of related businessesCombination Related-Unrelated Diversification StrategiesFigure 8.4: Identifying a Diversified Company’s Strategy8-31How to Evaluate aDiversified Company’s StrategyStep 1: Assess long-term attractiveness of each industry firm is inStep 2: Assess competitive strength of firm’s business unitsStep 3: Check competitive advantage potential of cross-business strategic fits among business units Step 4: Check whether firm’s resources fit requirements of present businessesStep 5: Rank performance prospects of businesses and determine priority for resource allocation Step 6: Craft new strategic moves to improve overall company performanceAttractiveness of eachindustry in portfolioEach industry’s attractivenessrelative to the othersAttractiveness of allindustries as a groupStep 1: Evaluate Industry Attractiveness from Three Angles8-33Industry Attractiveness FactorsMarket size and projected growthIntensity of competitionEmerging opportunities and threatsPresence of cross-industry strategic fits Resource requirementsSeasonal and cyclical factorsSocial, political, regulatory, andenvironmental factorsIndustry profitabilityDegree of uncertainty and business riskProcedure: Calculating Attractiveness Scores for Each IndustryStep 1: Select industry attractiveness factors Step 2: Assign weights to each factor (sum of weights = 1.0)Step 3: Rate each industry on each factor, using a scale of 1 to 10Step 4: Calculate weighted ratings; sum to get an overall industry attractiveness rating for each industryIndustries with a score much below 5.0 do not pass the attractiveness testIf a company’s industry attractiveness scores are all above 5.0, the group of industries the firm operates in is attractive as a wholeTo be a strong performer, a diversified firm’s principal businesses should be in attractive industries—that is, industries withA good outlook for growth andAbove-average profitability Interpreting Industry Attractiveness ScoresDifficulties in CalculatingIndustry Attractiveness ScoresDeciding on appropriate weights for industry attractiveness factorsDifferent analysts may have different views about which weights are appropriate for the industry attractiveness factorsDifferent weights may be appropriate for different companiesGaining sufficient command of an industry to assign accurate and objective ratingsGathering statistical data to assign objectiveratings is straightforward for some factors –market size, growth rate, industry profitabilityAssessing the intensity of competitionfactor is more difficult due to the differenttypes of competitive influencesObjectivesAppraise how well eachbusiness is positioned inits industry relative to rivalsEvaluate whether it is or can becompetitively strong enough tocontend for market leadershipStep 2: Evaluate Each Business-Unit’s Competitive StrengthRelative market shareCosts relative to competitorsAbility to match/beat rivals onkey product attributesAbility to benefit from strategic fits with sister businessesAbility to exercise bargaining leverage with key suppliers or customersCaliber of alliances and collaborative partnershipsBrand image and reputationCompetitively valuable capabilities Profitability relative to competitorsFactors to Use inEvaluating Competitive StrengthProcedure: Calculating Competitive Strength Scores for Each BusinessStep 1: Select competitive strength factorsStep 2: Assign weights to each factor (sum of weights = 1.0)Step 3: Rate each business on each factor, using a scale of 1 to 10Step 4: Calculate weighted ratings; sum to get an overall strength rating for each businessInterpreting Competitive Strength ScoresBusiness units with ratings above 6.7 are strong market contendersBusinesses with ratings in the3.3 to 6.7 range have moderatecompetitive strength vis-à-vis rivalsBusiness units with ratings below 3.3 are in competitively weak market positionsIf a diversified firm’s businesses all have scores above 5.0, its business units are all fairly strong market contendersUse industry attractiveness (see Table 8.1) and competitive strength scores (see Table 8.2) to plot location of each business in matrixIndustry attractiveness plotted on vertical axisCompetitive strength plotted on horizontal axis Each business unit appears as a “bubble”Size of each bubble is scaled to percentage of revenues the business generates relative to total corporate revenuesPlotting Industry Attractiveness and Competitive Strength in a Nine-Cell MatrixFigure 8.5: A Nine-Cell Industry Attractiveness-Competitive Strength Matrix8-43Businesses in upper left cornerAccorded top investment priorityStrategic prescription – grow and buildBusinesses in three diagonal cellsGiven medium investment priorityInvest to maintain positionBusinesses in lower right cornerCandidates for harvesting or divestitureMay, based on potential for good