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CORPORATE

STRATEGY:
DIVERSIFICATION AND
THE MULTIBUSINESS
KHAIRUN NISAA BINTI AB RASHID
COMPANY
HAFLIDA BINTI OMAR
WHAT DOES CRAFTING A
DIVERSIFICATION STRATEGY
ENTAIL?
Picking new industries to enter and deciding on the means of
Step 1 entry.

Pursuing opportunities to leverage cross-business value chain


Step 2 relationships and strategic fit into competitive advantage.

Establishing investment priorities and steering corporate


Step 3 resources into the most attractive business units.

Initiating actions to boost the combined performance


Step 4 of the cooperation’s collection of businesses.
WHEN BUSINESS
DIVERSIFICATION BECOMES A
CONSIDERATION
1. It can expand into businesses whose technologies and
products complement its present business.
2. Its resources and capabilities can be used as valuable
competitive assets in other businesses.
3. Costs can be reduced by cross-business sharing or
transfer of resources and capabilities.
4. Transferring a strong brand name to the products of
other businesses helps drive up sales and profits of
those businesses.
TESTING WHETHER DIVERSIFICATION
ADDS VALUE FOR SHAREHOLDERS
Are the industry’s profits and return
The Industry
on investment as good or better than
Attractiveness Test present business(es)?

Is the cost of overcoming entry


The Cost of Entry
barriers so great as to long delay or
Test
reduce the potential for profitability?

How much synergy** (stronger


The Better-Off Test overall performance) will be gained
by diversifying into the industry?
**Creating added value for shareholders via diversification requires
building a multibusiness company where the whole is greater than the
sum of its parts
APPROACHES TO DIVERSIFYING
THE BUSINESS LINEUP
Diversifying into
New Businesses

Internal Line Business


through Internal
Development
+

=
Internal Line
Business through
Internal Development
Company Name Operator/Services
The hotel operator of Sama
KL Airport Hotel Sdn. Bhd. Sama Hotel & Sama Sama
Express
MA Agriculture-Horticulture Sdn. Bhd.
(MAAH)
The operator of all airports in
Malaysia Airports Sdn. Bhd.
Malaysia except KLIA & KLIA2
MA Consultancy Services Sdn. Bhd.
(MACS)
MA Technologies Sdn Bhd.
The duty-free operator of
Malaysia Airports (Niaga) Sdn. Bhd.
Eraman Duty Free
MA Properties Sdn. Bhd.

Malaysia Airports (Sepang) Sdn. Bhd. The operator of the KLIA & KLIA2
Urusan Teknologi Wawasan Sdn.
Bhd. (UTW)
Malaysia International Aerospace
Centre Sdn. Bhd. (MIAC)
WHEN TO ENGAGE IN
INTERNAL DEVELOPMENT
Ample time to
develop and
launch business
Availability of Cost of acquisition
in-house skills is higher than
and resources internal entry

Factors Favoring
Internal Development

No head-to-head Added capacity


competition in will not affect
targeted industry supply and
Low resistance of demand balance
incumbent firms
to market entry
CHOOSING THE DIVERSIFICATION PATH:
RELATED VS UNRELATED BUSINESSES

Which Diversification
Path to Pursue?

Both Related
Related Unrelated
and Unrelated
Businesses Businesses
Businesses
CHOOSING THE DIVERSIFICATION PATH:
RELATED VS UNRELATED BUSINESSES

Have competitively valuable cross-


Related
business value chain and resource
Businesses
matchups.

Have dissimilar value chains and


Unrelated resource requirements, with no
Businesses competitively important cross-business
relationships at the value chain level.
DIVERSIFYING INTO
RELATED BUSINESSES
Strategic Fit Opportunities:
 Transferring specialized expertise, technological know-
how, or other resources and capabilities from one
business’s value chain to another’s.
 Cost sharing between businesses by combining their
related value chain activities into a single operation.
 Exploiting common use of a well-known brand name.
 Sharing other resources (besides brands) that support
corresponding value chain activities across businesses.
 Engaging in cross-business collaboration and knowledge
sharing to create new competitively valuable resources
and capabilities.
Group's Equity
Company Type Principal activities Incorporated in
Shareholding
Malaysia Airlines Cargo Sdn. Bhd Subsidiary Cargo Malaysia 100%

GE Engine Services Malaysia Joint Venture Engine Overhaul Malaysia 30%


MASwings Sdn. Bhd. Subsidiary Airline Malaysia 100%
Firefly Sdn. Bhd. Subsidiary Airline Malaysia 100%
MAS Aerotechnologies Sdn Bhd Subsidiary MRO Malaysia 100%

MAS Golden Holidays Sdn Bhd Subsidiary Tour operator Malaysia 100%
Malaysian Aerospace Engineering
Subsidiary Engineering Malaysia 100%
Sdn Bhd
MAS Academy Sdn Bhd Subsidiary Flight school Malaysia 100%

Abacus Distribution Systems Computer reservation


Subsidiary Malaysia 80%
(Malaysia) Sdn Bhd system

Taj Madras Air Catering Limited Associate Catering India 20%

MAS Catering (Sarawak) Sdn Bhd Subsidiary Catering Malaysia 60%


LSG Sky Chefs Associate Holding company Malaysia 30%
FIGURE 8.1 Related Businesses Provide Opportunities to
Benefit from Competitively Valuable Strategic Fit
DIVERSIFYING INTO
UNRELATED BUSINESSES
Can it meet corporate targets
for profitability and return on
investment?
Evaluating the
acquisition of a
Is it is in an industry with
new business or
attractive profit and growth
the divestiture of
potentials?
an existing
business
Is it is big enough to contribute
significantly to the parent firm’s
bottom line?
BUILDING SHAREHOLDER VALUE
VIA UNRELATED DIVERSIFICATION

Astute Corporate • Provide leadership, oversight, expertise, and guidance.


