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Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company
209
CORE CONCEPT
Restructuring refers to overhauling and streamlining the activities of a business—
combining plants with excess capacity, selling off underutilized assets, reducing
unnecessary expenses, and otherwise improving the productivity and profitability of a
company.
6. ThePathtoGreaterShareholderValuethroughUnrelatedDiversification:Buildingshareholdervalue
viaunrelateddiversificationultimatelyhingesonthecorporatelevelexecutivesdoingthreethings:
a. Diversify into businesses that can produce consistently good earnings and returns on investment (to
satisfy the industry attractiveness test).
(tosatisfythebetter-otest).
CORE CONCEPT
A diversified company has a parenting advantage when it is more able than other
companies to boost the combined performance of its individual businesses through
high-level guidance, general oversight, and other corporate-level contributions.
C. The Drawbacks of Unrelated Diversification
1. Unrelated diversification strategies have two important negatives that undercut the positives; Very
demanding managerial requirements and Limited competitive advantage potential
2. Demanding Managerial Requirements: Successfully managing a set of fundamentally dierent
businesses operating in fundamentally dierent industry and competitive environments is a very
challengingandexceptionallydicultpropositionforcorporatelevelmanagers.
3. Limited Competitive Advantage: Unrelated diversification oers limited potential for competitive
advantage beyond that of what each individual business can generate on its own.
Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company
210
1. Risk reduction—reducing perceived risk by spreading the company’s investments over a set of truly
diverse industries whose technologies and markets are largely disconnected.
2. Growth—pursuing growth for the sake of growth.
3. Stabilization—osettingmarketdowntrendsinsomebusinessesbyupswingsinothers.
4. ManagerialMotives—unrelateddiversificationthatresultsonlyinbenefitstomanagerssuchashigher
compensation and reduced employment risk.
VIII. Combination Related-Unrelated Diversification Strategies
ACTIVITY
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1. There is nothing to preclude a company from diversifying into both related and unrelated businesses.
2. Indeed,inactualpracticethebusinessmakeupofdiversifiedcompaniesvariesconsiderably:
a. Dominant-business enterprises—one major core business accounts for 50 to 80 percent of total
3. Figure 8.2, Three Strategy Alternatives for Pursuing Diversification, provides guidance on what
strategymightbemosteectiveinvarioussituations.
IX. Evaluating the Strategy of a Diversified Company
ACTIVITY
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an interactive question and answer review. The assignment can be graded and posted automatically.
A. Process—Theprocedureforevaluatingadiversifiedcompany’sstrategyanddecidinghowtoimprovethe
company’s performance involves six steps:
1. Assessing industry attractiveness individually and as a group
2. Assessing competitive strength of each business-unit in its industry
3. Evaluatingtheextentofcross-businessstrategicfits
Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company
211
B. Step 1: Evaluating Industry Attractiveness
1. Aprincipalconsiderationinevaluatingadiversifiedcompany’sbusinessmakeupandthecaliberofits
strategy is the attractiveness of the industries in which it has business operations. Answers to several
questions are required:
a. Doeseachindustrythecompanyhasdiversifiedintorepresentagoodbusinessforthecompanyto
be in—does it pass the industry-attractiveness test?
b. Which of the company’s industries are most attractive and which are least attractive?
c. How appealing is the whole group of industries in which the company has invested?
2. Calculating Industry Attractiveness Scores for Each Industry into Which the Company Has
Diversified: A simple and reliable analytical tool involves calculating quantitative industry attractiveness
scores, which can then be used to gauge each industry’s attractiveness, rank the industries from most to
least attractive, and make judgments about the attractiveness of all the industries as a group.
3. The following measures of industry attractiveness are likely to come into play for most companies:
a. Market size and projected growth rate
b. The intensity of competition
c. Emerging opportunities and threats.
g. Industryprofitability
4. Each factor should be given a weight (with all weights adding up to 1.0) and each industry should be
5. Itiscriticallyimportanttoconsiderthoseaspectsofindustryattractivenessthatpertainspecificallyto
6. Interpreting the Industry Attractiveness Scores:Industrieswithascoremuchbelow5.0probablydo
notpasstheattractivenesstest.Foradiversifiedcompanytobeastrongperformer,asubstantialportion
ofitsrevenuesandprofitsmustcomefrombusinessunitswithrelativelyhighattractivenessscores.
