Corporate Strategy: Diversification
and the Multibusiness Company
Chapter Summary
Chapter 8 moves up one level in the strategy-making hierarchy, from strategy making in a single business
enterprisetostrategymakinginadiversifiedenterprise.Thechapterbeginswithadescriptionofthevarious
pathsthroughwhichacompanycanbecomediversifiedandprovidesanexplanationofhowacompanycanuse
diversificationtocreateorcompoundcompetitiveadvantageforitsbusinessunits.Thechapteralsoexaminesthe
techniquesandproceduresforassessingthestrategicattractivenessofadiversifiedcompany’sbusinessportfolio
andsurveysthestrategicoptionsopentoalready-diversifiedcompanies.
Lecture Outline
I. What Does Crafting a Diversification Strategy Entail?
ACTIVITY
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1. Thetaskofcraftingadiversifiedcompany’soverallorcorporatestrategyfallssquarelyontheshoulders
of top-level corporate executives.
2. Devising a corporate strategy has four distinct facets:
units.
d. Initiating actions to boost the combined performances of the corporation’s collection of businesses.
II. When to Consider Diversifying
ACTIVITY
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an interactive question and answer review. The assignment can be graded and posted automatically.
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CHAPTER 8
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1. Diversifying into new industries always merits strong consideration whenever a single-business
company encounters diminishing market opportunities and stagnating sales in its principle business.
2. The decision to diversify presents wide-ranging possibilities however, the decision to diversify must
III. Building Shareholder Value: The Ultimate Justification for Diversifying
ACTIVITY
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an interactive question and answer review. The assignment can be graded and posted automatically.
1. Diversificationmustdomoreforacompanythansimplyspreaditsriskacrossvariousindustries.
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.
2. For there to be reasonable expectations that a diversification move can produce added value for
shareholders, the move must pass three Tests of Corporate Advantage:
a. Theindustryattractivenesstest—Theindustrychosenfordiversificationmustbeattractiveenough
3. Diversificationmovesthatsatisfyallthreetestshavethegreatestpotentialtogrowshareholdervalue
overthelongterm.Diversificationmovesthatcanpassonlyoneortwotestsaresuspect.
CORE CONCEPT
Creating added value for shareholders via diversification requires building a
multibusiness company where the whole is greater than the sum of its parts; such
1 + 1 =3 effects are called synergy.
IV. Approaches to Diversifying the Business Lineup
ACTIVITY
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an interactive question and answer review. The assignment can be graded and posted automatically.
1. Entryintonewbusinessescantakeanyofthreeforms;Acquisition,Internalstart-up,orJointventures/
strategic partnerships.
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A. Diversification by Acquisition of an Existing Business
CORE CONCEPT
An acquisition premium is the amount by which the price offered exceeds the pre-
acquisition market value of the target company.
B. Entering a New Line of Business through Internal Development
1. Achievingdiversificationthroughinternaldevelopmentinvolvesbuildinganewbusinesssubsidiary
from scratch and is often referred to as corporate venturing.
CORE CONCEPT
Corporate venturing is the process of developing new businesses as an outgrowth
of a company’s established business operations. It is also referred to as corporate
entrepreneurship or intrapreneurship since it requires entrepreneurial like qualities
within a larger enterprise.
2. This entry option takes longer than the acquisition option and poses some hurdles.
3. Generally, using internal development to enter a new business has appeal only when:
a. The parent company already has in-house most or all of the skills and resources it needs to piece
togetheranewbusinessandcompeteeectively
C. Using Joint Ventures to Achieve Diversification
1. Joint ventures typically entail forming a new corporate entity owned by the partners.
2. A strategic partnership or joint venture can be useful in at least three types of situations:
a. To pursue an opportunity that is too complex, uneconomical, or risky for a single organization to
pursue alone
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3. However,partneringwithanothercompanyhassignificantdrawbacksduetothepotentialforconicting
objectives, disagreements, over how to best operate the venture, culture clashes, and so on.
4. Joint ventures are generally the least durable of the entry options, usually lasting only until the partners
decide to go their own ways.
D. Choosing a Mode of Entry
1. The choice of entry mode depends on the answer to four important questions:
a. Does the company have all the resources and capabilities it requires to enter the business through
internal development or is it lacking some critical resources?
b. Are there entry barriers to overcome?
c. Isspeedanimportantfactorinthefirm’schancesforsuccessfulentry?
d. Which is the least costly mode of entry given the company’s objectives?
