Corporate-
Level
Strategy:
Creating Value
through
Diversification
Module 6
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Learning Objectives
6-2
After reading this chapter, you should have a
good understanding of:
LO6.1 The reasons for the failure of many
diversification efforts.
LO6.2 How managers can create value through
diversification initiatives.
LO6.3 How corporations can use related
diversification to achieve synergistic benefits through
economies of scope and market power.
Making Diversification Work
6-3
Diversification
initiatives must create
value for shareholders through
Mergers and acquisitions
Strategic alliances
Joint ventures
Internal development
Diversification should create synergy
Business Business More
1 2 than two
Making Diversification Work
6-4
A firm may diversify into related businesses
Benefits derive from horizontal relationships
Sharing intangible resources such as core
competencies in marketing
Sharing tangible resources such as production
facilities
A firm may diversify into unrelated
businesses
Benefits derive from hierarchical relationships
Value creation derived from the corporate office
Leveraging support activities in the value chain
Related Diversification
6-5
Related diversification enables a firm to
benefit from horizontal relationships
across different businesses
Economies of scope allow businesses to:
Leverage core competencies
Share related activities
Enjoy greater revenues
Related businesses gain market power by:
Pooled negotiating power
Vertical integration
Related Diversification:
Leveraging Core Competencies
6-6
Core competencies reflect the collective
learning in organizations. Can lead to the
creation of value and synergy if…
They create superior customer value
Thevalue chain elements in separate
businesses require similar skills
They are difficult for competitors to
imitate or find substitutes for
Related Diversification:
Sharing Activities
6-7
Corporations can also achieve synergy by
sharing activities across their business
units.
Sharing tangible & value-creating
activities can provide payoffs:
Cost savings through elimination of jobs,
facilities & related expenses, or economies of
scale
Revenue enhancements through increased
differentiation & sales growth
Related Diversification:
6-8
Market Power
Marketpower can lead to the creation of
value and synergy through…
Pooled negotiating power
Gaininggreater bargaining power with
suppliers & customers
Vertical
integration - becoming its own
supplier or distributor through
Backward integration
Forward integration
Related Diversification:
Vertical Integration
6-9
Exhibit 6.3 Simplified Stages of Vertical Integration: Shaw Industries
Related Diversification:
Vertical Integration
6-10
The transaction cost perspective
Every market transaction involves some
transaction costs:
Search costs
Negotiating costs
Contract costs
Monitoring costs
Enforcement costs
Need for transaction specific investments
Administrative costs
Unrelated Diversification
6-11
Unrelated diversification enables a firm to
benefit from vertical or hierarchical
relationships between the corporate office
& individual business units through…
The corporate parenting advantage
Providing competent central functions
Restructuring to redistribute assets
Asset, capital, & management restructuring
Portfolio management
BCG growth/share matrix
Unrelated Diversification:
Parenting & Restructuring
6-12
Parenting allows the corporate office to
create value through management
expertise & competent central functions
In restructuring the parent intervenes:
Asset restructuring involves the sale of
unproductive assets
Capital restructuring involves changing the
debt–equity mix, adding debt or equity
Management restructuring involves changes
in the top management team, organizational
structure, & reporting relationships
Unrelated Diversification:
Portfolio Management
6-13
Portfolio
management involves a better
understanding of the competitive position
of an overall portfolio or family of
businesses by…
Suggesting strategic alternatives for each
business
Identifying priorities for the allocation of
resources
Using Boston Consulting Group’s (BCG)
growth/share matrix
Unrelated Diversification:
Portfolio Management
6-14
Limitations of portfolio models:
SBUsare compared on only two dimensions
& each SBU is considered a standalone entity
Are these the only factors that really matter?
Can every unit be accurately compared on that
basis? What about possible synergies?
An oversimplified graphical model
substitutes for managers’ experience
Following strict & simplistic rules for
resource allocation can be detrimental to a
firm’s long-term viability
Means of Diversification
6-15
Diversification can be accomplished via
Mergers & acquisitions
And divestment
Poolingresources of other companies with a
firm’s own resource base through
Strategic alliances & joint ventures
Internal Development through
Corporate entrepreneurship
Mergers and Acquisitions
6-16
Mergers involve a combination or
consolidation of two firms to form a new
legal entity:
Are relatively rare
The two firms are on a relatively equal basis
Acquisitions involve one firm buying
another either through stock purchase,
cash, or the issuance of debt
Mergers and Acquisitions: Motives
6-17
In high-technology & knowledge-
intensive industries, speed is critical:
acquiring is faster than building.
M&A allows a firm to obtain valuable
resources that help it expand its product
offerings & services.
M&A helps a firm develop synergy:
Leveraging core competencies
Sharing activities
Building market power
Mergers and Acquisitions: Motives
6-18
M&A can lead to consolidation within an
industry, forcing other players to merge.
Corporations can also enter new market
segments by way of acquisitions.
Mergers and Acquisitions:
6-19
Limitations
Takeover premiums for acquisitions are
typically very high
Competing firms can imitate advantages
Competing firms can copy synergies
Managers’ egos get in the way of sound
business decisions
Cultural issues may doom the intended
benefits
Mergers and Acquisitions:
6-20
Divestment
Divestment objectives include:
Cutting the financial losses of a failed
acquisition
Redirecting focus on the firm’s core
businesses
Freeing up resources to spend on more
attractive alternatives
Raising cash to help fund existing businesses
Mergers and Acquisitions:
6-21
Divestment
Successful divestiture involves:
Removing emotion from the decision
Knowing the value of the business you’re
selling
Timing the deal right
Maintaining a sizable pool of potential buyers
Telling a story about the deal
Running divestitures systematically through a
project office
Communicating clearly and frequently
Strategic Alliances &
6-22
Joint Ventures: Motives
Strategic
alliances & joint ventures are
cooperative relationships with potential
advantages:
Ability to enter new markets through
Greater financial resources
Greater marketing expertise
Ability to reduce manufacturing or other
costs in the value chain
Ability to develop & diffuse new technologies
Strategic Alliances &
6-23
Joint Ventures: Limitations
Need for the proper partner:
Partners should have complementary
strengths
Partner’s strengths should be unique
Uniqueness should create synergies
Synergies should be easily sustained & defended
Partners must be compatible & willing to
trust each other
Internal Development
6-24
Corporateentrepreneurship & new
venture development motives:
No need to share the wealth with alliance
partners
No need to face difficulties associated with
combining activities across the value chains
No need to merge diverse corporate cultures
Limitations:
Time-consuming
Need to continually develop new capabilities
Managerial Motives
6-25
Managerialmotives: Managers may act in
their own self interest – eroding rather
than enhancing value creation through
Growth for growth’s sake
Top managers gain more prestige, higher
rankings, greater incomes, more job security
It’s exciting and dramatic!
Excessive egotism
Use of antitakeover tactics
