CORPORATE STRATEGY:

DIVERSIFICATION AND THE MULTIBUSINESS

COMPANYKHAIRUN NISAA BINTI AB RASHID

HAFLIDA BINTI OMAR

WHAT DOES CRAFTING A

DIVERSIFICATION STRATEGY ENTAIL?

Step 1Picking new industries to enter and deciding on the means of entry.

Step 2Pursuing opportunities to leverage cross-business value chain relationships and strategic fit into competitive advantage.

Step 3Establishing investment priorities and steering corporate resources into the most attractive business units.

Step 4 Initiating actions to boost the combined performanceof the cooperation’s collection of businesses.

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.

WHEN BUSINESS DIVERSIFICATION

BECOMES A CONSIDERATION

TESTING WHETHER DIVERSIFICATION ADDS VALUE

FOR SHAREHOLDERSThe Industry

Attractiveness Test

The Cost of Entry Test

The Better-Off Test

Are the industry’s profits and return on investment as good or better than present business(es)?

Is the cost of overcoming entry barriers so great as to long delay or reduce the potential for profitability?

How much synergy** (stronger 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

Internal Line Business through Internal

Development

Diversifying into New Businesses

+

=

Internal Line Business through

Internal Development

Company Name Operator/Services

KL Airport Hotel Sdn. Bhd.The hotel operator of Sama Sama Hotel & Sama Sama Express

MA Agriculture-Horticulture Sdn. Bhd. (MAAH)

Malaysia Airports Sdn. Bhd.The operator of all airports in Malaysia except KLIA & KLIA2

MA Consultancy Services Sdn. Bhd. (MACS)

MA Technologies Sdn Bhd.

Malaysia Airports (Niaga) Sdn. Bhd.The duty-free operator of 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

Availability of in-house skills and resources

Ample time to develop and

launch business Cost of acquisition is higher than internal entry

Added capacity will not affect supply and

demand balanceLow resistance of incumbent firms to market entry

No head-to-head competition in

targeted industry

Factors Favoring Internal Development

Factors Favoring Internal Development

CHOOSING THE DIVERSIFICATION PATH:

RELATED VS UNRELATED BUSINESSES

Related Businesses

Unrelated Businesses

Both Related and Unrelated

Businesses

Which Diversification Path to Pursue?

CHOOSING THE DIVERSIFICATION PATH: RELATED VS

UNRELATED BUSINESSES

Related Businesses

Unrelated Businesses

Have competitively valuable cross-business value chain and resource matchups.

Have dissimilar value chains and resource requirements, with no competitively important cross-business relationships at the value chain level.

DIVERSIFYING INTORELATED 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.

Company Type Principal activities Incorporated inGroup's Equity 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 Sdn Bhd

Subsidiary Engineering Malaysia 100%

MAS Academy Sdn Bhd Subsidiary Flight school Malaysia 100%

Abacus Distribution Systems (Malaysia) Sdn Bhd

SubsidiaryComputer reservation system

Malaysia 80%

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%

Related Businesses Provide Opportunities to Benefit from Competitively Valuable Strategic Fit

FIGURE 8.1

Evaluating the acquisition of a new business or the divestiture of

an existing business

Can it meet corporate targets for profitability and return on

investment?

Is it is in an industry with attractive profit and growth

potentials?

Is it is big enough to contribute significantly to the parent firm’s

bottom line?

DIVERSIFYING INTOUNRELATED BUSINESSES

BUILDING SHAREHOLDER VALUE

VIA UNRELATED DIVERSIFICATION

Astute Corporate Parenting by Management

• Provide leadership, oversight, expertise, and guidance.• Provide generalized or parenting resources that lower

operating costs and increase SBU efficiencies.

Cross-Business Allocation of

Financial Resources

• Serve as an internal capital market.• Allocate surplus cash flows from businesses to fund

the capital requirements of other businesses.

Acquiring and Restructuring Undervalued Companies

• Acquire weakly performing firms at bargain prices.• Use turnaround capabilities to restructure them to

increase their performance and profitability.

MISGUIDED REASONS FOR PURSUING UNRELATED

DIVERSIFICATION

Seeking a reduction of business

investment risk

Pursuing rapid or continuous

growth for its own sake

Seeking stabilization to avoid cyclical

swings in businesses

Pursuing personal managerial motives

Poor Rationales for Unrelated Diversification

STRUCTURES OF COMBINATION RELATED-UNRELATED DIVERSIFIED FIRMS

Dominant-Business

Enterprises

Narrowly Diversified

Firms

Have a major “core” firm that accounts for 50 to 80% of total revenues and a collection of small related or unrelated firms that accounts for the remainder

Are comprised of a few related or unrelated businesses

Broadly Diversified

Firms

Have a wide-ranging collection of related businesses, unrelated businesses, or a mixture of both

Multibusiness Enterprises

Have a business portfolio consisting of several 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 represent a good market for the company to be in. Does

it pass the industry attractiveness test?

Which of the company’s industries are most attractive

and which are least attractive?

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.

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.

FIGURE 8.3

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 cash flows sufficient

• Healthy capital marketFinancial

Resource Fit

• Strong of managerial, administrative & competitive capabilities to support.

Nonfinancial Resource Fit

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

The Chief Strategic and Financial Options for Allocating a Diversified Company’s Financial Resources

FIGURE 8.5

Step 6: Crafting New Strategic Moves to Improve Overall Corporate Performance.

A Firm’s Four Main Strategic Alternatives After It Diversifies

FIGURE 8.6

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