2. The Question of Critical Resources and Capabilities
a. Ifafirmhasalltheresourcesitneedstostartupanewbusinessorwillbeabletoeasilypurchaseor
lease any missing resources, it may choose to enter the business via internal development.
b. Ifmissingcriticalresourcescannotbeeasilypurchasedorleased,afirmwishingtoenteranew
business must obtain these missing resources through either acquisition or joint venture.
3. The Question of Entry Barriers
a. Ifentrybarriersarelowandtheindustryispopulatedbysmallfirms,internaldevelopmentmaybe
the preferred mode of entry.
b. If entry barriers are high, the company may still be able to enter with ease if it has the requisite
resources and capabilities for overcoming high barriers.
4. The Question of Speed
a. Acquisition is a favored mode of entry when speed is of the essence, as is the case in rapidly
changing industries where fast movers can secure long-term positioning advantages.
b. in other cases it can be better to enter a market after the uncertainties about technology or consumer
preferences through joint venture or internal development.
5. TheQuestionofComparativeCost
a. Acquisition can be a high-cost mode of entry due to the need to pay a premium over the share price
of the target company.
b. Whether it is worth it to pay that high a price will depend on how much extra value will be created
by the new combination of companies in the form of synergies.
c. Joint ventures may provide a way to conserve on such entry costs.
CORE CONCEPT
Transaction costs are the costs of completing a business agreement or deal of some
sort, over and above the price of the deal. They can include the costs of searching for
an attractive target, the costs of evaluating its worth, bargaining costs, and the costs of
completing the transaction.
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V. Choosing the Diversification Path: Related Versus Unrelated Businesses
1. Once the decision is made to pursue diversification, the firm must choose whether to diversify into
related businesses, unrelated businesses, or some mix of both.
2. Businesses are said to be related when their value chains possess competitively valuable cross-business
valuechainmatchupsorstrategicfits.
3. Businesses are said to be related when their value chains possess competitively valuable cross-business
relationships that present opportunities for the businesses to perform better under the same corporate
umbrella than they could by operating as stand-alone entities.
CORE CONCEPT
Related businesses possess competitively valuable cross-business value chain and
resource matchups; unrelated businesses have very dissimilar value chains and
resource requirements, with no competitively important cross-business relationships at
the value chain level.
VI. Diversifying into Related Businesses
ACTIVITY
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an interactive question and answer review. The assignment can be graded and posted automatically.
A.A related diversification strategy involves building the company around businesses whose value chains
possesscompetitivelyvaluablestrategicfits.
1. Strategic fit existswheneveroneormoreactivitiescomprisingthevaluechainsofdierentbusinesses
aresucientlysimilarastopresentopportunitiesfor:
a. Transferring specialized expertise, technological know-how, or other competitively valuable
capabilities from one business to another
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CORE CONCEPT
Strategic fit exists whenever one or more activities constituting the value chains
of different businesses are suciently similar as to present opportunities for cross-
business sharing or transferring of the resources and capabilities that enable these
activities.
2. Figure 8.1, Related Businesses Possess Related Value Chain Activities and Competitively Valuable
Strategic Fits,looksatrelatedbusinessesandstrategicfits.
CORE CONCEPT
Related diversification involves sharing or transferring specialized resources and
capabilities. Specialized resources and capabilities have very specific application and
their use is limited to a restricted range of industry and business types, in contrast
to generalized resources and capabilities that can be widely applied and can be
deployed across a broad range of industry and business type.
3. Related diversification thus has strategic appeal from several angles. It allows a firm to reap the
4. While companies pursuing related diversification strategies may also have opportunities to share or
1. Cross-business strategic fits can exist anywhere along the value chain—in R&D and technology
2. Strategic Fits in Supply Chain Activities: Businessesthathavesupplychainstrategicfitscanperform
better together because of the potential for skills transfer in procuring materials, greater bargaining
3. Strategic Fits in R&D and Technology Activities:BusinesseswithstrategicfitinR&Dortechnology
4. Manufacturing-Related Strategic Fits: Cross-businessstrategicfitinmanufacturing-relatedactivities
5. Strategic Fits in Sales and Marketing: Various cost-saving opportunities spring from diversifying into
businesses with closely related sales and marketing activities. Opportunities include:
a. Sales costs can be reduced by using a single sales force for the products of both businesses rather
than having separate sales forces for each business
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c. There may be competitively valuable opportunities to transfer selling, merchandising, advertising,
6. Distribution-Related Strategic Fits: Businesses with closely related distribution activities can perform
better together than apart because of potential cost savings in sharing the same distribution facilities or
7. Strategic Fits in Customer Service Activities: Strategicfitwithrespecttocustomerserviceactivities
canenablecostsavingsordierentiationadvantages,justasitdoesalongotherpointsofthevalue
chain.
