To discuss examples of diversification, both effective and ineffective.

Assignment: Write a two paragraph or longer response to the following question – Can you describe a situation where a company made a decision to diversify? What type of diversification was it? Did it pass the three tests of building shareholder value? Your short essay answer can focus on either an example of related or unrelated diversification described in Chapter 8 of the text (pages 157-162). Your task will be to find a company that has diversified and discuss whether the move was related or unrelated diversification. Also, did the diversification move pass the three tests of building shareholder value (page 155)? Also, how did the diversification turn out? Was it a net positive for the company, a negative, or is the jury still out on the outcome?Then, read and post a reply to two of your classmates regarding the analysis of their company. Specific questions to address include: Do you concur with your classmates’ analysis of the company? Is there another category of diversification that might be a better fit for the company? Why? Do you think that the diversification of the company adds to shareholder value? Why or why not? Rule: Only one post per company.Your post must be a unique company not discussed by any other post on this discussion board. Please discuss only one company in your post in order to give everyone a chance to focus on a single company in their example. Rule: Post one (1) original thread and two (2) replies to other threads for a total of three (3) posts on the discussion board. Your original thread must be unique to you and must focus on a unique company that is not discussed by anyone else in the class. Thread Example: In 2007, Nike acquired Umbro, a sportswear and soccer equipment company based in Manchester, England. Because the acquisition of Umbro was a sportswear company, this was a related diversification move for Nike. At the time of the acquisition, the European Sportswear Industry appeared attractive, particularly for Nike, which sought a toehold in Europe. The cost of entry, though, was high. The acquisition price was far in excess of Umbro’s stock price at the time of acquisition. Nike management argued that both firms would be better off post-acquisition.In 2012, Nike announced that they would be selling Umbro to focus on their core businesses. Reports suggested that Nike has been unable to successfully integrate Umbro, the unit continued to operate at a loss, and the European market had become unfavorable for many competitors, not just Nike. Nike reportedly took a loss on the sale of the Umbro subsidiary.
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When speaking of diversification, there is no better example than Apple. Not long ago, Apple was on the
brink of fizzling out. From about 1993-1997, Apple found itself struggling to find a consistently profitable source of
revenue, trying and failing to market everything from digital cameras to portable CD players to TV
appliances. Instead of continuing to aimlessly follow marginal product ideas that all eventually
fizzled out, Apple began to focus on creating innovative and attractive consumer electronics.
First there was the Mac line of computers, then Apple added the iPod, then the iPhone, and little
over a year ago, the iPad. Over the past 10 years, Apple has gone from being a computer
company to being a true consumer brand. Apple has a much more diverse product line now than
it had a decade ago. All these new products have only served to make the company stronger and
much more profitable, not to mention more valuable.
Apple’s diversification strategy is complicated to define; it’s not one that can
simply be described as related or unrelated. Some might say that Apple’s strategy is
best described as unrelated diversification since they have diversified from software and
computer technology to digital music marketing, music players and onwards to mobile
phones. On the other hand, Apple’s strategy can also be described as related
diversification since they have expanded and built upon their line of software and
computer products all the way from the original iMac to the current MacBook and iPad.
Overall, the company’s ability to diversify has been a major factor for their
success over the years. Apple’s diversification strategy also passed the three tests of
shareholder value since both the music player and mobile phone industry proved to be
attractive in the sense that they offered an opportunity for a greater return than Apple’s
previous line of business. Additionally, Apple also passed the cost of entry test since
their diverse portfolio over the years has proved to be quite profitable for the company.
Furthermore, over the last decade or so, Apple has also proved that it can maintain its
successful status in various industries all while operating under a single corporate
umbrella, thereby also passing the better off test.
References
Gamble, J., Peteraf, M., & Thompson, A. (2017). Essentials of Strategic Management, 5th Edition. NY, NY:
McGraw-Hill.
Webb, A. (2017, May 11). Apple Products Are Too Many for a Table But Still Add
Growth. Retrieved from https://www.bloomberg.com/news/articles/2017-05-11/appleproduct-lineup-too-big-for-a-table-but-adds-growth-anyway
Page 157
Choosing the Diversification Path: Related Versus
Unrelated Businesses
LO2 Gain an understanding of how related diversification strategies can produce crossbusiness 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 operating as stand-alone entities. Businesses are
said to be unrelated when the activities comprising their respective value chains and resource
requirements are so dissimilar that no competitively valuable cross-business relationships are present.
