Analyzing a Company's Diversification Strategy Businesses
Read the overview below and complete the activities that follow.
In this exercise you will apply the concepts of diversification and strategic fit to ITT, a company with multiple business units and products.
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. There are two fundamental approaches to diversification—into related businesses and into unrelated businesses.
The rationale for related diversification is based on cross-business strategic fit: diversify into businesses with strategic fit along their respective value chains, capitalize on strategic fit relationships to gain competitive advantage, and then use competitive advantage to achieve the desired 1 + 1 = 3 impact on shareholder value.
Unrelated diversification strategies surrender the competitive advantage potential of strategic fit. Given the absence of cross-business strategic fit, the task of building shareholder value through a strategy of unrelated diversification hinges on the ability of the parent company to:
(1) do a superior job of identifying and acquiring new businesses that can produce consistently good earnings and returns on investment;
(2) do an excellent job of negotiating favorable acquisition prices;
and
(3) do such a good job of overseeing and parenting the collection of businesses that they perform at a higher level than they would on their own efforts.
The greater the number of businesses a company has diversified into and the more diverse these businesses are, the harder it is for corporate executives to select capable managers to run each business, know when the major strategic proposals of business units are sound, or decide on a wise course of recovery when a business unit stumbles.
Review the concepts in Chapter 8 on diversification and strategic fit to help you with this exercise.
Read about ITT in Assurance of Learning Exercise 3, located in the end of chapter material and shown below. Also, visit the company's website at www.itt.com.
ITT is a technology-oriented engineering and manufacturing company with the following business divisions and products:
Industrial Process Division—industrial pumps, valves, and monitoring and control systems; aftermarket services for the chemical, oil and gas, mining, pulp and paper, power, and biopharmaceutical markets.
Motion Technologies Division—durable brake pads, shock absorbers, and damping technologies for the automotive and rail markets.
Interconnect Solutions—connectors and fittings for the production of automobiles,
aircraft, railcars and locomotives, oil field equipment, medical equipment, and industrial equipment.
Control Technologies—energy absorption and vibration dampening equipment, transducers and regulators, and motion controls used in the production of robotics, medical equipment, automobiles, subsea equipment, industrial equipment, aircraft, and military vehicles.
ITT's portfolio of business units reflects a strategy of:
unrelated diversification.
related diversification.
a combination of related and unrelated diversification.
corporate restructuring.
unrelated value chains.