C. Strategic Fit, Economies of Scope, and Competitive Advantage
1. Whatmakesrelateddiversificationanattractivestrategyistheopportunitytoconvertthestrategicfit
relationshipsbetweenthevaluechainsofdierentbusinessesintoacompetitiveadvantagefocusingon:
a. Transferring skills or knowledge
b. Combining related value chain activities to achieve lower costs
c. Leveraging the use of a well-respected brand name
d. Sharing other valuable resources
e. Using cross-business collaboration and knowledge sharing to create new resources and capabilities
and drive innovation.
2. Strategic Fit and Economies of Scope: Related businesses often present opportunities to consolidate
3. Economies of scale are cost savings that accrue directly from a larger-sized operation. Economies of
scopestemdirectlyfromcost-savingstrategicfitsalongthevaluechainsofrelatedbusinesses.
4. Economiesofscope,however,stemdirectlyfromstrategicfitalongthevaluechainsofrelatedbusinesses,
5. Thegreaterthecross-businesseconomiesassociatedwithresourcesharingandtransfer,thegreaterthe
potentialforarelateddiversificationstrategytogiveamultibusinessenterpriseacostadvantageover
6. From Competitive Advantage to Added Profitability and Gains in Shareholder Value: The cost
7. The competitive advantage potential that ows from economies of scope and the capture of other
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8.Therearefivethingstobearinmindhere:
a. Capturing cross-business strategic-fit benefits via a strategy of related diversification builds
shareholder value in ways that shareholders cannot undertake by simply owning a portfolio of
9. Illustration Capsule 8.1 describes the merger of Kraft Foods Group, Inc. with the H. J. Heinz Holding
Corporation,inpursuitofthestrategic-fitbenefitsofarelateddiversificationstrategy.
ILLUSTRATION CAPSULE 8.1
The Kraft–Heinz Merger: Pursuing the Benefits of Cross-Business
Strategic Fit
Discussion Question: In what way did the merger of Kraft Foods Group, Inc. with the H. J. Heinz
Holding Corporation leverage cross-business strategic fit?
Answer: The student should be able to identify that Kraft-Heinz was able to leverage cross
business value chain activities and resource similarities. These included increased bargaining
ACTIVITY
Consider adding a File Attachment assignment requiring the student to fully explore and explain how
the companies used a merger to gain competitive advantage through cross-business strategic fits.
Ask the student to describe areas where the company leveraged strategic fits in critical value chain
activities in order to improve cost competitiveness. You can send the student to the following links to
supplement the information in the Illustration Capsule:
http://www.kraftheinzcompany.com/company.html
http://ir.kraftheinzcompany.com/overview.cfm
VII. Diversification Into Unrelated Business
ACTIVITY
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1. Thebasicpremiseofunrelateddiversificationisthatanycompanythatcanbeacquiredongoodfinancial
2. Thecompanyspendsmuchtimeandeortscreeningnewacquisitioncandidatesanddecidingwhether
to keep or divest existing businesses, using such criteria as:
3. BuildingShareholderValueviaUnrelatedDiversification—Intheabsenceofcross-businessstrategic
fitsbywhichtogrowshareholdervalue,thecompanymustlookforunrelatedavenues.
B. Building Shareholder Value via Unrelated Diversification
1. Buildingshareholdervalueviaunrelateddiversificationultimatelyhingesontheabilityoftheparent
companytoimproveitsbusinessesintheabsenceofstrategicfitasaCorporateParent.
2. The Benefits of Astute Corporate Parenting—The parent corporation must nurture its component
businesses through top management expertise, expert problem solving, creative strategy suggestions,
andfirstrateadvice.
3. The parent can provide an umbrella brand which is a corporate brand name that can be applied to a
4. Judicious Cross-Business Allocation of Financial Resources—The parent corporation can serve as
5. Acquiringand Restructuring Undervalued Companies—Theparentcorporationcansearch out weak