SOLUTION AT Academic Writers Bay
Critical Thinking: Corporate Strategy and Diversification (105 points)
Corporate diversification strategies raise a wide range of strategic management issues. For this week’s critical thinking assignment, read the case study found in your textbook: Case 16: Manchester City: Building a Multinational Soccer Enterprise, p.554 (in the textbook).
Remember, a case study is a puzzle to be solved, so before reading and answering the specific case and study questions, develop your proposed solution by following these five steps:
Read the case study to identify the key issues and underlying issues. These issues are the principles and concepts of the course module, which apply to the situation described in the case study.
Record the facts from the case study which are relevant to the principles and concepts of the module. The case may have extraneous information not relevant to the current module. Your ability to differentiate between relevant and irrelevant information is an important aspect of case analysis, as it will inform the focus of your answers.
Describe in some detail the actions that would address or correct the situation.
Consider how you would support your solution with examples from experience or current real-life examples or cases from textbooks.
Complete this initial analysis and then read the discussion questions. Typically, you will already have the answers to the questions but with a broader consideration. At this point, you can add the details and/or analytical tools required to solve the case.
Case Study Questions:
Under what circumstances can a company extend its competitive advantage from its home market to an overseas market? Issues concerning the transferability and replicability of the firm’s competitive advantage are critical here.
What are the distinctive features of City Football’s strategy? What mode of foreign market entry should City Football adopt? Why? Again, issues of resources and capabilities and the need for local market knowledge, distribution, and political and business connections become critical here.
What criteria can companies apply in deciding what new diversification to pursue and which should City Football apply in deciding?
What changes in the financial structure, organizational structure and management systems would you recommend?
CONTEMPORARY STRATEGY ANALYSIS tenth edition Robert M. Grant John Wiley & Sons Ltd., 2019 Chapter 12 Diversification Strategy 1 Diversification Strategy OUTLINE • Introduction: The Basic Issues • Motives for Diversification • Competitive Advantage from Diversification • Diversification and Performance • The Meaning of Relatedness in Diversification Copyright © 2019 John Wiley & Sons, Inc. INTRODUCTION: THE BASIC ISSUES Core Issues in Diversification Decisions Superior profit derives from two sources: INDUSTRY ATTRACTIVENESS RETURN ON CAPITAL > COST OF CAPITAL COMPETITIVE ADVANTAGE Diversification decisions involve these same two issues: • How attractive is the industry to be entered? • Can the firm achieve a competitive advantage? Copyright © 2019 John Wiley & Sons, Inc. INTRODUCTION: THE BASIC ISSUES Diversification Strategies of US and UK Corporations during the 20th Century % 70 United States United Kingdom 60 50 Single business Dominant business Related business Unrelated business 40 30 20 10 0 1949 1964 Copyright © 2019 John Wiley & Sons, Inc. 1974 1950 1970 1993 INTRODUCTION: THE BASIC ISSUES The Evolution of Diversification Strategies, 1960-2018 Making diversification profitable MANAGEMENT GOALS Growth IMPLICATIONS FOR DIVERSIFICATION STRATEGY •Diversification by established firms • Emergence of conglomerates • Boom in M&A • Financial analysis STRATEGY TOOLS AND CONCEPTS • Corporate planning Copyright © 2019 John Wiley & Sons, Inc. • Quest for synergy • Economies of scope • Portfolio planning models • Modern financial theory • M-form structures 1960 • Emphasis on related diversification 1970 1980 Creating shareholder value Corporate advantage • Core business focus • Divestments, and spin-offs • Leveraged buyouts • Product bundling and customer solutions • Alliances • Growth options •Shareholder value •Transaction cost analysis •Core competence •Dominant logic • Parenting advantage • Real options • Demand-side economies of scope • Tech platforms 1990 2000 2018 MOTIVES FOR DIVERSIFICATION Motives for Diversification • GROWTH • • RISK SPREADING VALUE CREATION The desire to escape stagnant or declining industries a powerful motives for diversification (e.g. tobacco, oil, newspapers). But, growth in the interests of managers not shareholders Growth-seeking diversification (esp. by acquisition) tends to destroy shareholder value • Diversification reduces the variance of profit flows • But, doesn’t create value for shareholders—they can hold diversified portfolios of securities. [Capital Asset Pricing Model shows that diversification only lowers unsystematic risk not systematic risk] • For diversification to create shareholder value, then bringing putting different businesses under common ownership must increase their total profitability Copyright © 2019 John Wiley & Sons, Inc. MOTIVES FOR DIVERSIFICATION Diversification and Shareholder Value: Porter’s Three Essential Tests For diversification to create shareholder value, it must meet three tests: 1. The Attractiveness Test: diversification must be directed towards attractive industries (or those with e the potential to become attractive). 2. The Cost of Entry Test : the cost of entry must not capitalize all future profits. 3. The Better-Off Test: either the new unit must gain competitive advantage from its link with the company, or vice-versa. (i.e. some form of “synergy” must be present) Copyright © 2019 John Wiley & Sons, Inc. `COMPETITIVE ADVANTAGE FROM DIVERSIFICATION Sources of Competitive Advantage from Diversification • Sharing tangible resources (e.g. research labs, distribution systems) across multiple businesses ECONOMIES OF SCOPE • Sharing intangible resources (e.g. brands, technology) across multiple businesses • Transferring functional capabilities (e.g. marketing, product development) across businesses • Applying common general management capabilities to different businesses ECONOMIES FROM INTERNALIZING TRANSACTIONS • Economies of scope not a sufficient basis for diversification—must be supported by transaction costs in markets for resources • Diversified firm can avoid external transactions by operating internal capital and labor markets • Diversified firm has better information on resource characteristics than external markets Copyright © 2019 John Wiley & Sons, Inc. DIVERSIFICATION AND PERFORMANCE The Findings of Empirical Research • No consistent relationship • Evidence of a ∩-shaped relationship: dn. first increases profitability, then further dn. reduces profitability (increased complexity?) Do diversified firms outperform specialized firms? • McKinsey & Co. identify benefits from moderate dn.—especially for firms that have run out of growth opportunities • Question of direction of causation: does dn. drive profitability, or vice-versa? • Most studies show related dn. outperforms unrelated dn. What type of diversification is • Related dn. offers greater synergies—but most profitable? also imposes higher management costs –Related dn. vs. • But what is “related dn.”? Businesses can unrelated dn. be related in many different ways (e.g. LMVH, GE, Virgin group) Copyright © 2019 John Wiley & Sons, Inc. RELATEDNESS IN DIVERSIFICATION Types of Relatedness between Businesses Economies of scope in diversification derive from two types of relatedness: • Operational Relatedness—synergies from sharing resources across businesses (common distribution facilities, brands, joint R&D) • Strategic Relatedness—synergies at the corporate level deriving from the ability to apply common management capabilities to different businesses. Problem of operational relatedness: The benefits from economies of scope may be dwarfed by the administrative costs involved in their exploitation. Copyright © 2019 John Wiley & Sons, Inc. RELATEDNESS IN DIVERSIFICATION The Sources of Strategic Relatedness Between Businesses Corporate Management Tasks Determinants of Strategic Similarity • Similar sizes of capital investment projects • Similar time spans of investment projects Resource allocation • Strategy formulation Performance management and control Copyright © 2019 John Wiley & Sons, Inc. Similar sources of risk • Similar general management skills required for business unit managers • Similar key success factors • Similar stages of the industry life cycle • Similar competitive positions occupied by each business within its industry • Targets defined in terms of similar performance variables Similar time horizons for performance targets •