earnings and ROI, be candidates for an overhaul and reposition strategyStrategy Implications of Attractiveness/Strength Matrix Appeal of Attractiveness/Strength MatrixIncorporates a wide variety ofstrategically relevant variablesStrategy implicationsConcentrate corporate resourcesin businesses that enjoy high degree of industry attractiveness and high degree of competitive strengthMake selective investments in businesses with intermediate positions on gridWithdraw resources from businesses low in attractiveness and strength unless they offer exceptional potential ObjectiveDetermine competitive advantage potential of cross-business strategic fits among portfolio businessesExamine strategic fit based onWhether one or more businesseshave valuable strategic fits withother businesses in portfolioWhether each business meshes wellwith firm’s long-term strategic directionStep 3: Check Competitive Advantage Potential of Cross-Business Strategic FitsIdentify businesses which have valuechain match-ups offering opportunities toReduce costs Purchasing Manufacturing DistributionTransfer skills / technology / intellectual capital from one business to anotherShare use of a well-known, competitively powerful brand nameCreate valuable new competitive capabilitiesEvaluate Portfolio for Competitively Valuable Cross-Business Strategic FitsObjectiveDetermine how well firm’s resourcesmatch business unit requirementsGood resource fit exists whenA business adds to a firm’s resource strengths,either financially or strategicallyFirm has resources to adequately support requirements of its businesses as a groupStep 4: Check Resource FitDetermine cash flow and investmentrequirements of business unitsWhich are cash hogs andwhich are cash cows?Assess cash flow of each businessHighlights opportunities to shift financial resources between businesses Explains why priorities for resource allocationcan differ from business to businessProvides rationalization for both invest-and-expand and divestiturestrategiesStep 4 (cont.): Check for Financial Resource FitsInternal cash flows are inadequate to fully fund needs for working capital and new capital investmentParent company has to continually pump in capital to “feed the hog”Strategic optionsAggressively invest in attractive cash hogsDivest cash hogs lacking long-term potentialCharacteristics of Cash Hog BusinessesGenerate cash surpluses over what is needed to sustain present market positionSuch businesses are valuable because surplus cash can be used to Pay corporate dividendsFinance new acquisitionsInvest in promising cash hogsStrategic objectivesFortify and defend present market positionKeep the business healthyCharacteristics of Cash Cow BusinessesGood financial fit exists when a businessContributes to achievement ofcorporate objectivesEnhances shareholder valuePoor financial fit exists when a businessSoaks up disproportionate share of financial resourcesIs an inconsistent bottom-line contributorExperiences a profit downturnthat could jeopardize entire companyIs too small to make a sizable contribution to total corporate earnings Good vs. Poor Financial Resource Fit Other Tests of Resource FitsDoes the business adequately contribute to achieving companywide performance targets?Does the company have adequate financial strength to fund its different businesses and maintain a healthy credit rating?Does the company have or can it develop the specific resource strengths and competitive capabilities needed to be successful in each of its businesses?Are recently acquired businesses acting to strengthen a company’s resource base and competitive capabilities or are they causing its competitive and managerial resources to be stretched too thin?Trying to replicate a firm’s success in one business and hitting a second home run in a new business is easier said than done Transferring resource capabilities tonew businesses can be far more arduous and expensive than expectedManagement can misjudge difficultyof overcoming resource strengths ofrivals it will face in a new business A Note of Caution: WhyDiversification Efforts Can FailStep 5: Rank Business Units Based onPerformance and Priority for Resource Allocation Factors to consider in judgingbusiness-unit performanceSales growthProfit growthContribution to company earningsReturn on capital employed in businessEconomic value addedCash flow generationIndustry attractiveness and business strength ratingsObjective“Get the biggest bang for the buck”in allocating corporate resources ApproachRank each business from highest to lowest priority for corporate resource support and new capital investmentSteer resources from low- to high-opportunity areasWhen funds are lacking, strategic uses of resources should take precedence 23564Determine Prioritiesfor Resource AllocationFigure 8.7: The Chief Strategic and Financial