Wikimedia Commons — public domain. Sometimes the benefits of related diversification that executives hope to enjoy are never achieved.
Both soft drinks and cigarettes are products that consumers do not need. Companies must convince consumers to buy these products through marketing activities such as branding and advertising. Thus, on the surface, the acquisition of 7Up by Philip Morris seemed to offer the potential for Philip Morris to take its existing marketing skills and apply them within a new industry. Unfortunately, the possible benefits to 7Up never materialized. Table 8.
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By building a portfolio of stocks, an investor can minimize the chances of suffering a huge loss. Some executives take a similar approach. Rather than trying to develop synergy across businesses, they seek greater financial stability for their firms by owning an array of companies. Below we illustrate some of the different groups in their very diversified portfolio of firms.
Shareholders were all on board for the purchase of the Burlington Northern Santa Fe Corporation in Why would a soft-drink company buy a movie studio? Most unrelated diversification efforts, however, do not have happy endings. Harley-Davidson, for example, once tried to sell Harley-branded bottled water. Starbucks tried to diversify into offering Starbucks-branded furniture. Both efforts were disasters. Although Harley-Davidson and Starbucks both enjoy iconic brands, these strategic resources simply did not transfer effectively to the bottled water and furniture businesses. Lighter firm Zippo is currently trying to avoid this scenario.
This brand has fueled eighty years of success for the firm. But the future of the lighter business is bleak. This downward trend is likely to continue as smoking becomes less and less attractive in many countries. To save their company, Zippo executives want to diversify.
The high-quality image of Swiss Army knives has been used to sell Swiss Army—branded luggage and watches. As of March , Zippo was examining a wide variety of markets where their brand could be leveraged, including watches, clothing, wallets, pens, liquor flasks, outdoor hand warmers, playing cards, gas grills, and cologne.
Trying to figure out which of these diversification options would be winners, such as the Eddie Bauer-edition Ford Explorer, and which would be losers, such as Harley-branded bottled water, was a key challenge facing Zippo executives.
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Not much, but that did not stop Globodyne from buying each of these companies in its quest for synergy in the movie In Good Company. Synergy is created when two or more businesses produce benefits together that could not be produced separately. While Duryea was confident that a cross-promotional strategy between his advertising division and the other units within the Globodyne universe was a slam-dunk, Waterman employee Dan Foreman saw little congruence between advertisements in Sports America on the one hand and cell phones and breakfast cereals on the other.
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Seeing little value in owning a failing publishing company, Globodyne promptly sold the division to another conglomerate. After the sale, the executives that had been rewarded for the initial purchase of Waterman Publishing, including Duryea, were fired. Porter, M. From competitive advantage to corporate strategy. Harvard Business Review , 65 3 , — Prahalad, C. The core competencies of the corporation. Harvard Business Review , 86 1 , 79— Rank the business unit from best to worst in terms of potential for cost reduction and profit margin improvement B.
Determine how strongly positioned each business unit is in its industry and the extent to which it already is or can become a strong market contender C. Determine which business unit has the greatest number of resource strengths, competencies and competitive capabilities and which one has the least Answer:b. Using relative market share to assess a business's competitive strength is analytically superior to straight percentage measures of market share because relative market share A.
Is a better measure of a business's potential for increased sales and profitability B. A weighted competitive strength analysis of a diversified company's business units is conceptually stronger than an unweighted analysis because A. It provides a more accurate assessment of the strength of cross-business strategic fits B. The different measures of competitive strength are unlikely to be equally important Answer:c.
The value of determining the relative competitive strength of each business a company has diversified into is A. To have a quantitative basis for rating them from strongest to weakest in terms of contributing to the corporate parent's revenue growth C. To compare resource strengths and weaknesses, business by business D. To have a quantitative basis for rating them from strongest to weakest in contending for market leadership in their respective industries Answer:d.
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The nine-cell industry attractiveness-competitive strength matrix A. Is useful for helping decide which businesses should have high, average and low priorities in allocating corporate resources B. Indicates which businesses are cash hogs and which are cash cows C. Pinpoints what strategies are most appropriate for businesses positioned in the three top cells of the matrix but is less clear about the best strategies for businesses positioned in the bottom six cells Answer:a. The most important strategy-making guidance that comes from drawing a 9-cell industry attractiveness-competitive strength matrix is A.
