chapter 8 : Corporate Strategy: Diversification and the Multibusiness Company

Assalamualaikum

In this chapter, we will understand when we understand correctly in this chapter and how diversification can enhance shareholder value.

Beside that, we will also practice how to get a clear understanding of how related diversification strategy can produce cross-business strategic fit can provide competitive advantage.

Through strategic management studies also, we need to recognize the merits and risks to key corporate strategy of unrelated diversification, and should be instructed to target profit of analytical tools to assess the company's diversification strategy.

Last we need to understand four key corporate strategic options a company wide strategy to enhance diversity, and improve performance on of the company.

Unrelated diversification strategies surrender the competitive advantage potential of strategic fit at the value chain level in return for the potential that can be realized from superior corporate parenting. An outstanding corporate parent can benefit its businesses through 

(1) Providing high-level oversight and making available other corporate resources

(2) Allocating financial resources across the business portfolio

(3) Restructuring underperforming acquisitions.

 

Analyzing how good a company's diversification strategy is consists of a six-step process: 

Step 1: Evaluate the long-term attractiveness of the industries into which the firm has diversified. Industry attractiveness needs to be evaluated from three angles: the attractiveness of each industry on its own, the attractiveness of each industry relative to the others, and the attractiveness of all the industries as a group.

Step 2: Evaluate the relative competitive strength of each of the company's business units. The purpose of rating the competitive strength of each business is to gain a clear understanding of which businesses are strong contenders in their industries, which are weak contenders, and the underlying reasons for their strength or weakness. The conclusions about industry attractiveness can be joined with the conclusions about competitive strength by drawing an industry attractiveness–competitive strength matrix that helps identify the prospects of each business and what priority each business should be given in allocating corporate resources and investment capital.

Step 3: Check for cross-business strategic fit. A business is more attractive strategically when it has value chain relationships with the company's other business units that offer potential to 

(1) realize economies of scope or cost-saving efficiencies, 

(2) transfer technology, skills, know-how, or other resource capabilities from one business to another, 

(3) leverage use of a trusted brand name or other resources that enhance differentiation, and 

(4) build new resources and competitive capabilities via cross-business collaboration. Cross-business strategic fit represents a significant avenue for producing competitive advantage beyond what any one business can achieve on its own.

Step 4: Check whether the firm's resource mix fits the resource requirements of its present business lineup. In firms with a related diversification strategy, resource fit exists when the company's businesses add to its overall resource position and when they have matching resource requirements at the value chain level. In companies pursuing unrelated diversification, resource fit exists when the parent company has generalized resources that can add value to its component businesses and when it has corporate resources sufficient to support its entire group of businesses without spreading itself too thin. When there is financial resource fit among the businesses of any type of diversified company, the company can generate internal cash flows sufficient to fund the capital requirements of its businesses, pay its dividends, meet its debt obligations, and otherwise remain financially healthy.

Step 5: Rank the performance prospects of the businesses from best to worst, and determine what the corporate parent's priority should be in allocating resources to its various businesses. The most important considerations in judging business-unit performance are sales growth, profit growth, contribution to company earnings, and the return on capital invested in the business. Normally, strong business units in attractive industries have significantly better performance prospects than weak businesses or businesses in unattractive industries. Business subsidiaries with the brightest profit and growth prospects and solid strategic and resource fit generally should head the list for corporate resource support.

Step 6: Crafting new strategic moves to improve overall corporate performance. This step entails using the results of the preceding analysis as the basis for devising actions to strengthen existing businesses, make new acquisitions, divest weak-performing and unattractive businesses, restructure the company's business lineup, expand the scope of the company's geographic reach into new markets around the world, and otherwise steer corporate resources into the areas of greatest opportunity. 

That all, thank you,
Assalamualaikum.