CorporateLevel
Strategy:
Creating
Value
through
Diversificati
chapter 6
on
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Education
Making Diversification
Work
6-2
Diversification initiatives must create
value for shareholders through
Mergers and acquisitions
Strategic alliances
Joint ventures
Internal development
Diversification should create synergy
Making Diversification
Work
6-3
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
6-4
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
6-5
Core competencies reflect the
collective learning in organizations. Can
lead to the creation of value and synergy
if
They create superior customer value
The value chain elements in separate
businesses require similar skills
They are difficult for competitors to
imitate or find substitutes for
Related Diversification:
Sharing Activities
6-6
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:
Market Power
6-7
Market power can lead to the creation
of value and synergy through
Pooled negotiating power
Gaining greater bargaining power with
suppliers & customers
Vertical integration - becoming its
own supplier or distributor through
Backward integration
Forward integration
Related Diversification:
Vertical Integration
6-8
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
6-9
Unrelated diversification enables a firm
to benefit from vertical or hierarchical
relationships between the corporate office
& individual business units through
The corporate parenting advantage
Restructuring to redistribute assets
Providing competent central functions
Asset, capital, & management restructuring
Portfolio management
BCG growth/share matrix
Unrelated Diversification:
Parenting & Restructuring
6-10
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
debtequity mix, adding debt or equity
Management restructuring involves changes
in the top management team, organizational
structure, & reporting relationships
Unrelated Diversification:
Portfolio Management
6-11
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 Groups (BCG)
growth/share matrix
Unrelated Diversification:
6-12
Portfolio Management
Each circle
represents one
of the firms
business units.
The size of the
circle
represents the
relative size of
the business
unit in terms of
revenue.
Exhibit 6.5 The Boston Consulting Group (BCG) Portfolio
Matrix
Means of Diversification
6-13
Diversification can be accomplished via
Mergers & acquisitions
And
divestment
Pooling resources of other companies with a
firms own resource base through
Strategic
alliances & joint ventures
Internal Development through
Corporate
entrepreneurship
Managerial Motives
6-14
Managerial motives: Managers may
act in their own self interest eroding
rather than enhancing value creation
through
Growth for growths sake
Top
managers gain more prestige, higher
rankings, greater incomes, more job security
Its exciting and dramatic!
Excessive egotism
Use of antitakeover tactics
Managerial Motives:
Antitakeover Tactics
6-15
Antitakeover tactics include:
Green mail
Golden parachutes
Poison pills
Can benefit multiple stakeholders not
just management
Can raise ethical considerations because
the managers of the firm are not acting
in the best interests of the shareholders
