Diversification : Strategies for Managing a Group of Businesses

In a diversified company, the strategy-making challenge involves assessing multiple industry environment and developing a set of business strategies, one for each industry arena in which the diversified company operates.
The task of crafting a diversified company’s overall of 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.
2. Initiating actions to boost the combined performance of the businesses the firm has entered.
3. Pursuing opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantage.
4. Establishing investment priorities and steering corporate resources into the most attractive business units.
So long as a company has its hands full trying to capitalize on profitable growth opportunities in its present industry, there is no urgency to pursue diversification.

There are four other instances in which a company becomes a prime candidate for diversifying:
1. When it spots opportunities for expanding into industries whose technologies and products complement its present business.
2. When it can leverage existing competencies and capabilities by expanding into business where these same resources strengths are key success factors and valuable competitive assets.
3. When diversifying into closely related business opens new avenues for reducing costs.
4. When it has a powerful and well-known brand name that can be transferred to the products of other businesses and thereby used as a lever for driving up the sales and profits of such business.

A move to diversify into a new business must pass there tests: (1) the industry attractiveness test, (2) the cost-of-entry test, (3) the better-off test. Diversification moves that satisfy all three tests have the greatest potential to grow shareholder value over the long term.
The means of entering new businesses can take any of three forms: acquisition, internal start-up, or joint ventures with other companies. The biggest drawbacks to entering an industry by forming an internal start-up are the costs of over-coming entry barriers and the extra time it takes to build a strong and profitable competitive position.

There are three diversification strategy options:
1. Diversified into related businesses
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.
2. Diversified into unrelated businesses
- Spread risks across completely different business
- Build shareholder value by doing superior job of choosing businesses to diversify into and of managing the whole collection of businesses in the company’s portfolio.
3. Diversified into both related and unrelated business.
Strategic fit exists when the value chains of different businesses present opportunities for cross-business resource transfer, lower costs through combining the performance of related value chain activities, cross-business use of a potent brand name, and cross-business collaboration to build new or stronger competitive capabilities. Cross-business strategic fits can exist anywhere along the value chain: in R&D and technology activities, in supply chain activities and relationships with suppliers, in manufacturing, in sales and marketing, in distribution activities, or in administrative support activities.

The procedure for evaluating the pluses and minuses of a diversified company’s strategy and deciding what actions to take to improve the company’s performance involves six steps:
1. Assessing the attractiveness of the industries the company has diversified into, both individually and as a group.
2. Assessing the competitive strength of the company’s business units and determining how many are strong contenders in their respective industries.
3. Checking the competitive advantage potential of cross-business strategic fits among the company’s various business units.
4. Checking whether the firm’s resources fit the requirements of its present business lineup.
5. Ranking 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.
6. Crafting new strategic moves to improve overall corporate performance.

A company’s five main strategic alternatives after it diversifies:
1. Stick closely with the existing business lineup.
2. Broaden the diversification base.
3. Divest some businesses and retrench to a narrower diversification base.
4. Restructure the company’s business lineup through a mix of divestitures and new acquisitions.
5. Pursue multinational diversification.

Source: Crafting and Executing Strategy, Chapter 8.