Answer & Explanation:Please see the “assignment requirement” and ” document requirement” to know what to write in this case assignment. The case material is in “Walt Disney Case” file . And i also uploaded “Chapter 8” in the textbook, it provide detailed discussion of the topic/tool (Portfolio analysis) that you would need to know in order to complete this assignment.Read all of these files i uploaded before you start this case assignment. Please meet all requirement in the 2 requirement files. (Especially Footnotes-you must link your analysis to the materials/concepts in the textbook chapter i provided)
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chapter_8.pdf
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Corporate Strategy:
Diversification and the
Multibusiness
Company
chapter
8
LEARNING OBJECTIVES
LO1
Understand when and how diversifying into multiple businesses can
enhance shareholder value.
LO2
Gain an understanding of how related diversification strategies can
produce cross-business strategic fit capable of delivering competitive
advantage.
LO3
Become aware of the merits and risks of corporate strategies keyed to
unrelated diversification.
LO4
Gain command of the analytical tools for evaluating a company’s
diversification strategy.
LO5
Understand a diversified company’s four main corporate strategy
options for solidifying its diversification strategy and improving
company performance.
153
154 Part 1 Section C: Crafting a Strategy
This chapter moves up one level in the strategy-making hierarchy, from strategy making in a single-business enterprise to strategy making in a diversified enterprise.
Because a diversified company is a collection of individual businesses, the strategymaking task is more complicated. In a one-business company, managers have to come
up with a plan for competing successfully in only a single industry environment—the
result is what Chapter 2 labeled as business strategy (or business-level strategy). But
in a diversified company, the strategy-making challenge involves assessing multiple
industry environments and developing a set of business strategies, one for each industry arena in which the diversified company operates. And top executives at a diversified company must still go one step further and devise a companywide or corporate
strategy for improving the attractiveness and performance of the company’s overall
business lineup and for making a rational whole out of its diversified collection of
individual businesses.
In most diversified companies, corporate-level executives delegate considerable
strategy-making authority to the heads of each business, usually giving them the latitude to craft a business strategy suited to their particular industry and competitive
circumstances and holding them accountable for producing good results. But 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. The decision
to pursue business diversification requires that management decide what new
industries offer the best growth prospects and whether to enter by starting a new
business from the ground up, acquiring a company already in the target industry,
or forming a joint venture or strategic alliance with another company.
2. Pursuing opportunities to leverage cross-business value chain relationships into
competitive advantage. Companies that diversify into businesses with strategic fit
across the value chains of their business units have a much better chance of gaining a 1 + 1 = 3 effect than do multibusiness companies lacking strategic fit.
3. Establishing investment priorities and steering corporate resources into the most
attractive business units. A diversified company’s business units are usually
not equally attractive, and it is incumbent on corporate management to channel
resources into areas where earnings potentials are higher.
4. Initiating actions to boost the combined performance of the corporation’s collection of businesses. Corporate strategists must craft moves to improve the overall
performance of the corporation’s business lineup and sustain increases in shareholder value. Strategic options for diversified corporations include (a) sticking
closely with the existing business lineup and pursuing opportunities presented
by these businesses, (b) broadening the scope of diversification by entering additional industries, (c) retrenching to a narrower scope of diversification by divesting poorly performing businesses, and (d) broadly restructuring the business
lineup with multiple divestitures and/or acquisitions.
The first portion of this chapter describes the various means a company can use
to diversify and explores the pros and cons of related versus unrelated diversification
strategies. The second part of the chapter looks at how to evaluate the attractiveness of
a diversified company’s business lineup, decide whether it has a good diversification
strategy, and identify ways to improve its future performance.
Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company 155
When Business Diversification Becomes
a Consideration
As long as a single-business company can achieve profitable growth opportunities in
its present industry, there is no urgency to pursue diversification. However, a company’s opportunities for growth can become limited if the industry becomes competitively unattractive. Consider, for example, what the growing use of debit cards and
online bill payment have done to the check printing business and what mobile phone
companies and marketers of Voice over Internet Protocol (VoIP) have done to the
revenues of long-distance providers such as AT&T, British Telecommunications, and
NTT in Japan. Thus, diversifying into new industries always merits strong consideration whenever a single-business company encounters diminishing market opportunities and stagnating sales in its principal business.1
LO1
Understand when
and how diversifying into
multiple businesses can
enhance shareholder
value.
Building Shareholder Value: The Ultimate
Justification for Business Diversification
Diversification must do more for a company than simply spread its business risk across
various industries. In principle, diversification cannot be considered a success unless it
results in added shareholder value—value that shareholders cannot capture on their own
by spreading their investments across the stocks of companies in different industries.
Business diversification stands little chance of building shareholder value without
passing the following three tests:2
1. The industry attractiveness test. The industry to be entered through diversification must offer an opportunity for profits and return on investment that is equal to
or better than that of the company’s present business(es).
2. The cost-of-entry test. The cost to enter the target industry must not be so high as
to erode the potential for good profitability. A catch-22 can prevail here, however.
The more attractive an industry’s prospects are for growth and good long-term
profitability, the more expensive it can be to enter. It’s easy for acquisitions of
companies in highly attractive industries to fail the cost-of-entry test.
3. The better-off test. Diversifying into a new business must offer potential for the company’s existing businesses and the new business to perform better together under
a single corporate umbrella than they would perform operating as independent,
stand-alone businesses. For example, let’s say company A diversifies by purchasing
company B in another industry. If A and B’s consolidated profits in the years to come
prove no greater than what each could have earned on its own, then A’s diversification
won’t provide its shareholders with added value.
Company A’s shareholders could have achieved the
Creating added value for shareholders via diversification requires building a multibusiness comsame 1 + 1 = 2 result by merely purchasing stock
pany in which the whole is greater than the sum
in company B. Shareholder value is not created by
of its parts.
diversification unless it produces a 1 + 1 = 3 effect.
Diversification moves that satisfy all three tests have the greatest potential to grow
shareholder value over the long term. Diversification moves that can pass only one or
two tests are suspect.
156 Part 1 Section C: Crafting a Strategy
Approaches to Diversifying
the Business Lineup
The means of entering new industries and lines of business can take any of three forms:
acquisition, internal development, or joint ventures with other companies.
Diversification by Acquisition of an Existing Business
Acquisition is a popular means of diversifying into another industry. Not only is it
quicker than trying to launch a new operation, but it also offers an effective way to
hurdle such entry barriers as acquiring technological know-how, establishing supplier
relationships, achieving scale economies, building brand awareness, and securing adequate distribution. Buying an ongoing operation allows the acquirer to move directly
to the task of building a strong market position in the target industry, rather than getting bogged down in the fine points of launching a startup.
The big dilemma an acquisition-minded firm faces is whether to pay a premium
price for a successful company or to buy a struggling company at a bargain price.3 If
the buying firm has little knowledge of the industry but has ample capital, it is often
better off purchasing a capable, strongly positioned firm—unless the price of such an
acquisition is prohibitive and flunks the cost-of-entry test. However, when the acquirer
sees promising ways to transform a weak firm into a strong one, a struggling company
can be the better long-term investment.
Entering a New Line of Business Through
Internal Development
Achieving diversification through internal development involves starting a new business
subsidiary from scratch. Generally, forming a startup subsidiary to enter a new business
has appeal only when (1) the parent company already has in-house most or all of the skills
and resources needed to compete effectively; (2) there is ample time to launch the business; (3) internal entry has lower costs than entry via acquisition; (4) the targeted industry
is populated with many relatively small firms such that the new startup does not have
to compete against large, powerful rivals; (5) adding new production capacity will not
adversely impact the supply–demand balance in the industry; and (6) incumbent firms are
likely to be slow or ineffective in responding to a new entrant’s efforts to crack the market.
