CHAPTER 9

STRATEGY AND
COMPETITIVE ADVANTAGE
IN DIVERSIFIED
COMPANIES
Screen graphics created by:
Jana F. Kuzmicki, PhD, Mississippi University for Women
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. . .to acquire or not to acquire: that is

the question.
Robert J. Terry

Fit between a parent and its businesses

is a two-edged sword: a good fit can
create value; a bad one can destroy it.
Andrew Campbell, Michael
Gould, and Marcus Alexander
Quote

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Chapter Outline

When to Diversify
Building Shareholder Value
Related vs. Unrelated businesses
Related Diversification Strategies
Unrelated Diversification Strategies
Combination Related-Unrelated Diversification Strategies
Strategies for Entering New Businesses
Strategy Options for Diversified Companies
Strategies to Broaden a Diversified Companys Base
Divestiture Strategies
Corporate Restructuring and Turnaround Strategies
Multinational Diversification Strategies

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Diversification and Corporate Strategy

A company is diversified when it is in two or

more lines of business

Strategy-making in a diversified company is a

bigger picture exercise than crafting a strategy

for a single line-of-business
A diversified company needs a multi-

industry, multi-business strategy

A strategic action plan must be developed

for several different businesses competing

in diverse industry environments
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Four Main Tasks in

Crafting Corporate Strategy
Pick new industries to enter and decide on

means of entry
Initiate actions to boost combined

performance of businesses
Pursue opportunities to leverage cross-

business value chain relationships and

strategic fits into competitive advantage
Establish investment priorities,

steering resources into most

attractive business units
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Competitive Strengths of a
Single Business Strategy
Less ambiguity about who we are
Energies of firm can be directed down one

business path and keeping strategy

responsive to industry change
Less chance resources will be
stretched thinly over too many
competing activities
Resources can be focused on building
competencies and capabilities that make the
firm better at what it does
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Competitive Strengths of a
Single Business Strategy (continued)
Higher probability innovative ideas will

emerge
Top executives can maintain hands-on
contact with core business
Important competencies more likely to
emerge
Ability to parlay experience and reputation
into
Sustainable competitive advantage
Prominent leadership position
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Risks of a Single Business Strategy

Putting all the eggs in one industry basket
If market becomes unattractive, a

firms prospects can quickly dim

Unforeseen changes can undermine

a single business firms prospects

Changing customer needs
Technological innovation
New substitutes
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When Does Diversification

Start to Make Sense?
Strong competitive
position, rapid market
growth -- Not a good
time to diversify

Weak competitive
position, rapid market
growth -- Not a good
time to diversify

Strong competitive
position, slow market
growth -Diversification is top
priority consideration

Weak competitive
position, slow market
growth -Diversification merits
consideration

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When to Diversify?
Diminishing growth prospects in present

business
Opportunities to add value for customers or gain

competitive advantage by broadening present

business to include complementary products
Attractive opportunities to transfer existing

competencies to new businesses

Potential cost-saving opportunities to

be realized by entering related businesses

Availability of adequate financial and

organizational resources
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Why Diversify?
To build shareholder value
1+1=3
Diversification is capable of increasing

shareholder value if it passes three tests

1. Industry Attractiveness Test
2. Cost of Entry Test
3. Better-Off Test
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Strategic Management Principle

To create shareholder value, a
diversifying firm must get into
businesses that can perform better
under common management than they
could perform operating as
independent stand-alone enterprises!
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Related vs. Unrelated Diversification

Related Diversification

Unrelated Diversification

Involves diversifying into

businesses whose value
chains possess
competitively valuable
strategic fits with the
value chain(s) of the firms
present business(es)

Involves diversifying into

businesses where there is
no deliberate effort to seek
out businesses having
strategic fit with the firms
other business(es)

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Figure 9.1: Strategy Alternatives for

a Company Looking to Diversify
Diversify into Related Businesses

Strategy
Options
for a
Company
Looking to
Diversify

Build shareholder value by capturing crossbusiness strategic fits

- Transfer skills and capabilities from one
business to another
- Share facilities or resources to reduce costs
- Leverage use of a common brand name
- Combine resources to create new
competitive strengths and capabilities

Diversify into Unrelated Businesses

Spread risks across diverse businesses
Build shareholder value by doing a superior job
of choosing businesses to diversify into and of
managing the whole collection of businesses in
the companys portfolio

Diversify into Both Related

and Unrelated Businesses
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What is Related Diversification?

