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. 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, or (3) averaging the use of a well-respected brand name or other resources that enhance differentiation.
Bloomin’ Brands
Outback Steakhouse
Carrabba’s Italian Grill
Bonefish Grill (market-fresh fine seafood)
Fleming’s Prime Steakhouse & Wine Bar
L’Oréal
Maybelline, Lancôme, Helena Rubinstein, essie, Kiehl’s, and Shu Uemura cosmetics
L’Oréal and SoftSheen-Carson hair care products
Redken, Matrix, L’Oréal Professional, and Kérastase Paris professional hair care and skin care products
Ralph Lauren and Giorgio Armani fragrances
La Roche-Posay, Vichy Laboratories dermo-cosmetics
Johnson & Johnson
Baby products (powder, shampoo, oil, lotion)
Band-Aids and other first-aid products
Women’s health and personal care products (Stayfree, Carefree, Sure & Natural)
Neutrogena and Aveeno skin care products
Nonprescription drugs (Tylenol, Motrin, Pepcid AC, Mylanta, Monistat)
Prescription drugs
Prosthetic and other medical devices
Surgical and hospital products
Acuvue contact lenses
List and describe the cross-business opportunities for transferring skills or technology that exist with Bloomin’ Brands.

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