CHAPTER 8 - SFI

The Drawbacks of Unrelated Diversification

• - Demanding managerial requirements
  

• - Limited Competitive advantage potential
  

• - Monitoring and maintaining the parenting advantage
  

• - Possible lack of cross-business strategic-fit benefits

• All of the above

Purpose of Industry Attractiveness Test:

• Negotiate favorable acquisition prices

• Diversify into industries where the businesses can produce consistently good earnings and returns on investment

• Enhance value through exceptional corporate parenting

• None of the above

A unrelated diversification strategy means

• Adding new products or services that are unrelated or dissimilar to the firm's existing ones.

• Consider business opportunities only where they can leverage their existing competencies and resources

• An increase in the variety of products and services a firm offers or markets and the geographic regions in which it competes.

• the process of reorganizing and divesting business units and activities to refocus a company in order to leverage its core competencies more fully.

Joint ventures are advantageous when

• Dissolution of the venture when one of the venture partners decides to go their own way.

• Cultural clashes among and between the partners.

• Diversification opportunities are too large, complex, uneconomical, or risky for one firm to pursue alone.

• • Conflicting objectives and expectations of venture partners.

Step 1 in Evaluating the Strategy of a Diversified Company is:

• Evaluate the extent of cross-business strategic fit along the value chains of the firm's various business units.

• Check whether the firm's resources fit the requirements of its present business lineup.

• Craft strategic moves to improve corporate performance.

• Assess the attractiveness of the industries the firm has diversified into, both individually and as a group.

Parenting Advantage:

• When it is more able than other firms to boost the combined performance of its individual businesses through high-level guidance, general oversight, and other corporate-level contributions

• Competently overseeing a set of widely diverse businesses can turn out to be much harder than it sounds

• Unrelated diversification is thus a somewhat risky strategy from a managerial perspective

• Unless a company truly has a parenting advantage, the odds are that the result of unrelated diversification will be 1 + 1 = 2 or even less.

Gauging industry attractiveness involves calculating quantitative industry-attractiveness scores based on one of these measures:

• Ability to benefit from strategic fit with other business units

• A widely known and respected Brand image and reputation

• The intensity of competition

• Relative market share

Interpreting the Competitive-Strength Scores:

Business units ratings above 6.7

• have a competitively weak standing in the marketplace.

• are strong market contenders in their industries.

• have moderate competitive strength vis-à-vis rivals.

• None of the above

Using a Nine-Cell Matrix to Simultaneously Portray Industry Attractiveness and Competitive Strength:

Businesses in the three diagonal cells stretching from the lower left to the upper right

• have the lowest claim on corporate resources and may be good candidates for being divested

• have comparatively low industry attractiveness and minimal competitive strength

• generate sizable positive cash flows

• usually merit intermediate priority in the parent’s resource allocation ranking

Step 5 in Evaluating the strategy of diversified company is

• Assessing the competitive strength of the company’s business units and drawing a nine-cell matrix to simultaneously portray industry attractiveness and business unit competitive strength

• 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 determining what the corporate parent’s priorities should be in allocating resources to its various businesses.

• Crafting new strategic moves to improve overall corporate performance.