Creating added value for shareholders via diversification requires building a multibusiness company where the whole is greater than the some of its parts.
The biggest drawback to entering an industry by forming a start-up company internally 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 matchups; unrelated businesses have very 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.
Diversifying into related businesses where competitively valuable strategic-fit benefits can be captured puts sister businesses in position to perform better financially as part of the same company than they could have performed as independent enterprises, thus providing a clear avenue for boosting shareholder.
The two biggest drawbacks to unrelated diversification are the difficulties of competently managing many different businesses and being without the added sources of competitive advantage that cross-business strategic fit provides.
Relying solely on the expertise of corporate executives to wisely manage 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 the capture of competitively valuable strategic fits, as well as by wise and expert corporate level management.
A company's businesses exhibit resource fit when the various businesses, individually and collectively, add to the company's complement of resources is adequate to support the requirements of its business units.
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 business is one which 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.
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 thinly.
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.
