Corporate Strategy: Mod Iii Topic 4

Corporate Strategy
Mod III
Topic 4
LEARNING OBJECTIVES
• Understand when and how business diversification can enhance

shareholder value.
• Gain an understanding of how related diversification strategies
can produce cross-business strategic fit capable of delivering
competitive advantage.
• Become aware of the risks and merits of corporate strategies
keyed to unrelated diversification.
• Gain command of the analytical tools for evaluating a company’s
diversification strategy.
• Understand a diversified company’s main corporate strategy
options for solidifying its diversification strategy and improving
company performance.
WHAT DOES CRAFTING A DIVERSIFICATION STRATEGY
ENTAIL?
The task of crafting a diversified company’s overall corporate
strategy falls squarely in the lap of top-level executives and involves
four distinct facets:
1. Picking new industries to enter and deciding on the means of
entry.
2. Pursuing opportunities to leverage cross-business value chain
relationships and strategic fit into competitive advantage.
3. Establishing investment priorities and steering corporate
resources into the most attractive business units.
4. Initiating actions to boost the combined performance of the
corporation’s collection of businesses
WHEN BUSINESS DIVERSIFICATION BECOMES A
CONSIDERATION
1. Whenever a single business company encounters diminishing
market opportunities and stagnating sales in its principal
business.
2. When it spots opportunities for expanding into industries
whose technologies and products complement its present
business.
3. When it can leverage its collection of resources and capabilities
by expanding into businesses where these resources and
capabilities are valuable competitive assets.
4. When diversifying into additional businesses opens new
avenues for reducing costs.
5. When it has a powerful and well-known brand name that can
be transferred to the products of other businesses.
BUILDING SHAREHOLDER VALUE: THE ULTIMATE
JUSTIFICATION FOR DIVERSIFYING
1. Diversification must do more for a company than simply spread
its business risk across various industries.
2. In principle, diversification cannot be considered successful
unless it results in added long-term economic value for
shareholders.
The industry
The cost-of-entry test The better-off test
attractiveness test
APPROACHES TO DIVERSIFYING THE BUSINESS LINEUP
Diversification
through internal Diversification
Diversification
development through joint
by acquisition
(Corporate ventures
Venturing)
APPROACHES TO DIVERSIFYING THE BUSINESS LINEUP
Choosing a mode of entry: Depends on the answers to four important

questions:
1. 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?
2. Are there entry barriers to overcome?
3. Is speed an important factor in the firm’s chances for successful
entry?
4. Which is the least costly mode of entry, given the company’s
objectives?
CHOOSING THE DIVERSIFICATION PATH: RELATED V/S
UNRELATED BUSINESSES
Once a company decides to diversify, it faces the choice of whether to
diversify into related business, unrelated business, or some mix of
both.
Businesses are said to be related when their value chain exhibit

competitively important cross-business relationships.
Businesses are said to be unrelated when resource requirements and

key value chain activities are so dissimilar that no competitively
important cross-business relationships exist.
Diversifying into Related Businesses
Related Diversification Strategy: It involves building the company around

businesses with strategic fit with respect to key value chain activities and
competitive assets.
Strategic fit exists whenever one or more activities constituting the value chain
of different businesses are sufficiently similar as to present opportunities for
cross-business sharing or transferring of the resources and capabilities that
enable these activities. For instance,
– Transferring specialized expertise, technological know-how, or other valuable resources and

capabilities from one business’s value chain to another’s.
– Cost sharing between businesses by combining their related value chain activities into single
operation.
– Exploiting common use of a well known brand name.
– Sharing other resources that support corresponding value chain activities across businesses.
– Engaging in cross-business collaboration with knowledge sharing to create new
competitively valuable resources and capabilities.
L’Oreal, the world’s largest beauty products company.

Revenue: 29.87 bn euros.
Identifying cross-business strategic fit along the value chain:
1. Strategic fit in supply chain activities

2. Strategic fit in R&D and technology activities
3. Manufacturing related strategic fit
4. Strategic fit in sales and marketing activities
5. Distribution related strategic fit
6. Strategic fit in customer service activities
7. Strategic fit, economies of scope and competitive advantage.
Important points to bear in mind pertaining to Related

diversification
Diversifying into Unrelated Businesses
• Companies that pursue a strategy of unrelated diversification
generally exhibit a willingness to diversify into any industry where
senior managers see an opportunity to realize consistently good
financial results. Such businesses are frequently labeled
Conglomerates.
TATA, RIL, Aditya Birla, Adani, M&M, L&T, Godrej, Bajaj etc…
• Acquisition is the most preferred route for companies into unrelated

diversification.
• With an unrelated diversification, an acquisition is deemed to have

potential if it passes the industry attractiveness and cost-of-entry
tests and if it has good prospects for attractive financial performance.
Building Shareholder Value via Unrelated
Diversification
• Building shareholder value via unrelated diversification
ultimately hinges on the ability of the parent company to
improve its businesses via Corporate Parenting.
• Corporate parenting refers to the role that a diversified

corporation plays in nurturing its component businesses through
the provision of top management expertise, disciplined control,
financial resources, and other types of generalized resources and
capabilities such as long term planning systems, business
development skills, management development processes, and
incentive systems.
Building Shareholder Value via Unrelated
Diversification
Benefits of Astute Corporate Parenting:
• It offers high level oversight and guidance by top executive of a

large diversified corporation with varied experience.
• It creates added value for their businesses by providing them
with other types of generalized or parenting resources that
lower the operating costs or enhances the operating
effectiveness of individual businesses.
• Judicious cross-business allocation of financial resources
• Acquiring and restructuring undervalued companies
The Path to Greater Shareholder Value Through
Unrelated Diversification
Corporate executives must do three things to add greater
shareholder value through unrelated diversification:
1. Diversify into businesses that can produce consistently good

earnings and return on investment (to satisfy attractive test)
2. Negotiate favourable acquisition price (to satisfy the cost-of-
entry test)
3. Do a superior job of corporate parenting via high level
managerial oversight and resource sharing , financial resource
allocation and portfolio management, or restructuring
underperforming businesses (to satisfy better-off test).
It is all about gaining Parenting Advantage.