Involves 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
phenomenon

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Concept: Strategic Fit

Exists whenever one or more activities in the

value chains of different businesses are sufficiently

similar to present opportunities for
Transferring competitively valuable
expertise or technological know-how
from one business to another
Combining performance of common value
chain activities to achieve lower costs
Exploiting use of a well-known brand name
Cross-business collaboration to create
competitively valuable resource strengths and
capabilities
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Figure 9.2: Value Chains

for Related Businesses
Business A

Representative Value Chain Activities

Support Activities
Supply
Chain
Activities

Technology

Operations

Sales and
Marketing

Distribution

Customer
Service

Business B

Competitively valuable opportunities for technology or skills transfer, cost

reduction, common brand name usage, and cross-business collaboration exist
at one or more points along the value chains of A and B

Supply
Chain
Activities

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Technology

Operations

Sales and
Marketing

Distribution

Customer
Service

Support Activities
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Strategic Appeal of Related Diversification

Reap competitive advantage benefits of
Skills transfer
Lower costs
Common brand name usage
Stronger competitive capabilities

Spread investor risks over a broader base

Preserves strategic unity in its business activities
Achieve consolidated performance greater than

the sum of what individual businesses can earn

operating independently
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Types of Strategic Fits

Cross-business strategic fits can exist

anywhere along the value chain

R&D and technology activities
Supply chain activities
Manufacturing activities
Distribution activities
Sales and marketing activities
Managerial and administrative support

activities
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R&D and Technology Fits

Offer potential for sharing common technology

or transferring technological know-how

Potential benefits
Cost-savings in technology

development and new product R&D

Shorter times in getting new

products to market
Interdependence between

resulting products leads to increased sales

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Supply Chain Fits

Offer potential opportunities for

skills transfer
Procuring materials
Greater bargaining power in negotiating with

common suppliers
Benefits of added collaboration with

common supply chain partners

Added leverage with shippers

in securing volume discounts

on incoming parts
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Manufacturing Fits
Potential source of competitive advantage when a
diversifiers expertise can be beneficially transferred
to another business
Quality manufacture
Cost-efficient production methods
Just-in-time inventory practices
Training and motivating workers
Cost-saving opportunities arise from ability to perform
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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Distribution Fits
Offer potential cost-saving

opportunities
Share same distribution

facilities
Use many of the same

wholesale distributors
and retail dealers to
access customers
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Sales and Marketing Fits:

Types of Potential Benefits
Reduction in sales costs
Single sales force for related products
Advertising related products together
Combined after-sale service and repair work
Joint delivery and shipping
Joint order processing and billing
Joint promotion tie-ins

Similar sales and marketing approaches provide

opportunities to transfer selling, merchandising, and

advertising/promotional skills
Transfer of a strong companys brand name and
reputation
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Managerial and Administrative Support Fits

Emerge when different business units

require

comparable types of
Entrepreneurial know-how
Administrative know-how
Operating know-how

Different businesses often entail same types of

administrative support facilities

Customer data network
Billing and customer accounting systems
Customer service infrastructure
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Concept: Economies of Scope

Stem from cross-business cost-saving

opportunities
Arise from ability to eliminate costs by
operating two or more businesses under same
corporate umbrella
Exist when it is less costly for two or more
businesses to operate under centralized
management than to function independently
Cost saving opportunities can
stem from interrelationships
anywhere along businesses
value chains
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Related Diversification
and Competitive Advantage
Competitive advantage can result from related

diversification if opportunities exist to

Transfer expertise/capabilities/technology
Combine related activities into a single

operation and reduce costs

Leverage use of firms brand

name reputation
Conduct related value chain activities in a

collaborative fashion to create valuable

competitive capabilities
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Capturing Benefits of Strategic Fit

Benefits dont occur just because a company has

diversified into related businesses !

Businesses with sharing potential must be

reorganized to coordinate activities

Means must be found to make skills transfer effective

Benefits of some strategic coordination must exist

to justify sacrificing business-unit autonomy

Competitive advantage potential exists to
Expand resources and strategic assets and
Create new ones faster and cheaper than rivals
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What is Unrelated Diversification?