Using Joint Ventures to Achieve Diversification
A joint venture to enter a new business can be useful in at least two types of situations.4 First, a joint venture is a good vehicle for pursuing an opportunity that is too
complex, uneconomical, or risky for one company to pursue alone. Second, joint ventures make sense when the opportunities in a new industry require a broader range of
competencies and know-how than an expansion-minded company can marshal. Many
of the opportunities in biotechnology call for the coordinated development of complementary innovations and tackling an intricate web of technical, political, and regulatory factors simultaneously. In such cases, pooling the resources and competencies of
two or more companies is a wiser and less risky way to proceed.
However, as discussed in Chapters 6 and 7, partnering with another company—in
the form of either a joint venture or a collaborative alliance—has significant drawbacks
due to the potential for conflicting objectives, disagreements over how to best operate
Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company 157
the venture, culture clashes, and so on. Joint ventures are generally the least durable of
the entry options, usually lasting only until the partners decide to go their own ways.
Choosing the Diversification Path:
Related Versus Unrelated Businesses
LO2 Gain an
understanding of how
related diversification
strategies can produce
cross-business strategic
fit capable of delivering
competitive advantage.
Once a company decides to diversify, its first big corporate strategy decision is whether
to diversify into related businesses, unrelated businesses, or some mix of both (see
Figure 8.1). Businesses are said to be related when their value chains possess competitively valuable cross-business relationships. These value chain matchups present
opportunities for the businesses to perform better
under the same corporate umbrella than they could by
CORE CONCEPT
operating as stand-alone entities. Businesses are said
Related businesses possess competitively valuto be unrelated when the activities comprising their
able cross-business value chain and resource
matchups; unrelated businesses have dissimilar
respective value chains and resource requirements
value chains and resources requirements, with
are so dissimilar that no competitively valuable crossno competitively important cross-business value
business relationships are present.
chain relationships.
The next two sections explore the ins and outs of
related and unrelated diversification.
FIGURE 8.1
Strategic Themes of Multibusiness Corporation
Diversify into Related
Businesses
Diversification
Strategy
Options
• Enhance shareholder value by
capturing cross-business
strategic fits.
–Transfer skills and capabilities
from one business to another.
–Share facilities or resources to
reduce costs.
–Leverage use of a common brand
name.
–Combine resources to create new
strengths and capabilities.
Diversify into Unrelated
Businesses
• Spread risks across completely
different businesses.
• Build shareholder value by doing a
superior job of choosing businesses
to diversify into and of managing
the whole collection of businesses
in the company’s portfolio.
Diversify into Both Related
and Unrelated Businesses
158 Part 1 Section C: Crafting a Strategy
Diversifying into Related Businesses
CORE CONCEPT
Strategic fit exists when value chains of different
businesses present opportunities for cross-business skills transfer, cost sharing, or brand sharing.
A related diversification strategy involves building the
company around businesses whose value chains possess
competitively valuable strategic fit, as shown in F
igure 8.2.
Strategic fit exists whenever one or more activities comprising the value chains of different businesses are sufficiently similar to present opportunities for:5
∙
Transferring competitively valuable resources, expertise, technological knowhow, or other capabilities from one business to another. Google’s technological
know-how and innovation capabilities refined in its Internet search business have
aided considerably in the development of its Android mobile operating system
and Chrome operating system for computers. After acquiring Marvel Comics in
2009, Walt Disney Company shared Marvel’s iconic characters such as SpiderMan, Iron Man, and the Black Widow with many of the other Disney businesses,
including its theme parks, retail stores, motion picture division, and video game
business.
∙
Cost sharing between separate businesses where value chain activities can be
combined. For instance, it is often feasible to manufacture the products of different businesses in a single plant or have a single sales force for the products of
different businesses if they are marketed to the same types of customers.
