CHAPTER 8 CORPORATE STRATEGY: Diversification and the Multibusiness Company (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale ordistribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
THIS CHAPTER WILL HELP YOU UNDERSTAND: LO 1 When and how business diversification can enhance shareholder value. LO 2 How related diversification strategies can produce cross- business strategic fit capable of delivering competitive advantage. LO 3 The merits and risks of unrelated diversification strategies. LO 4 The analytic tools for evaluating a company’s diversification strategy. LO 5 What four main corporate strategy options a diversified company can employ for solidifying its strategy and improving company performance. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 8 – 2 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
WHAT DOES CRAFTING A DIVERSIFICATION STRATEGY ENTAIL? Picking new industries to enter and deciding on the means of Step 1 entry. Pursuing opportunities to leverage cross-business value chain Step 2 relationships and strategic fit into competitive advantage. Establishing investment priorities and steering corporate Step 3 resources into the most attractive business units. Initiating actions to boost the combined performance Step 4 of the cooperation’s collection of businesses. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 8 – 3 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
STRATEGIC DIVERSIFICATION OPTIONS Sticking closely with the existing business lineup and pursuing opportunities presented by these businesses. Broadening the current scope of diversification by entering additional industries. Retrenching to a narrower scope of diversification by divesting poorly performing businesses Broadly restructuring the entire firm by divesting some businesses and acquiring others to put a whole new face on the firm’s business lineup. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 8 – 4 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
WHEN TO CONSIDER DIVERSIFYING A firm should consider diversifying when: 1. It can expand into businesses whose technologies and products complement its present business. 2. Its resources and capabilities can be used as valuable competitive assets in other businesses. 3. Costs can be reduced by cross-business sharing or transfer of resources and capabilities. 4. Transferring a strong brand name to the products of other businesses helps drive up sales and profits of those businesses. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 8 – 5 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING Testing Whether Diversification Will Add Long-Term Value for Shareholders The The industry The better-off attractiveness cost-of-entry test test test (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 8 – 6 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING The Attractiveness Test: ● Are the industry’s profits and return on investment as good or better than present business(es)? The Cost of Entry Test: ● Is the cost of overcoming entry barriers so great as to long delay or reduce the potential for profitability? The Better-Off Test: ● How much synergy (stronger overall performance) will be gained by diversifying into the industry? (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 8 – 7 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
CORE CONCEPT ♦ 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 (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 8 – 8 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
CORE CONCEPT ♦ Creating added value for shareholders via diversification requires building a multibusiness company in which the whole is greater than the sum of its parts — such 1 + 1= 3 effects are called synergy . (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 8 – 9 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
BETTER PERFORMANCE THROUGH SYNERGY Firm A purchases Firm B in No another industry. A and B’s Synergy profits are no greater than what each firm could have (1+1=2) Evaluating the earned on its own. Potential for Synergy through Firm A purchases Firm C in Diversification another industry. A and C’s Synergy profits are greater than what (1+1=3) each firm could have earned on its own. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any 8 – 10 manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
APPROACHES TO DIVERSIFYING THE BUSINESS LINEUP Diversifying into New Businesses Existing business Internal new Joint acquisition venture (start-up) venture (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 8 – 11 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
DIVERSIFICATION BY ACQUISITION OF AN EXISTING BUSINESS Advantages: ● Quick entry into an industry ● Barriers to entry avoided ● Access to complementary resources and capabilities Disadvantages: ● Cost of acquisition — whether to pay a premium for a successful firm or seek a bargain in struggling firm ● Underestimating costs for integrating acquired firm ● Overestimating the acquisition’s potential to deliver added shareholder value (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 8 – 12 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
CORE CONCEPT ♦ An acquisition premium is the amount by which the price offered exceeds the preacquisition market value of the target firm. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 8 – 13 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
ENTERING A NEW LINE OF BUSINESS THROUGH INTERNAL DEVELOPMENT Advantages of New Venture Development: ● Avoids pitfalls and uncertain costs of acquisition. ● Allows entry into a new or emerging industry where there are no available acquisition candidates. Disadvantages of Intrapreneurship: ● Must overcome industry entry barriers. ● Requires extensive investments in developing production capacities and competitive capabilities. ● May fail due to internal organizational resistance to change and innovation. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 8 – 14 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
CORE CONCEPT ♦ Corporate venturing (or new venture development ) is the process of developing new businesses as an outgrowth of a firm’s established business operations. It is also referred to as corporate entrepreneurship or intrapreneurship since it requires entrepreneurial-like qualities within a larger enterprise. (c) 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution 8 – 15 in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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