Which businesses in the portfolio have the most potential for strategic fit and resource fit B. Why cash cow businesses are more valuable than cash hog businesses C. That corporate resources should be concentrated on those businesses enjoying both a higher degree of industry attractiveness and competitive strength and that businesses having low competitive strength in relatively unattractive industries should be looked at for possible divestiture Answer:c.
Identifying which businesses have strategies that should be continued, which business have strategies that need fine-tuning and which businesses have strategies that need major overhaul B. That businesses having the greatest competitive strength and positioned in the most attractive industries should have the highest priority for corporate resource allocation and that competitively weak businesses in relatively unattractive industries should have the lowest priority and perhaps even be considered for divestiture C.
Pinpointing what strategies are most appropriate for businesses positioned in the four corners of the matrix although the matrix reveals little about the best strategies for businesses positioned in the remainder of the matrix Answer:b. In a diversified company, a business subsidiary has more competitive advantage potential when A. It is a cash cow B. It has value chain relationships with other business subsidiaries that present competitively valuable opportunities to transfer skills or technology or intellectual capital from one business to another, combine the performance of related activities and reduce costs, share use of a well-respected brand name or collaborate to create new competitive capabilities C.
It is the company's biggest profit producer or is capable of becoming the biggest Answer:b. Checking a diversified company's business portfolio for the competitive advantage potential of cross-business strategic fits does not involve ascertaining A. The extent to which sister business units have value chain match-ups that offer opportunities to combine the performance of related value chain activities and reduce costs B.
The extent to which sister business units have value chain match-ups that offer opportunities to transfer skills or technology or intellectual capital from one business to another C. The extent to which sister business units have opportunities to share use of a well-respected brand name D. The extent to which sister business units have value chain match-ups that offer opportunities to create new competitive capabilities or to leverage existing resources E.
Which business units are cash cows and which ones are cash hogs Answer:e. Checking a diversified firm's business portfolio for the competitive advantage potential of cross-business strategic fits entails consideration of A. Whether the parent's company's competitive advantages are being deployed to maximum advantage in each of its business units B. Whether the competitive strategies employed in each business act to reinforce the competitive power of the strategies employed in the company's other businesses C.
Whether the competitive strategies in each business possess good strategic fit with the parent company's corporate strategy D. The extent to which there are competitively valuable relationships between the value chains of sister business units and what opportunities they present to reduce costs, share use of a potent brand name, create competitively valuable new capabilities via cross-business collaboration or transfer skills or technology or intellectual capital from one business to another Answer:d.
Which of the following is not a part of checking a diversified company's business units for cross-business competitive advantage potential? Ascertaining the extent to which sister business units have value chain match-ups that offer opportunities to combine the performance of related value chain activities and reduce costs B.
Ascertaining the extent to which sister business units have value chain match-ups that offer opportunities to transfer skills or technology or intellectual capital from one business to another C. Ascertaining the extent to which sister business units are making maximum use of the parent company's competitive advantages Answer:c. A diversified company's business units exhibit good resource fit when A.
Each business is a cash cow B. A company has the resources to adequately support the requirements of its businesses as a group without spreading itself too thin and when individual businesses add to a company's overall strengths C. Each business is sufficiently profitable to generate an attractive return on invested capital Answer:b. The businesses in a diversified company's lineup exhibit good resource fit when A. The resource requirements of each business exactly match the resources the company has available B. Individual businesses add to a company's resource strengths and when a company has the resources to adequately support the requirements of its businesses as a group without spreading itself too thin C.
Each business is generates just enough cash flow annually to fund its own capital requirements and thus does not require cash infusions from the corporate parent Answer:b. A "cash cow" type of business A. Generates unusually high profits and returns on equity investment B. Is so profitable that it has no long-term debt C. A "cash hog" type of business A. Is one that is losing money and requires cash infusions from its corporate parent to continue operations B. Is one that generates cash flows that are too small to fully fund its operations and growth C.
