Chapter 8: Corporate Strategy: Diversification and the Multibusiness Company Flashcards
(22 cards)
Facets of diversifying
1) Picking new industry and means of entry
2) Pursuing opportunities to leverage cross-business VC relationships into competitive advantage
3) Establishing investment priorities and steering corporate resources into most attractive business units
4) Initiating actions to boost the combined performance of the corporation’s collection of action
When diversifying becomes a consideration
Single-business company encounters diminishing market opportunities and stagnating sales in its principal business
3 tests for building shareholder value
1) Industry attractiveness test
2) Cost of entry test
3) Better off test
Industry attractiveness test
Does it offer potential profits and ROE that is equal or better than present business(es)?
Cost of Entry test
Does the cost to enter erode business prospects for growth and long-term profitability (often acquisitions fail this)
Better-off test
Would existing and new business perform better than if shareholders just bought stock in both (1+1=3 not 1+1=2)
Acquisition
Taking over existing business (old struggling for cheap or well-off for more expensive)
Internal Development
Start business subsidiary from scratch
Corporate venturing
Process of developing new business as an extension/part of existing business (AKA corporate entrepreneurship or intrapreneurship)
Joint ventures
Partner with another company for the short or long-term
Diversifying into a related business
Possess competitively valuable cross business VC and resource matchups
1) Transfer skills and capabilities
2) Share resources and facilities at lower costs
3) leverage use of common brand name
4) Combo resources to get better strengths and capabilities
Diversifying into an unrelated business
Dissimilar VC, resource needs, and no competitively valuable cross-business matchups
1) Spreads risk across completely different businesses
2) Do superior job of choosing businesses and managing whole collection of businesses into company portfolio (Increase shareholder value)
Strategic fit
Exists when VC of different businesses present opportunities for cross-business sharing and skills transfer, or specialized resources and capabilities
Economies of scope
Cost reductions from strategic fit along VC
Economies of scale
Cost reductions from larger operation capacity
Pitfalls of diversifying into unrelated businesses
1) Demanding managerial requirements
2) Limited competitive advantage potential
Misguided reasons for diversifying into unrelated businesses
1) Risk reduction
2) Growth
3) Earnings stabilization
4) Managerial motives
6 steps to evaluating diversification strategy
1) Evaluate industry attractiveness
2) Evaluate business-unit competitive strength
3) Determine competitive value of strategic fit in multi-business company
4) Evaluate resource fit
5) Rank business units
6) Craft new strategic moves
Cash hog
Not enough money generated to fully fund
Cash cow
Lots of earnings beyond internal requirements and can fund other operations, buybacks, dividends, etc.
Spinoff
Business unit divestiture approach that creates an independent company through IPO sale to public or distributing shares to shareholders of corporate parent
Corporate restructuring
Divesting in some companies and acquiring others
