Chapter 8 - Corporate strategy: Diversification and the multibusiness company. Learning objectives of this chapter: 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 merits and risks of corporate strategies keyed to unrelated diversification,. | CHAPTER 8 CORPORATE STRATEGY: DIVERSIFICATION AND THE MULTIBUSINESS COMPANY STUDENT VERSION STRATEGIC DIVERSIFICATION OPTIONS Sticking closely with the existing business lineup and pursuing opportunities presented by these businesses. Broadening the current scope of diversification by entering additional industries. Divesting some businesses and retrenching to a narrower collection of diversified businesses with better overall performance prospects. Restructuring the entire firm by divesting some businesses and acquiring others to put a whole new face on the firm’s business lineup. BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING The industry attractiveness test The cost-of-entry test The better-off test Testing Whether Diversification Will Add Long-Term Value for Shareholders 8–3 BETTER PERFORMANCE THROUGH SYNERGY Evaluating the Potential for Synergy through Diversification Firm A purchases Firm B in another industry. A and B’s profits are no greater than what each firm could have earned on its own. Firm A purchases Firm C in another industry. A and C’s profits are greater than what each firm could have earned on its own. No Synergy (1+1=2) Synergy (1+1=3) 8–4 APPROACHES TO DIVERSIFYING THE BUSINESS LINEUP Acquisition of an existing business Internal new venture (start-up) Joint venture Diversifying into New Businesses 8–5 WHEN TO ENGAGE IN INTERNAL DEVELOPMENT Availability of in-house skills and resources Ample time to develop and launch business Cost of acquisition is higher than internal entry Added capacity will not affect supply and demand balance Low resistance of incumbent firms to market entry No head-to-head competition in targeted industry Factors Favoring Internal Development 8–6 WHEN TO ENGAGE IN A JOINT VENTURE Evaluating the Potential for a Joint Venture Is the opportunity too complex, uneconomical, or risky for one firm to pursue alone? Does the opportunity require a broader range of competencies and know-how . | CHAPTER 8 CORPORATE STRATEGY: DIVERSIFICATION AND THE MULTIBUSINESS COMPANY STUDENT VERSION STRATEGIC DIVERSIFICATION OPTIONS Sticking closely with the existing business lineup and pursuing opportunities presented by these businesses. Broadening the current scope of diversification by entering additional industries. Divesting some businesses and retrenching to a narrower collection of diversified businesses with better overall performance prospects. Restructuring the entire firm by divesting some businesses and acquiring others to put a whole new face on the firm’s business lineup. BUILDING SHAREHOLDER VALUE: THE ULTIMATE JUSTIFICATION FOR DIVERSIFYING The industry attractiveness test The cost-of-entry test The better-off test Testing Whether Diversification Will Add Long-Term Value for Shareholders 8–3 BETTER PERFORMANCE THROUGH SYNERGY Evaluating the Potential for Synergy through Diversification Firm A purchases Firm B in another industry. A and B’s profits are no greater than