Options orAllocating a Diversified Company’s Financial Resources8-57Stick closely with existing business lineupand pursue opportunities it presentsBroaden company’s business scope bymaking new acquisitions in new industriesDivest certain businesses and retrenchto a narrower base of business operationsRestructure company’s business lineup, putting a whole new face on business makeupPursue multinational diversification,striving to globalize operations ofseveral business unitsStep 6: Craft New StrategicMoves – Strategic OptionsStick Closely with Existing Business LineupAttractive approach whencurrent businessesOffer attractive growth opportunitiesCan be counted on to generate goodearnings and cash flowsPlace company in a good future positionHave good strategic and/or resource fitsStrategic options includePursuing the best performance from each businessSteering corporate resources to areasof greatest potential and profitabilityConditions making thisapproach attractiveSlow grow in current businessesVulnerability to seasonal orrecessionary influences or to threatsfrom emerging new technologiesPotential to transfer resources and capabilities to other related businessesRapidly-changing conditions in one or more core industries alter buyer requirementsComplement and strengthen market position of one or more current businessesStrategies to Broaden aDiversified Company’s Business BaseStrategic optionsRetrench to a smaller but more appealing group of businessesDivest unattractive businessesSell itSpin it off asindependent companyLiquidate it (close it downbecause no buyers can be found)Retrench ?Divest ?Sell ?Close ?Divestiture Strategies Aimed at Retrenchingto a Narrower Diversification BaseRetrenchment StrategiesObjectiveReduce scope of diversification to smaller number of “core “ businessesStrategic options involve divesting businesses thatAre losing moneyHave little growth potentialHave little strategic fitwith core businessesAre too small to contributemeaningfully to earningsDiversification efforts have become too broad, resulting in difficulties in profitably managing all the businessesDeteriorating market conditions in a once-attractive industryLack of strategic or resource fit of a businessA business is a cash hog with questionable long-term potentialA business is weakly positioned in its industryBusinesses that turn out to be “misfits”One or more businesses lack compatibility of values essential to cultural fitConditions That MakeRetrenchment AttractiveOptions for Accomplishing DivestitureSell itInvolves finding a company which views the business as a good deal and good fitSpin it off as independent companyInvolves deciding whether or not to retain partial ownershipLiquidationInvolves closing down operationsand selling remaining assetsA last resort because no buyer can be foundStrategies to Restructure a Company’s Business LineupObjectiveMake radical changes in mixof businesses in portfolio via bothDivestitures and New acquisitions to put a whole new face on the company’s business makeupToo many businesses in unattractive industriesToo many competitively weak businessesOngoing declines in market shares of one or more major business unitsExcessive debt loadIll-chosen acquisitions performingworse than expectedNew technologies threaten survivalof one or more core businessesAppointment of new CEO who decides to redirect company“Unique opportunity” emerges and existing businesses must be sold to finance new acquisitionConditions That Make Portfolio Restructuring AttractiveMultinational Diversification StrategiesDistinguishing characteristicsDiversity of businesses andDiversity of national marketsPresents a big strategy-making challengeStrategies must be conceived and executedfor each business, with as manymultinational variations as appropriateCross-business and cross-country collaboration opportunities must be pursued and managedAppeal of MultinationalDiversification StrategiesOffer two avenues for long-termgrowth in revenues and profitsEnter additional businessesExtend operations ofexisting businesses intoadditional country marketsOpportunities to Build Competitive Advantage via Multinational DiversificationFull capture of economies of scale and experience curve effectsCapitalize on cross-business economies of scopeTransfer competitively valuable resources from one business to another and from one country to anotherLeverage use of a competitivelypowerful brand nameCoordinate strategic activities andinitiatives across businesses and countriesCompetitive advantagepotential is based onUsing a related diversificationstrategy based onResource-sharing and resource-transferopportunities among businesses Economies of scope and brand name benefits Managing related businesses to capture important cross-business strategic fitsCompetitive Strength ofa DMNC in Global Markets