C. Step 2: Evaluating Business-Unit Competitive Strength
1. Thesecondstepinevaluatingadiversifiedcompanyistoappraisehowstronglypositionedeachofits
business units are in their respective industry.
2. Calculating Competitive Strength Scores for Each Business Unit: Quantitative measures of each
Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company
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3. The following measures of competitive strength are likely to come into play for most companies:
a. Relative market share
b. Costs relative to competitors’ costs
4. Each factor should be given a weight (with all weights adding up to 1.0) and each industry should be
5. Interpreting the Competitive Strength Scores: Business units with competitive strength ratings above
6.7 on a rating scale of 1 to 10 are strong market contenders in their industries.
6. Using a Nine-Cell Matrix to Simultaneously Portray Industry Attractiveness and Competitive
Strength: The industry attractiveness and business strength scores can be used to portray the strategic
positionsofeachbusinessinadiversifiedcompany.Industryattractivenessisplottedontheverticalaxis
and competitive strength on the horizontal axis.
7. Thenine-cellattractiveness-strengthmatrixprovidesclear,stronglogicforwhyadiversifiedcompany
1. Checkingthe competitiveadvantagepotential ofcross-businessstrategic fitsinvolvessearching and
evaluatinghowmuchbenefitadiversifiedcompanycangainfromfourtypesofvaluechainmatchups:
Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company
213
2. Figure 8.4, Identifying the Competitive Advantage Potential of Cross-Business Strategic Fits,
3. More than just strategic fit identification is needed. The real test is what competitive value can be
1. Thebusinessesinadiversifiedcompany’slineupneedtoexhibitgoodresourcefit.
CORE CONCEPT
A company pursuing related diversification exhibits resource fit when its businesses
have matching specialized resource requirements along their value chains; a company
pursuing unrelated diversification has resource fit when the parent company has
adequate corporate resources (parenting and general resources) to support its
businesses’ needs and add value.
2. Goodresourcefitexistswhenthefirm’sbusinesseshavewell-matchedspecializedresourcerequirements
at points along their value chains that are critical for the businesses’ market success.
3. FinancialResourceFits:adiversifiedcompanycangeneratetheinternalcashowssucienttofundthe
4. Aportfolioapproachtomanagingthediversifiedfirmfocusesontwogeneralcategoriesofbusinesses,
cash hogs and cash cows.
a. Business units in rapidly growing industries are often cash hogs—theannualcashowstheyare
able to generate from internal operations are not big enough to fund their expansion.
b. Business units with leading market positions in mature industries may be cash cows—businesses
that generate substantial cash surpluses over what is needed for capital reinvestment and competitive
maneuvers to sustain their present market position.
CORE CONCEPT
A strong internal capital market allows a diversified company to add value by shifting
capital from business units generating free cash flow to those needing additional
capital to expand and realize their growth potential.
CORE CONCEPT
A portfolio approach to ensuring financial fit among a firm’s businesses is based
on the fact that different businesses have different cash flow and investment
characteristics.
Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company
214
CORE CONCEPT
A cash hog business generates cash flows that are too small to fully fund its operations
and growth; a cash hog requires cash infusion to provide additional working capital
and finance new capital investment.
CORE CONCEPT
A cash cow generates cash flows over and above its internal requirements, thus
providing a corporate parent with funds for investing in cash hogs, financing new
acquisitions, or paying dividends.
5. Viewingthediversifiedgroupofbusinessesasacollectionofcashowsandcashrequirementsisa
6. Star businesses have strong or market-leading competitive positions in attractive, high-growth markets
andhighlevelsofprofitabilityandareoftenthecashcowsofthefuture.