Involves diversifying into businesses with
No strategic fit
No meaningful value chain

relationships
No unifying strategic theme
Approach is to venture into any business

in which we think we can make a profit

Firms pursuing unrelated diversification are

often referred to as conglomerates

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Basic Premise of
Unrelated Diversification

Any company that can be

acquired on good financial
terms and offers good
prospects for profitability is a
good business to diversify into!
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Figure 9-3: Value Chains

for Unrelated Businesses
Business A

Representative Value Chain Activities

Support Activities
Supply
Chain
Activities

Technology

Operations

Sales and
Marketing

Distribution

Customer
Service

Business B

An absence of competitively valuable strategic fits between the value chain

for Business A and the value chain for Business B

Supply
Chain
Activities

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Technology

Operations

Sales and
Marketing

Distribution

Customer
Service

Support Activities
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Acquisition Criteria For Unrelated

Diversification Strategies
Can business meet corporate targets

for profitability and ROI?

Will business require substantial
infusions
of capital?
Is business in an industry with growth potential?
Is business big enough to contribute to the parent
firms bottom line?
Is there potential for union difficulties or adverse
government regulations?
Is industry vulnerable to recession, inflation, high
interest rates, or shifts in government policy?

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Attractive Acquisition Targets

Companies with undervalued assets
Capital gains may be realized
Companies in financial distress
May be purchased at

bargain prices
and turned around
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Appeal of Unrelated Diversification

Business risk scattered over different industries
Financial resources can be directed to those

industries offering best profit prospects

Stability of profits -- Hard times in one industry

may be offset by good times in another industry

If bargain-priced firms with big profit

are bought, shareholder

enhanced
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Drawbacks of Unrelated Diversification

Difficulties of competently managing many diverse

businesses
Lack of strategic fits which can be leveraged into

competitive advantage
Consolidated performance of unrelated
businesses tends to be no better than sum of
individual businesses on their own (and it may be
worse)
Likely effect is 1 + 1 = 2, rather than 1 + 1 =3
Promise of greater sales-profit stability over
business cycles seldom realized
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How Broadly Should a

Company Diversify?

Two questions should guide unrelated

diversification efforts
1. What is the least diversification it will take to
achieve acceptable growth and profitability?
2. What is the most diversification that can be
managed, given its added complexity?
Need to strike a balance between too few
different businesses and too many
different businesses!

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How Many Unrelated Businesses Can a

Company Diversify Into?
With unrelated diversification, corporate

managers have to be shrewd enough to

Discern good acquisitions from bad ones
Select capable managers to run many

different businesses
Judge soundness of strategic proposals of

business-unit managers
Know what to do if a subsidiary stumbles
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Diversification and Shareholder Value

Related Diversification
A strategy-driven approach

to creating shareholder value

Unrelated Diversification
A finance-driven approach

to creating shareholder value

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Combination Related-Unrelated
Diversification 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 ranging collection of

either related or unrelated businesses or a mixture

Multibusiness firms
Diversification portfolio includes several unrelated

groups of related businesses

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Strategies for Entering

New Businesses

Acquire existing company

Internal start-up

Joint venture/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
Technological inexperience
Gaining access to reliable suppliers
Being of a size to match rivals in

terms of efficiency and costs

Getting adequate distribution access
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Internal Startup
More attractive when
Ample time exists to create a

new

business from ground up

Incumbents slow in responding to new entry
Less expensive than buying an existing firm
Company already has most of needed skills
Additional capacity will not adversely impact

supply-demand balance in industry

New start-up does not have to go head-to-

head against powerful rivals

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Joint Ventures and Strategic Partnerships

Good way to diversify when
Uneconomical or risky to go it alone
Pooling competencies of two partners provides

more competitive strength

Foreign partners are needed to surmount
Import quotas
Tariffs
Nationalistic political interests
Cultural roadblocks
Lack of knowledge about markets

of particular countries
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Drawbacks of Joint Ventures

Raises questions
Which partner will do what
Who has effective control

Potential conflicts
Control over strategy and long-term

direction
How operations will be conducted
Control over cash flows and profits
Personalities and cultures of partners
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Figure 9-4: Strategy Options for a

Company Already Diversified
Make new acquisitions and/or
enter into additional strategic
partnerships

Strategy
Options
for a
Diversified
Company

Divest some of the companys

existing businesses

Restructure the companys

portfolio of businesses

Become a multinational, multiindustry enterprise

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Strategies to Broaden a Diversified

Companys Business Base
Conditions making this approach attractive
Slow grow in current business
Eminently transferable resources and capabilities

to other related businesses

Unexpected opportunity arises to acquire an

attractive company
Rapidly-changing conditions in one core industry

are blurring boundaries with adjoining industries

Desirable conditions favor new acquisitions to

complement and strengthen market position of

one or more of present businesses
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Divestiture Strategies Aimed at Retrenching

to a Narrower Diversification Base
Strategic options

Retrench ?

