CorporateLevel
Strategy:
Creating Value
through
Diversification
chapter 6
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education
.
Making Diversification Work
6-2
 Diversification
initiatives must create
value for shareholders through
 Mergers
and acquisitions
 Strategic alliances
 Joint ventures
 Internal development
 Diversification
Business
1
should create synergy
Business
2
More
than two
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
firm may diversify into unrelated
businesses
A
 Benefits
 Value
derive from hierarchical relationships
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
 Pooled
businesses gain market power by:
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
 Forward
integration
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
 Providing
competent central functions
 Restructuring
 Asset,
capital, & management restructuring
 Portfolio
 BCG
to redistribute assets
management
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
debt–equity mix, adding debt or equity
 Management restructuring involves changes
in the top management team, organizational
structure, & reporting relationships
Unrelated Diversification:
Portfolio Management
6-11
 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 Group’s (BCG)
growth/share matrix
Unrelated Diversification:
Portfolio Management
6-12
Each circle
represents one
of the firm’s
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
 Mergers
 And
can be accomplished via
& acquisitions
divestment
 Pooling
resources of other companies with a
firm’s own resource base through
 Strategic
 Internal
alliances & joint ventures
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 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
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