7. Asidefrom cashow considerations,there aretwo otherfactors toconsider inassessing whethera
diversifiedcompany’sbusinessesexhibitgoodfinancialfit:
1. A company must also have a big enough and deep enough pool of managerial, administrative, and other
parentingcapabilitiestosupportallofitsdierentbusinesses:
a. Doesthe companyhave (orcanit develop)thespecific resourcesand capabilitiesneededto be
successful in each of its businesses?
b. Are the company’s resources being stretched too thinly by the resource requirements of one or more
of its businesses?
G. Step 5: Ranking the Performance Prospects of Business Unites and Assigning a Priority for Resource
Allocation
1. Onceadiversifiedcompany’sstrategyhasbeenevaluatedfromtheperspectivesofindustryattractiveness,
2. Asarule,businesssubsidiarieswiththebrightestprofitandgrowthprospects,attractivepositionsin
3. This does not rule out the importance of judging business-unit performance on sales growth, profit
growth,contributiontocompany’searnings,andthereturnoncapital,andcashowfromoperations.
5. Therankingsoffutureperformancegenerallydeterminewhatprioritythecorporateparentshouldgive
to each business in terms of resource allocation.
Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company
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6. Figure 8.5, The Chief Strategic and Financial Options for Allocating a Diversified Company’s
Financial Resources, shows the chief strategic and financial options for allocating a diversified
company’sfinancialresources.
H. Step 6: Crafting New Strategic Moves to Improve Overall Corporate Performance
1. Theconclusionsowingfromthefiveprecedinganalyticalstepssettheagendaforcraftingstrategic
movestoimproveadiversifiedcompany’soverallperformance.Thestrategicoptionsboildowntofour
broad categories of actions: (pictured in Figure 8.6, A Company’s Four Main Strategic Alternatives
3. Intheeventthatcorporateexecutivesarenotentirelysatisfiedwiththeopportunitiestheyseeinthe
2. Sticking Closely with the Existing Business Lineup makes sense when the company’s present
4 Broadening a Diversified Company’s Business Base—Motivating factors to build positions in new
industries:
a. Sluggishgrowththatmakesthepotentialrevenueandprofitboostofanewlyacquiredbusinesslook
5. Retrenching to a Narrower Diversification Base:
a. Retrenching to a narrower diversification base is usually undertaken when top management
concludesthatitsdiversificationstrategyhasrangedtoofarafieldandthatthecompanycanimprove
long term performance by concentrating on a smaller number of core businesses and industries.
b. Market conditions in a once-attractive business have badly deteriorated
6. Restructuring a Diversified Company’s Business Lineup involves divesting some businesses and
acquiring others to put a whole new face on the company’s business lineup.
Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company
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CORE CONCEPT
Companywide restructuring (corporate restructuring) involves making major changes
in a diversified company by divesting some businesses and/or acquiring others so as
to put a whole new face on the company’s business lineup.
7. Performing radical surgery on the group of businesses a company is in becomes an appealing strategy
alternativewhenadiversifiedcompany’sfinancialperformanceisbeingsqueezedorerodedby:
a. Aseriousmismatchbetweenthecompany’sresourcesandcapabilitiesandthetypeofdiversification
8. Over the past decade, corporate restructuring has become a popular strategy at many diversified
9. Illustration Capsule 8.2 discusses how Hewlett-Packard (HP) has been restructuring its operations to
addressinternalproblemsandimproveitsprofitability.
ILLUSTRATION CAPSULE 8.2
Restructuring for Better Performance at Hewlett-Packard (HP)
Discussion Question: Describe the restructuring strategy used by Hewlett-Packard to turn
around company performance.
Answer: The student should note that the company split operations into HP Inc which focuses on
legacy products such as PCs and printers and HP Enterprise which focuses on the technology
ACTIVITY
Use the Question Bank to build a quiz for the chapter to measure and reinforce learning. Consider
using the questions you select to build a comprehensive mid-term and final exam for the course. The
assignment can be graded and posted automatically.