Retrenchment

Divest ?

Divestiture

Sell ?

LBO ?

Spin it off as independent

company
Sell it
Leveraged buyout
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Retrenchment Strategies
Objective
Reduce scope of diversification to smaller

number of core businesses

Strategic options involve

divesting businesses
Having little strategic fit with

core businesses
Too small to contribute to earnings
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Conditions That Make

Retrenchment Attractive
Diversification efforts have become too broad
Difficulties encountered in profitably managing

broad diversification
Continuing losses in certain businesses
Lack of funds or resources to support operating

and investment needs of all businesses

Misfits cannot be completely avoided
Unfavorable changes in industry attractiveness
Diversification may lack compatibility of values

essential to cultural fit

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Options for Accomplishing Divestiture

Spin it off as independent company
Involves deciding whether to retain partial

ownership or forego any ownership interest

Sell it
Involves finding a company which views the

business as a good deal and good fit

Leveraged buy out
Involves selling business to the managers who

have been running it for a minimal equity down

payment and loaning balance of purchase price
to new owners
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Corporate Restructuring
and Turnaround Strategies
Strategy options for a diversified firm with

ailing subsidiaries
Why consider these options?
Large losses in one or more subsidiaries
Large number of businesses

in unattractive industries
Bad economic conditions
Excessive debt load
Acquisitions performing worse than expected
New technologies threatening survival of one
or more core businesses
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Corporate Restructuring Strategy

Objective
Make radical changes in mix of

businesses in portfolio via both

Divestitures and
New acquisitions

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Conditions That Make Portfolio

Restructuring Attractive

Long-term performance prospects are unattractive

Core business units fall upon hard times
New CEO takes over and decides to redirect where
company is headed
Wave of the future technologies emerge prompting
a shakeup to build position in a new industry
Unique opportunity emerges and existing
businesses must be sold to finance new acquisition
Major businesses in portfolio become unattractive
Changes in markets of certain businesses proceed in
such different directions, its better to de-merge

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Corporate Turnaround Strategies

Objectives
Restore money-losing businesses to profitability

rather than divest them

Get whole firm back in the back by curing
problems of ailing businesses in portfolio
Most appropriate where
Reasons for poor performance

are

short-term
Ailing businesses are in attractive industries
Divesting money-losers doesnt make longterm strategic sense
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Turnaround Strategies: The Options

Sell or close down a portion of operations
Shift to a different, and hopefully better,

business-level strategy
Launch new initiatives to boost

revenues
Pursue cost reduction
Combination of efforts
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Comment: Trend in Diversification

The present trend toward narrower
diversification has been driven by a
growing preference to gear
diversification around creating strong
competitive positions in a few, wellselected industries as opposed to
scattering corporate investments
across many industries!
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Multinational Diversification Strategies

Distinguishing characteristic
Diversity of businesses and diversity of

national markets
Presents a big strategy-making challenge
Strategies must be conceived

and executed for each

business, with as many
multinational variations
as appropriate
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Appeal of Multinational
Diversification Strategies
Offer two avenues for long-term

growth in revenues and profits

Enter additional

businesses
Extend operations of

existing businesses into

additional country markets
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Opportunities to Build Competitive

Advantage via Multinational Diversification

Full capture of economies of scale

and experience curve effects
Capitalize on cross-business
economies of scope
Transfer competitively valuable
resources from one business to
another and/or from one country to another
Leverage use of a competitively powerful brand name
Coordinate strategic activities and initiatives across
businesses and countries
Use cross-business or cross-country subsidization to
out-compete rivals

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Competitive Strength of
a DMNC in Global Markets
Competitive advantage potential is based on
Using a related diversification strategy based on
Resource-sharing and resource-transfer

opportunities among businesses

Economies of scope and brand name benefits
Managing related businesses
to
capture important
crossbusiness strategic fits
Using cross-market or
cross-business subsidization
sparingly to secure footholds
in attractive country markets
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Competitive Power of
a DMNC in Global Markets
A DMNC has a strategic arsenal capable of

defeating both a domestic-only rival or a

single-business rival by competing in

Multiple businesses and

Multiple country markets

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