Strategic Fit and Diversification in Related Businesses Read the overview below
ID: 370192 • Letter: S
Question
Strategic Fit and Diversification in Related Businesses
Read the overview below and complete the activities that follow.
The purpose of diversification is to build shareholder value. Diversification builds shareholder value when a diversified group of businesses can perform better under the auspices of a single corporate parent than they would as independent, stand-alone businesses. The goal is to achieve not just a 1 + 1 = 2 result, but rather to realize important 1 + 1 = 3 performance benefits. Whether getting into a new business has the potential to enhance shareholder value hinges on whether a company’s entry into that business can pass the attractiveness test, the cost-of-entry test, and the better-off test. Entry into new businesses can take any of three forms: acquisition, internal start-up, or joint venture. The choice of which is best depends on: the firm’s resources and capabilities, the industry’s entry barriers, the importance of speed, and the relative costs. There are two fundamental approaches to diversification: into related businesses and into unrelated businesses. The rationale for related diversification is to benefit from strategic fit: Diversify into businesses with matchups along their respective value chains, and then capitalize on the strategic fit by sharing or transferring the resources and capabilities across matching value chain activities to gain competitive advantage. Unrelated diversification strategies surrender the competitive advantage potential of strategic fit at the value chain level in return for the potential that can be realized from superior corporate parenting or the sharing and transfer of generalized resources and capabilities. An outstanding corporate parent can benefit its businesses through (1) providing high-level oversight and making available other corporate resources, (2) allocating financial resources across the business portfolio, and (3) restructuring underperforming acquisitions.
Case:
See if you can identify the value chain relationships that make the businesses of the following companies related in competitively relevant ways. In particular, you should consider whether there are cross-business opportunities for (1) transferring skills and technology, (2) combining related value chain activities to achieve economies of scope, and/or (3) leveraging the use of a well-respected brand name or other resources that enhance differentiation.
Bloomin’ Brands
Outback Steakhouse
Carrabba’s Italian Grill
Roy’s Restaurant (Hawaiian fusion cuisine)
Bonefish Grill (market-fresh fine seafood)
Fleming’s Prime Steakhouse & Wine Bar
L’Oréal
Maybelline, Lancôme, Helena Rubinstein cosmetics
L’Oréal, Garnier, and SoftSheen-Carson hair care products
Redken, Matrix, L’Oréal Professional, Kiehl’s, and Kérastase professional hair care and skin care products
Ralph Lauren, Yves Saint Laurent, and Giorgio Armani fragrances
La Roche-Posay, Vichy Laboratories, Dermablend, and SkinCeuticals dermocosmetics
Johnson & Johnson
Baby products (powder, shampoo, oil, lotion)
Band-Aids and other first-aid products
Women’s health and personal care products
Neutrogena, Lubriderm, and Aveeno skin care products
Nonprescription drugs (Tylenol, Motrin, Pepcid AC, Mylanta, Benadryl)
Prescription drugs
Oral health care (Listerine, Rembrandt)
Nutritionals (Splenda, Lactaid)
Prosthetic and other medical devices
Surgical and hospital products
Vision care (Acuvue contact lenses, Visine)
1. List and describe the cross-business opportunities for transferring skills or technology that exist with the business lineups of Bloomin' Brands, L'Oreal, and Johnson & Johnson.
2. List and describe the cross-business opportunities to combine related value chain activities to achieve economies of scope within each of the three diversified companies.
3. Discuss how the three diversified companies are able to leverage the use of well-respected brand names or other resources that enhance differentiation.
Explanation / Answer
Bloomin' Brands:
The company’s overall strategy is to differentiate its restaurants by emphasizing consistently on high-quality food and distinguished service, generous portions at moderate prices and a casual atmosphere across the locations. This is a great example of two strategic t opportunities: transferring skills and combining the related value chain activities to achieve lower costs, and economies of scope especially in the administrative functions. Also, since its inception and till date, its USP has been its top notch experience, it has carved and niche for itself and built a brand for each of its restaurant chains, separately. So, eventhough differentiated in terms of cuisine and experiences, the brand recognition and motive remains the same, and so does the perception, which imbibes the sense of quality among the customers..
L’Oréal:
L'Oreal has been the pioneer of the beauty industry ever since one can remember. One strategic t opportunity that can be noted in the entire value chain is that of skills transfer which involves cross-business collaborations to focus on innovation of new beauty-related products, i.e. creating new strengths and capabilities, backed by thorough research and plethora of insights from a wide range of users worldwide.In some of the businesses, there is the potential of combining related value chain activities, including manufacturing, R&D, distribution and marketing.
Johnson & Johnson:
This is an unparalled example of leveraging a well-respected brand name which exudes trust, protection and care like no other. To match this, all of their products, howsoever diversified they may be, have one thing in common, that its very personal to the end user and are hygiene or health related. Another potential strategic t opportunity is combining related value chain activities, including distribution, manufacturing and maybe advertising as well.