FIGURE 8.1 Strategic Themes of Multibusiness Corporation
CORE CONCEPT
Related businesses possess competitively valuable cross-business value chain and resource
matchups; unrelated businesses have dissimilar value chains and resources requirements, with no
competitively important cross-business value chain relationships.
The next two sections explore the ins and outs of related and unrelated diversification.
Page 158
Diversifying into Related Businesses
A related diversification strategy involves building the company around businesses whose value chains
possess competitively valuable strategic fit, as shown in Figure 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
FIGURE 8.2 Related Diversification Is Built upon Competitively Valuable Strategic Fit in Value Chain Activities
CORE CONCEPT
Strategic fit exists when value chains of different businesses present opportunities for cross-business
skills transfer, cost sharing, or brand sharing.
•
Transferring competitively valuable resources, expertise, technological know-how, 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.
Page 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, however, stem directly from cost-saving
strategic fit along the value chains of related businesses. Such economies are open only to a
multibusiness enterprise and are the result of a related diversification strategy that allows sibling
businesses to share technology, 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.
CORE CONCEPT
Economies of scope are cost reductions stemming from strategic fit along the value chains of related
businesses (thereby, a larger scope of operations), whereas economies of scale accrue from a larger
operation.
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
Page 160
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 industrywhere 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
corporations is that growth by acquisition can deliver enhanced shareholder value through upwardtrending corporate revenues and earnings and a stock price that on averagerises enough year after year
to amply reward and please shareholders. Three types of acquisition candidates are usually of particular
interest: (1) businesses that have bright growth prospects but are short on investment capital, (2)
undervalued companies that can be acquired at a bargain price, and (3) struggling companies whose
operations can be turned around with the aid of the parent company’s financial resources and managerial
know-how.
Building Shareholder Value Through Unrelated Diversification
Given the absence of cross-business strategic fit with which to capture added competitive advantage, the
task of building shareholder value via unrelated diversification ultimately hinges on the ability of the parent
company to improve its businesses via other means. To succeed with a corporate strategy keyed to
unrelated diversification, corporate executives must:
•
Do a superior job of identifying and acquiring new businesses that can produce consistently good
earnings and returns on investment.
•
Do an excellent job of negotiating favorable acquisition prices.
•
Do such a good job overseeing and parenting the firm’s businesses that they perform at a higher
level than they would otherwise be able to do through their own efforts alone. The parenting
activities of corporate executives can take the form of providing expert problem-solving skills,
creative strategy suggestions, and first-rate advice and guidance on how to improve competitiveness
and financial performance to the heads of the various business subsidiaries. 8 The outstanding
leadership of Royal Little, the founder of Textron, was a major reason that the company became an
exemplar of the unrelated diversification strategy while he was CEO. Little’s bold moves transformed
the company from its origins as a small textile manufacturer into a global powerhouse known for its
Bell helicopters, Cessna aircraft, and host of other strong brands in an array of industries.
The Pitfalls of Unrelated Diversification
Unrelated diversification strategies have two important negatives that undercut the pluses: very
demanding managerial requirements and limited competitive advantage potential.
Page 161
Demanding Managerial Requirements Successfully managing a set of fundamentally different
businesses operating in fundamentally different industry and competitive environments is an exceptionally
difficult proposition for corporate-level managers. The greater the number of businesses a company is in
and the more diverse they are, the more difficult it is for corporate managers to:
1. Stay abreast of what’s happening in each industry and each subsidiary.
2. Pick business-unit heads having the requisite combination of managerial skills and know-how to drive gains in
performance.
3. Tell the difference between those strategic proposals of business-unit managers that are prudent and those that
are risky or unlikely to succeed.
4. Know what to do if a business unit stumbles and its results suddenly head downhill.9
As a rule, the more unrelated businesses that a company has diversified into, the more corporate
executives are forced to “manage by the numbers”—that is, keep a close track on the financial and
operating results of each subsidiary and assume that the heads of the various subsidiaries have most
everything under control so long as the latest key financial and operating measures look good. Managing
by the numbers works if the heads of the various business units are quite capable and consistently meet
their numbers. But problems arise when things start to go awry and corporate management has to get
deeply involved in turning around a business it does not know much about.
Unrelated diversification requires that corporate executives rely on the skills and expertise of businesslevel managers to build competitive advantage and boost the performance of individual businesses.
