1 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright STRATEGY AND COMPETITIVE ADVANTAGE IN DIVERSIFIED COMPANIES CHAPTER 9

“...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” © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright

3 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Diversification and Corporate Strategy  What does it mean when a company is diversified?  Does a firm that is diversified use only one of the five generic business strategies?  What are the types of diversification strategies?  Does a diversified firm compete in similar or different industry environments?

4 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright 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

5 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Single Business Strategy vs. Diversification Strategy  What are some of the advantages of pursuing a single business?  What are some of the risks associated with pursuing one business?  When should firms consider diversification?

6 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Why Diversify?  To build shareholder value  = 3 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!

7 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Diversification Kraft Foods Philip Morris (Cigarettes) Miller Brewing P.M. Capital A Diversification strategy is guided by a vision of how “the firm as a whole can create economic value.”

8 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Philip Morris Corporation (Altria) Kraft Foods Philip Morris (Cigarettes) Miller Brewing P.M. Capital The corporation is seen as a system of interdependent parts.

9 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright What is Related Diversification?  Define “strategic fit”  What are the different types of “strategic fits”?  Which of the “strategic fits” has the greatest potential impact on time-to-market?  Which of the has the greatest potential impact on volume discounts for incoming parts?  How can firms achieve a “strategic fit” through manufacturing? Distribution?

10 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Figure 9.2: Value Chains for Related Businesses Supply Chain Activities Sales and Marketing Customer Service TechnologyOperationsDistribution Support Activities Representative Value Chain Activities Supply Chain Activities Sales and Marketing Customer Service TechnologyOperationsDistribution Support Activities 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 Business A Business B

11 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Capturing Benefits of Strategic Fit  Benefits don’t 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

12 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Capturing Benefits of Strategic Fit  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

13 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright  What is the difference between related and unrelated diversification?  What are some reasons that firms pursue unrelated diversification?  What are some of the risks associated with an unrelated diversification strategy? What is Unrelated Diversification?

14 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright 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 firm’s 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?

15 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Diversification Strategy  Which of the diversification strategies (related or unrelated) relies more heavily on financial vs. strategic measures to create shareholder value?  What is the difference between economies of scale and economies of scope?  Economies of scale can beTrue False achieved due to a related diversification strategy.

16 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Determining the Type of Diversification  Example General Electric and Walt Disney Business Units General Electric Aircraft Engines Capital Services Lighting Medical Systems NBC Applicances Power Systems Plastics Walt Disney Media Networks - ABC Parks and Resorts Studio and Entertainment Consumer Products

17 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Determining the Type of Diversification Necessary Questions  Are there opportunities to share Value Chain activities and achieve strategic fits?  Are there similarities in the business units’ products?  Are there similarities in the business units’ customers?  Are there similarities in the business units’ distribution channels?

18 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Determining the Type of Diversification Walt Disney’s opportunities to share Value Chain activities and achieve strategic fits  Supply Chain – Media Networks and Studio Entertainment  Manufacturing/Operations – Media Networks and Studio Entertainment  Distribution – 1) Parks and Resorts and Consumer Products and 2) ABC Television and Studio Entertainment  Sales and Marketing – Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products  Managerial and administrative support – Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products

19 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Determining the Type of Diversification GE’s opportunities to share Value Chain activities and achieve strategic fits  Relatively few opportunities to share activities

20 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Determining the Type of Diversification Walt Disney versus General Electric  Walt Disney has several activities that can be shared across business units (BUs). GE has relatively few opportunities to share activities across the BUs  There are many similarities in the Disney BUs’ products. Few similarities in the GE BUs’ products.  The Disney BUs’ major customers are families. GE BUs customers vary from large corporations for Aircraft Engines and Power Systems to the general public for Appliances.  The Disney BUs’ can use the same distribution channel in most cases whereas the GE BUs’ can not.  What type of diversification strategy does each of these firms pursue?

21 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Combination Related-Unrelated Diversification Strategies  Dominant-business firms  One major core business accounting for 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

22 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Strategies for Entering New Businesses  What are some possible strategies for broadening diversification or entering a new business?  What are some possible strategies for narrow the diversification?  When is it attractive to narrow the collection of businesses a firm has?  What are some options firms have to increase the financial health of their portfolio of businesses?  When should a firm decide to follow a turnaround rather than a restructure strategy?

23 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright 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, well- selected industries as opposed to scattering corporate investments across many industries!

24 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Multinational Diversification Strategies  What does it mean to have a multinational diversification strategy?  Why do firms decide to follow a multinational diversification strategy?  Which of the diversification strategies seem to have the most advantages for DMNC?

25 © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Copyright Summary  Understand what is a Diversification strategy  Understand why firms diversify  Know the types of diversification, advantages and disadvantages of each.  Know how related and unrelated diversification differ  Understand what it means to have strategic fit, the different types of fit and how to utilize a particular type of fit  Know how to determine the type of diversification strategy a firm is pursuing  Understand the different options for entering new, exiting, and restoring businesses  Know what the advantages are of a multinational strategy