Generates negative cash flows from internal operations and thus requires cash infusions from its corporate parent to report a profit Answer:b. The difference between a "cash-cow" business and a "cash hog" business is that A. A cash cow business is making money whereas a cash hog business is losing money B. A cash cow business generates enough profits to pay off long-term debt whereas a cash hog business does not C. A cash cow business generates positive retained earnings whereas a cash hog business produces negative retained earnings D.
A cash cow business produces large internal cash flows over and above what is needed to build and maintain the business whereas the internal cash flows of a cash hog business are too small to fully fund its operating needs and capital requirements Answer:d.
Diversification: Definition, Levels, Strategy, Risks, Examples
The tests of whether a diversified company's businesses exhibit resource fit do not include A. Whether the excess cash flows generated by cash cow businesses are sufficient to cover the negative cash flows of its cash hog businesses B. Whether a business adequately contributes to achieving the corporate parent's performance targets C.
Whether the company has adequate financial strength to fund its different businesses and maintain a healthy credit rating D. Whether the corporate parent has sufficient cash to fund the needs of its individual businesses and pay dividends to shareholders without having to borrow money Answer:d.
Which one of the following is not part of the task of checking a diversified company's business line-up for adequate resource fit? Determining whether the excess cash flows generated by cash cow businesses are sufficient to cover the negative cash flows of its cash hog businesses B. Determining whether recently acquired businesses are acting to strengthen a company's resource base and competitive capabilities or whether they are causing its competitive and managerial resources to be stretched too thinly across its businesses sometimes newly-acquired businesses soak up a disproportionate share of management's time and put a strain on other company resources C.
Determining whether some business units have value chain match-ups that offer opportunities to transfer skills or technology or intellectual capital from one business to another Answer:c. Which one of the following is not a particularly relevant consideration in deciding what the priorities should be for allocating resources to the various businesses of a diversified company? Whether and how corporate resources and capabilities can be used to enhance the competitiveness of particular business units B.
What competitive strategy the business is presently using C. Whether a business exhibits good strategic fit and resource fit with sister businesses Answer:b. Which one of the following is the best guideline for deciding what the priorities should be for allocating resources to the various businesses of a diversified company?
Businesses with high industry attractiveness ratings should be given top priority and those with low industry attractiveness ratings should be given low priority B. Business subsidiaries with the brightest profit and growth prospects and solid strategic and resource fits generally should head the list for corporate resource support C. The positions of each business in the nine-cell attractiveness-strength matrix should govern resource allocation Answer:b.
Which one of the following is not a reasonable option for deploying a diversified company's financial resources? Making acquisitions to establish positions in new businesses or to complement existing businesses B. Concentrating most of a company's financial resources in cash cow businesses and allocating little or no additional resources to cash hog businesses until they show enough strength to generate positive cash flows C. The strategic options to improve a diversified company's overall performance do not include which of the following categories of actions?
Advantages & Disadvantages of Diversifying Into an Unrelated Business? | Small Business -
Broadening the company's business scope by making new acquisitions in new industries B. Restructuring the company's business lineup and putting a whole new face on the company's business makeup Answer:b. Once a company has diversified into a collection of related or unrelated businesses and concludes that some strategy adjustments are needed, which one of the following is not one of the main strategy options that a company can pursue?
Pursue multinational diversification B. Restructure the company's business lineup C. Retrenching to a narrower diversification base A. Is usually the most attractive long-run strategy for a broadly diversified company confronted with recession, high interest rates, mounting competitive pressures in several of its businesses and sluggish growth B. Has the advantage of focusing a diversified firm's energies on building strong positions in a few core businesses rather the stretching its resources and managerial attention too thinly across many businesses C.
Is an attractive strategy option for revamping a diverse business lineup that lacks strong cross-business financial fit Answer:b. In which of the following instances is retrenching to a narrower diversification base not likely to be an attractive or advisable strategy for a diversified company? When a diversified company has struggled to make certain businesses attractively profitable B. When a diversified company has too many cash cows C. When one or more businesses are cash hogs with questionable long-term potential Answer:b.