FIGURE 8.2 Related Diversification Is Built upon Competitively Valuable Strategic Fit in Value Chain Activities
Representative Value Chain Activities
Support Activities
Business
A
Supply
Chain
Activities
Technology
Operations
Sales
and
Marketing
Distribution
Customer
Service
Competitively valuable opportunities for technology or skills transfer, cost
reduction, common brand name usage, and cross-business collaboration exist
at one or more points along the value chains of Business A and Business B.
Business
B
Supply
Chain
Activities
Technology
Operations
Sales
and
Marketing
Support Activities
Distribution
Customer
Service
Chapter 8 Corporate Strategy: Diversification and the Multibusiness Company 159
∙
Brand sharing between business units that have common customers or that draw
upon common core competencies. For example, Apple’s reputation for producing
easy-to-operate computers and stylish designs were competitive assets that facilitated the company’s diversification into digital music players, smartphones, tablet
computers, and wearable technology.
Cross-business strategic fit can exist anywhere along the value chain: in R&D and
technology activities, in supply chain activities, in manufacturing, in sales and marketing, or in distribution activities. Likewise, different businesses can often use the
same administrative and customer service infrastructure. For instance, a cable operator
that diversifies as a broadband provider can use the same customer data network, the
same customer call centers and local offices, the same billing and customer accounting systems, and the same customer service infrastructure to support all its products
and services.6
Strategic Fit and Economies of Scope
Strategic fit in the value chain activities of a diversified corporation’s different businesses opens up opportunities for economies of scope—a concept distinct from economies of scale. Economies of scale are cost savings that accrue directly from a larger
operation; for example, unit costs may be lower in a
large plant than in a small plant. Economies of scope,
CORE CONCEPT
however, stem directly from cost-saving strategic fit
Economies of scope are cost reductions stemalong the value chains of related businesses. Such
ming from strategic fit along the value chains of
economies are open only to a multibusiness enterprise
related businesses (thereby, a larger scope of
and are the result of a related diversification strategy
operations), whereas economies of scale accrue
that allows sibling businesses to share technology,
from a larger operation.
perform R&D together, use common manufacturing
or distribution facilities, share a common sales force or distributor/dealer network,
and/or share the same administrative infrastructure. The greater the cross-business
economies associated with cost-saving strategic fit, the greater the potential for a
related diversification strategy to yield a competitive advantage based on lower costs
than rivals.
The Ability of Related Diversification to
Deliver Competitive Advantage and Gains
in Shareholder Value
Economies of scope and the other strategic-fit benefits provide a dependable basis for
earning higher profits and returns than what a diversified company’s businesses could
earn as stand-alone enterprises. Converting the competitive advantage potential into
greater profitability is what fuels 1 + 1 = 3 gains in shareholder value—the necessary
outcome for satisfying the better-off test. There are three things to bear in mind here:
(1) Capturing cross-business strategic fit via related diversification builds shareholder
value in ways that shareholders cannot replicate by simply owning a diversified portfolio of stocks; (2) the capture of cross-business strategic-fit benefits is possible only
through related diversification; and (3) the benefits of cross-business strategic fit are
not automatically realized—the benefits materialize only after management has successfully pursued internal actions to capture them.7
160 Part 1 Section C: Crafting a Strategy
Diversifying into Unrelated Businesses
LO3 Become aware
of the merits and risks
of corporate strategies
keyed to unrelated
diversification.
An unrelated diversification strategy discounts the importance of pursuing cross-
business strategic fit and, instead, focuses squarely on entering and operating businesses in industries that allow the company as a whole to increase its earnings.
Companies that pursue a strategy of unrelated diversification generally exhibit a willingness to diversify into any industry where senior managers see opportunity to realize improved financial results. Such companies are frequently labeled conglomerates
because their business interests range broadly across diverse industries.
Companies that pursue unrelated diversification nearly always enter new businesses by acquiring an established company rather than by internal development. The
premise of acquisition-minded co …
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