Parenting by • Provide generalized or parenting resources that lower
Management operating costs and increase SBU efficiencies.

Cross-Business
• Serve as an internal capital market.
Allocation of
• Allocate surplus cash flows from businesses to fund
Financial
the capital requirements of other businesses.
Resources

Acquiring and
• Acquire weakly performing firms at bargain prices.
Restructuring
• Use turnaround capabilities to restructure them to
Undervalued
increase their performance and profitability.
Companies
MISGUIDED REASONS FOR PURSUING
UNRELATED DIVERSIFICATION

Poor Rationales for


Unrelated Diversification

Seeking
Pursuing rapid
Seeking a reduction stabilization to
or continuous Pursuing personal
of business avoid cyclical
growth for its own managerial motives
investment risk swings in
sake
businesses
STRUCTURES OF COMBINATION
RELATED-UNRELATED DIVERSIFIED FIRMS
Dominant- Have a major “core” firm that accounts for 50 to
80% of total revenues and a collection of small
Business related or unrelated firms that accounts for the
Enterprises remainder

Narrowly
Are comprised of a few related or unrelated
Diversified businesses
Firms
Broadly Have a wide-ranging collection of related
Diversified businesses, unrelated businesses, or a mixture of
Firms both

Multibusiness Have a business portfolio consisting of several


Enterprises unrelated groups of related businesses
EVALUATING THE STRATEGY
OF A DIVERSIFIED FIRM
Step 1 : Assessing the attractiveness of the industries the firm has
diversified into, both individually and as a group.

Does each industry the


company has diversified into Which of the company’s
represent a good market for industries are most attractive
the company to be in. Does and which are least
it pass the industry attractive?
attractiveness test?

How appealing is the whole


group of industries in which
the company has invested?
8.1 Calculating Weighted Industry Attractiveness Scores*

* Rating scale: 1 = very unattractive to the firm; 10 = very attractive to the firm.

Remember: The more intensely competitive an industry is,


the lower the attractiveness rating for that industry!
Step 2: Evaluating Business-Unit
Competitive Strength
♦ Relative market share
♦ Costs relative to competitors’ costs.
♦ Ability to match or beat rivals on key product attributes.
♦ Brand image and reputation.
♦ Other competitively valuable resources and capabilities.
♦ Strategic fit with the firm’s other businesses.
♦ Bargaining leverage with key suppliers or customers.
♦ Alliances and partnerships with suppliers and/or buyers.
♦ Profitability relative to competitors
8.2 Calculating Weighted Competitive Strength Scores
for a Diversified Company’s Business Units*

* Rating scale: 1 = very weak; 10 = very strong.

Relative market share: the ratio of a business unit’s market share to the market
share of its largest industry rival as measured in unit volumes, not dollars.
FIGURE 8.3
A Nine-Cell Industry
Attractiveness–
Competitive
Strength Matrix

Note: Circle sizes are scaled to


reflect the percentage of
companywide revenues
generated by the business unit.
Step 3: Determining the Competitive
Value of Strategic Fit in Diversified
Companies.
 To what extent can cost savings be realized?
 How much competitive value will come from the cross-
business transfer of skills, technology, or intellectual
capital?
 Will transferring a potent brand name to the products of
other businesses increase sales significantly?
 Will cross-business collaboration to create or strengthen
competitive capabilities lead to significant gains in the
marketplace or in financial performance?
Step 4: Checking for Resource Fit

• Generate the internal


Financial cash flows sufficient
Resource Fit • Healthy capital market

• Strong of managerial,
Nonfinancial administrative &
Resource Fit competitive capabilities
to support.
Step 5: Ranking Business Unit &
Assigning a Priority for Resource
Allocation
 Help top level executives assign each business a priority for
resource support and capital investment.
 Best ways of generate additional funds for redeployment to
businesses with better opportunities and better strategic and
resource fit.
 Ranking Factors: Sales growth, Profit growth, Contribution to
company earnings, Return on capital invested in the business,
Cash flow
 Financial resources are limited - Steer resources to business units
with the brightest profit and growth prospects and solid strategic
and resource fit
FIGURE 8.5 The Chief Strategic and Financial Options for Allocating
a Diversified Company’s Financial Resources
Step 6: Crafting New Strategic
Moves to Improve Overall
Corporate Performance.
FIGURE 8.6
A Firm’s Four Main
Strategic Alternatives
After It Diversifies
Broadening a Diversified
Firm’s Business Base

♦ Factors Motivating the Adding of Businesses:


● The transfer of resources and capabilities
to related or complementary businesses.
● Rapidly changing technology, legislation, or new
product innovations in core businesses.
● Shoring up the market position and competitive
capabilities of the firm’s present businesses.
● Extension of the scope of the firm’s operations
into additional country markets.
Divesting Businesses and Retrenching
to a Narrower Diversification Base

♦ Factors Motivating Business Divestitures:


● Improvement of long-term performance by
concentrating on stronger positions in fewer core
businesses and industries.
● Business is now in a once-attractive industry where
market conditions have badly deteriorated.
● Business has either failed to perform as expected
and\or is lacking in cultural, strategic or resource fit.
● Business has become more valuable if sold to
another firm or as an independent spin-off firm.
Using Divestitures and Acquisitions to
Restructure the Business Lineup

♦ Factors Leading to Corporate Restructuring:


● Too many businesses in unattractive industries
● Too many competitively weak businesses
● Ongoing declines in the market shares of business
units due to more market-savvy competitors
● Debt and interest costs that sap profitability
● Acquisitions that haven’t lived up to expectations
● Businesses with poor resource or strategic fit