The biggest drawbacks to entering
an industry by forming
an internal start-up are the
costs of overcoming entry barriers
and the extra time it takes
to build a strong and profitable
competitive position.
Related businesses possess
competitively valuable cross-business
value chain match-ups;
unrelated businesses have
dissimilar value chains, containing
no competitively useful
cross-business relationships.
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.
Economies of scope are cost
reductions that flow from operating
in multiple businesses;
such economies stem directly
from strategic-fit efficiencies
along the value chains of
related businesses.
A company that leverages the
strategic fit of its related businesses
into competitive advantage
has a clear avenue to
producing gains in shareholder
value.
The two biggest drawbacks to
unrelated diversification are the
difficulties of competently managing
many different businesses
and being without the
added source of competitive
advantage that cross-business
strategic fit provides.
Managing a set of unrelated
businesses is a much
weaker foundation for enhancing
shareholder value than is a
strategy of related diversification
where corporate performance
can be boosted by
competitively valuable cross-business
strategic fits.
In a diversified company, businesses
having the greatest
competitive strength and positioned
in attractive industries
should generally have top priority
in allocating corporate
resources.
The greater the value of cross-business
strategic fits in enhancing
a company's
performance in the marketplace
or on the bottom line, the
more competitively powerful is
its strategy of related
diversification.
A cash hog is a business
whose internal cash flows are
inadequate to fully fund its
needs for working capital and
new capital investment.
A cash cow is a business that
generates cash flows over and
above its internal requirements,
thus providing a corporate parent
with funds for investing in
cash hog businesses, financing
new acquisitions, or paying
dividends.
A close match between industry
key success factors and
company resources and capabilities
is a solid sign of good
resource fit.
Focusing corporate resources
on a few core and mostly related
businesses avoids the
mistake of diversifying so
broadly that resources and
management attention are
stretched too thin.
Restructuring involves divesting
some businesses and acquiring
others so as to put a
whole new face on the company's
business lineup.
A strategy of multinational
diversification has more built-in
potential for competitive advantage
than any other diversification
strategy.
Although cross-subsidization—diverting a portion of the profits and cash flows from existing businesses to help funbd entry into a new business or country market--is
a potent competitive weapon, it
can only be used infrequently
because of its adverse impact
on overall corporate
profitability.