The Drawback and Misguided Reasons for Pursuing
Unrelated Diversification
Drawbacks of unrelated diversification
1. Demanding managerial requirements

2. Limited competitive advantage potential
Misguided reasons for pursuing unrelated diversification

3. Risk reduction
4. Growth
5. Stabilization
6. Managerial motives
COMBINATION RELATED-UNRELATED DIVERSIFICATION
STRATEGIES
There is nothing to preclude a company from diversifying into both related and
unrelated business.
Some diversified companies are really dominant-business enterprises – one

major “core” business accounts for 50 to 80 percent of total revenues and a
collection of small related or unrelated businesses accounts for the remainder.
Some diversified companies are narrowly diversified around a few (two to five)
related or unrelated businesses.
Others are broadly diversified around a wide-ranging collection of related

businesses, unrelated businesses, or a mixture of both.
A number of multibusiness enterprises have a business portfolio of several

unrelated groups of related businesses.
The Range of Alternatives for Companies Pursuing
Diversification
Diversification Strategy
Options
Diversify Diversify into

Diversify into
both related
into related unrelated
and unrelated
businesses businesses businesses
EVALUATING THE STRATEGY OF A DIVERSIFIED
COMPANY
Assessing the attractiveness of the industries the company has diversified into, both
STEP 1
●
individually and as a group
STEP 2 ●
Assessing the competitive strength of the company’s business units
Evaluating the extent of cross-business strategic fit along the value chains of the
STEP 3
●
company’s various business units
STEP 4 Checking whether the firm’s resources fit the requirements of its present business lineup
●
Ranking the performance prospects of the businesses from best to worst and
STEP 5
●
determining a priority for allocating resources
STEP 6 ●
Crafting new strategic moves to improve overall corporate performance
Step 1: Evaluating Industry Attractiveness
Image source:
https://www.chegg.com/homework-help/questions-and-answers/table-81-calculating-weighted-industry-attractiveness-scores-rating-scale-1-unattractive-c-q242803
Step 2: Evaluating Business Unit Competitive Strength
Image source:
https://www.chegg.com/homework-help/questions-and-answers/table-81-calculating-weighted-industry-attractiveness-scores-rating-scale-1-unattractive-c-q242803
Image source:
https://www.chegg.com
/homework-help/questi
ons-and-answers/table-
81-calculating-weighted-
industry-attractiveness-s
cores-rating-scale-1-una
ttractive-c-q24280334
Step 3: Determining the Competitive Value of Strategic
Fit in Diversified Companies
Step 4: Checking for Resource Fit
A diversified company exhibits Resource Fit when its businesses add

to a company’s overall resource strengths and have matching
resource requirements and/ or when the parent company has
adequate corporate resources to support its businesses’ needs and
add value.
1. Financial Resource Fit:

–Internal Capital Market
–Portfolio Approach
2. Nonfinancial Resource Fit

Step 5: Ranking Business Units and Assigning a Priority
for Resource Allocation
• The locations of the different businesses in the nine-cell industry
attractiveness/ competitive strength matrix provide a solid base for
identifying high-opportunity businesses and low-opportunity businesses.
• Allocating financial resources:
Strategic Options for allocating Financial options for allocating

company’s financial resources company’s financial resources
Pay off existing long term or

Invest in ways to strengthen
short term debt
or grow existing businesses
Increase dividend payments to
Make acquisitions to establish shareholders
positions in new industries or to
complement existing businesses Repurchase shares of the
company’s common stock
Fund long range R&D ventures aimed
at opening market opportunities in Build cash reserves; invest in
new or existing businesses short-term securities
Step 6: Crafting New Strategic Moves to Improve
Overall Corporate Performance
1. Sticking closely with the existing business lineup and pursuing the
opportunities these businesses present
2. Broadening the company’s business scope by making new
acquisitions in new industries
3. Divesting some businesses and retrenching to a narrower base of
business operations
4. Restructuring the company’s business lineup and putting a whole
new face on the company’s business makeup
Thank You

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Corporate Strategy

• Understand when and how business diversification can enhance

Choosing a mode of entry: Depends on the answers to four important

1. Does the company have all the resources and capabilities it

Businesses are said to be related when their value chain exhibit

Businesses are said to be unrelated when resource requirements and

Related Diversification Strategy: It involves building the company around

– Transferring specialized expertise, technological know-how, or other valuable resources and

L’Oreal, the world’s largest beauty products company.

1. Strategic fit in supply chain activities

Important points to bear in mind pertaining to Related

• Acquisition is the most preferred route for companies into unrelated

• With an unrelated diversification, an acquisition is deemed to have

• Corporate parenting refers to the role that a diversified

• It offers high level oversight and guidance by top executive of a

1. Diversify into businesses that can produce consistently good

It is all about gaining Parenting Advantage.

1. Demanding managerial requirements

Misguided reasons for pursuing unrelated diversification

Some diversified companies are really dominant-business enterprises – one

Others are broadly diversified around a wide-ranging collection of related

A number of multibusiness enterprises have a business portfolio of several

Diversify Diversify into

individually and as a group

company’s various business units

determining a priority for allocating resources

A diversified company exhibits Resource Fit when its businesses add

1. Financial Resource Fit:

2. Nonfinancial Resource Fit

Strategic Options for allocating Financial options for allocating

Pay off existing long term or

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