Limited Competitive Advantage Potential The second big negative associated with unrelated
diversification is that such a strategy offers limited potential for competitive advantage beyond what each
individual business can generate on its own. Unlike a related diversification strategy, there is no crossbusiness strategic fit to draw on for reducing costs; transferring capabilities, skills, and technology; or
leveraging use of a powerful brand name and thereby adding to the competitive advantage possessed by
individual businesses. Without the competitive advantage potential of strategic fit, consolidated
performance of an unrelated group of businesses is unlikely to be better than the sum of what the
individual business units could achieve independently in most instances.
Misguided Reasons for Pursuing Unrelated Diversification
Competently overseeing a set of widely diverse businesses can turn out to be much harder than it
sounds. In practice, comparatively few companies have proved that they have top management
capabilities that are up to the task. Far more corporate executives have failed than have been successful
at delivering consistently good financial results with an unrelated diversification strategy. 10 Odds are that
the result of unrelated diversification will be 1 + 1 = 2 or less. In addition, management sometimes
undertakes a strategy of unrelated diversification for the wrong reasons.
•
Risk reduction. Managers sometimes pursue unrelated diversification to reduce risk by spreading the
company’s investments over a set of diverse industries. But this cannot create long-term shareholder
value alone since the company’s shareholders can more efficiently reduce their exposure to risk by
investing in a diversified portfolio of stocks and bonds.
Page 162
•
Growth. While unrelated diversification may enable a company to achieve rapid or continuous
growth in revenues, only profitable growth can bring about increases in shareholder value and justify
a strategy of unrelated diversification.
•
Earnings stabilization. In a broadly diversified company, there’s a chance that market downtrends in
some of the company’s businesses will be partially offset by cyclical upswings in its other
businesses, thus producing somewhat less earnings volatility. In actual practice, however, there’s no
convincing evidence that the consolidated profits of firms with unrelated diversification strategies are
more stable than the profits of firms with related diversification strategies.
•
Managerial motives. Unrelated diversification can provide benefits to managers such as higher
compensation, which tends to increase with firm size and degree of diversification. Diversification for
this reason alone is far more likely to reduce shareholder value than to increase it.
Diversifying into Both Related and Unrelated Businesses
There’s nothing to preclude a company from diversifying into both related and unrelated businesses.
Indeed, the business makeup of diversified companies varies considerably. 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. And a number of multibusiness enterprises have diversified
into several unrelated groups of related businesses. There’s ample room for companies to customize their
diversification strategies to incorporate elements of both related and unrelated diversification.
In February 2015 the Royal Dutch Shell company acquired BG (British Gas) for $52 billion (Ron, 2016). This type
of diversification was considered an expansion of Shell’s existing portfolio into a related business, as it looked to
become the world’s largest provider of Liquified Natural Gas (LNG).
This diversification passed the three tests of building shareholder value. First, as the oil and gas prices declined,
Shell found itself considering areas that presented long-term profitability. The “fast-growing liquified natural gas
industry” was a great option” (Reed, 2015). Second, it passed the cost-of-entry test as the long-term profitability
will offset the acquisition price of $52 billion. In addition, Shell compensated the current costs by streamlining
operational cost in other business areas (Reed, 2015). Third, it passed the Better-off test as British Gas was known
as a major producer of LNG and Shell known for its Deep-Water Explorations, the acquisition gives shell a position
to focus on both companies’ strengths and puts Shell into a “world-leading position in producing and trading LNG”
(Reed, 2015).
The outcome of the diversification will not turn out until the year 2020 as Shell expects to increase profits from
LNG production by then. However, the merger has placed Shell as the second largest Energy company after Exxon
Mobil. Critics still argue that the merger presents a challenge for Shell (Reuters, 2016).
References
Gamble, J.E., Peteraf, M.A., Thompson Jr, A.A. (2015). Strategic Management: The Quest for
Competitive Advantage (4th ed.). New York: McGraw Hill
Bousso, Ron. (2016) “Shell Pursues Transition Plan After Sealing 53 Billion BG Deal”.
Retrieved from https://www.reuters.com/article/us-bg-m-a-shell/shell-pursues-transition-planafter-sealing-53-billion-bg-deal-idUSKCN0VO0YJ
Reed, Standley.(2015) “Shell to Focus on Liquefied Natural Gas in Deal for BG Group”.
Retrieved from https://www.nytimes.com/2015/11/04/business/energy-environment/shell-bggroup-lng.html
When Business Diversification Becomes a Consideration
LO1 Understand when and how diversifying into multiple businesses can enhance
shareholder value.
As long as a single-business company can achieve profitable growth opportunities in its presen …
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