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Transcript of 1-1 CHAPTER 9 Strategies for Multibusiness Corporations McGraw-Hill/Irwin Copyright © 2009 by The...
1-1
CHAPTER 9CHAPTER 9
Strategies for Strategies for Multibusiness Multibusiness CorporationsCorporations
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
9-2
Four Main Tasks inFour Main Tasks inCrafting Corporate StrategyCrafting Corporate Strategy
Picking new industries to enterand deciding on means of entry
Pursuing opportunities to leverage cross-business value chain relationships into competitive advantage
Steering resources into most attractive business units
Initiating actions to boost the combined performance of businesses
9-3
When Business Diversification When Business Diversification Becomes a ConsiderationBecomes 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 diversifyinginto closely related businesses
It has a powerful brand name it cantransfer to products of other businesses
9-4
Building Shareholder Value Through Building Shareholder Value Through Business DiversificationBusiness 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 shareholders
9-5
Acquisition of an Existing Acquisition of an Existing BusinessBusiness
Most popular approach to diversification
Advantages Quicker entry into target market
Easier to hurdle certain entry barriers
» Acquiring technological know-how
» Establishing supplier relationships
» Securing adequate distribution access
9-6
Entering a New Business Through Entering a New Business Through Internal Start-upInternal Start-up
More attractive whenParent firm already has most of needed
resources to build a new businessAmple time exists to launch a new businessInternal entry has lower costs
than entry via acquisitionNew start-up does not have to go
head-to-head against powerful rivalsAdditional capacity will not adversely impact
supply-demand balance in industry
9-7
Joint Ventures andJoint Ventures andStrategic PartnershipsStrategic 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
9-8
Corporate Strategy Options: Corporate Strategy Options: Related vs. Unrelated Related vs. Unrelated DiversificationDiversification
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
9-9
Value Chain Relationships for Related Value Chain Relationships for Related BusinessesBusinesses
9-10
Related Diversification and Related Diversification and Competitive AdvantageCompetitive Advantage
Strategic fit exists when one or more activities included in the value chains of of a diversified company’s businesses present opportunities to
Transfer expertise/capabilities/technologyfrom one business to another
Reduce costs by combining related activities of different businesses into a single operation
Transfer use of firm’s brand name from one business to another
9-11
Related Diversification and Related Diversification and Economies of ScopeEconomies of Scope
Stem from cross-business opportunities to reduce costs
Arise when costs can be cut by operating two or more businesses under same corporate umbrella
Cost saving opportunities can stem from interrelationships anywhere along the value chains of different businesses—R&D, manufacturing, distribution, or administrative functions
9-12
What Is Unrelated Diversification?What Is Unrelated Diversification?
Involves diversifying into businesses with
No strategic fit
No meaningful value chainrelationships
No unifying strategic theme
Basic 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 secondary
9-13
Acquisition Criteria For Unrelated Acquisition Criteria For Unrelated Diversification StrategiesDiversification 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?
9-14
Building Shareholder ValueBuilding Shareholder Valuevia Unrelated Diversificationvia Unrelated Diversification
Corporate managers must Do a superior job of diversifying into businesses
capable of producing good earnings and returns on investments
Do an excellent job of negotiating favorable acquisition prices
Shift corporate financial resources from poorly-performing businesses to those with potential for above-average earnings growth
Discern when it is the “right” time to sell a business at the “right” price
9-15
Combination Related-Unrelated Combination Related-Unrelated Diversification StrategiesDiversification Strategies
Dominant-business firms One major core business
accounting for 50 - 80 percent of revenues, with several small related or unrelated businesses accounting for remainder
Narrowly diversified firms Diversification includes a few (2 -
5) related or unrelated businesses Broadly diversified firms
Diversification includes a wide collection of either related or unrelated businesses or a mixture
9-16
How to Evaluate aHow to Evaluate aDiversified Company’s StrategyDiversified 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
9-17
Industry Attractiveness FactorsIndustry 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
9-18
Calculating Industry Attractiveness Calculating Industry Attractiveness ScoresScores
9-19
Factors to Use in Evaluating Factors to Use in Evaluating Competitive StrengthCompetitive 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
9-20
Calculating Competitive Strength Calculating Competitive Strength ScoresScores
9-21
Nine-Cell Industry Attractiveness-Nine-Cell Industry Attractiveness-Competitive Strength MatrixCompetitive Strength Matrix
9-22
Strategy Implications of Strategy Implications of Attractiveness/Strength MatrixAttractiveness/Strength Matrix
Businesses in upper left cornerReceive top investment priorityStrategic prescription – grow and build
Businesses in three diagonal cellsGiven medium investment prioritySome businesses in this category may have
brighter or dimmer prospects than others Businesses in lower right corner
Candidates for divestiture or managed to take cash out of the business
9-23
Identifying Cross-Business Identifying Cross-Business Strategic FitsStrategic Fits
9-24
Evaluating Resource Fit and Evaluating Resource Fit and SufficiencySufficiency
Good resource fit exists when
A company’s businesses, individually, add to its collective resource strengths, either financially or strategically
Firm has resources to adequately support its businesses without spreading itself too thin
9-25
Determining Financial Resource FitDetermining Financial Resource Fit
Determine cash flow and investmentrequirements of business unitsWhich are cash hogs and which are
cash cows? Aside from cash flow, financial resource fit
also includesAssessing the individual contributions to
companywide performance targets by each business unit
Determining if the company has the financial strength to provide proper funding to its business unit and maintain a healthy credit rating
9-26
Ranking Business Units for Resource Ranking Business Units for Resource AllocationAllocation
Factors to consider in judgingbusiness-unit performanceSales growthProfit growthContribution to company earningsCash flow generationReturn on capital employed in business
9-27
Crafting New Strategic MovesCrafting New Strategic Moves
Stick closely with existing business lineupand pursue opportunities it presents
Broaden company’s business scope bymaking new acquisitions in new industries
Divest certain businesses and retrenchto a narrower base of business operations
Restructure company’s business lineup, putting a whole new face on business makeup
9-28
Broadening the Diversification BaseBroadening the Diversification Base
Multi business companies may consider adding to the diversification base whenRevenues and profits are growing slowlyOpportunities exist to transfer resources and
capabilities to a related businessUnfavorable driving forces face its core
businessThe market positions of one or more of its
business units can be strengthened with the acquisition of a related business
9-29
Retrenching to a Narrower Retrenching to a Narrower Diversification BaseDiversification Base
Retrenchment focuses corporate resources to building strong positions in a smaller number of businesses and industries
Retrenchment involves Divesting businesses that have become unattractive
because of deteriorating market conditions Eliminating cash hog businesses with questionable
long-term potential Divesting business units with weak strategic fit with
other businesses in the portfolio Eliminating weakly positioned businesses that offer
little prospect for earning a decent return on investment
9-30
Broadly Restructuring the Business Broadly Restructuring the Business LineupLineup
Radically altering the business lineup may be necessary whenToo many businesses are in unattractive
industriesThe business lineup is made up of too
many weak businessesThe company is saddled with excessive
debtIll-chosen acquisitions have not lived up
to expectations