Corporate-Level Strategy:
Creating Value through Diversification
Chapter Six
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Making Diversification Work
• Diversification
 the process of firms
expanding their
operations by
entering new
businesses.
6-2
Making Diversification Work
• What businesses should a corporation
compete in?
• How should these businesses be managed to
jointly create more value than if they were
freestanding units?
6-3
Making Diversification Work
• Diversification initiatives must create value
for shareholders




Mergers and acquisitions
Strategic alliances
Joint ventures
Internal development
• Diversification should be synergistic
6-4
Making Diversification Work
• Related businesses (horizontal
relationships)
 Sharing tangible resources
 Sharing intangible resources
• Unrelated businesses (hierarchical
relationships)
 Value creation derives from corporate office
 Leveraging support activities
6-5
Related Diversification
• Related diversification
 a firm entering a different business in which it
can benefit from leveraging core
competencies, sharing activities, or building
market power.
6-6
Related Diversification
• Economies of scope
 cost savings from
leveraging core
competencies or
sharing related
activities among
businesses in a
corporation.
6-7
Leveraging Core Competencies
• Core competencies
 a firm’s strategic resources that reflect the
collective learning in the organization.
6-8
Leveraging Core Competencies
Core competencies reflect the collective
learning in a firm:
• How to coordinate diverse production skills
• How to integrate multiple streams of
technologies
• How to market diverse products and services
6-9
Three Criteria of Core Competencies
• Core competencies must enhance competitive
advantages by creating superior customer value
• Different businesses in the firm must be similar
in at least one important way related to the core
competence
• Core competencies must be difficult for
competitors to imitate or find substitutes for
6-10
QUESTION
Philip Morris bought Miller Brewing and
used its marketing expertise to improve
Miller's market share. This justification for
diversification is best described as
A. Utilizing common infrastructures
B. Capitalizing on core competencies
C. Reducing corporate risk
D. Using portfolio analysis
6-11
Sharing Activities
• Corporations can also achieve synergy by
sharing tangible and value-creating
activities across their business units
 Common manufacturing facilities
 Distribution channels
 Sales forces
6-12
Market Power
• Market power
 firms’ abilities to profit through restricting or
controlling supply to a market or coordinating
with other firms to reduce investment.
6-13
Market Power
• Pooled
• Vertical
negotiating power
integration
 The improvement
in bargaining
position relative to
suppliers and
customers.
 an expansion or
extension of the
firm by integrating
preceding or
successive
production
processes.
6-14
Pooled Negotiating Power
• Similar businesses working together can have
stronger bargaining position relative to
 Suppliers
 Customers
 Competitors
• Abuse of bargaining power may affect
relationships with customers, suppliers and
competitors
6-15
Vertical Integration
6-16
Vertical Integration
•
•
•
•
Benefits
A secure source of raw materials or
distribution channels.
Protection of and control over valuable
assets.
Access to new business opportunities.
Simplified procurement and administrative
procedures.
6-17
Vertical Integration
•
•
•
•
Risks
Costs and expenses associated with
increased overhead and capital expenditures.
Loss of flexibility resulting from large
investments.
Problems associated with unbalanced
capacities along the value chain.
Additional administrative costs associated
with managing a more complex set of
activities.
6-18
Making Vertical Integration Decisions
1. Is the company satisfied with the quality of the
value that our present suppliers and
distributors are providing?
2. Are there activities in our industry value chain
presently being outsourced or performed
independently by others that are a viable
source of future profits?
3. Is there a high level of stability in the demand
for the organization’s products?
6-19
Making Vertical Integration Decisions
(cont.)
4. Do we have the necessary competencies to
execute the vertical integration strategies?
5. Will the vertical integration initiative have
potential negative impacts on our
stakeholders?
6-20
Transaction Cost Perspective
• Transaction Cost Perspective
 the choice of a transaction’s governance
structure, is influenced by transaction costs,
such as search, negotiating, contracting,
monitoring, and enforcement costs
6-21
Unrelated Diversification
• Unrelated diversification
 a firm entering a different business that has
little horizontal interaction with other
businesses of a firm.
6-22
Corporate Parenting and Restructuring
• Parenting advantage
 the positive contributions of the corporate
office to a new business as a result of
expertise and support provided
6-23
Corporate Parenting and Restructuring
• Corporate Restructuring
 The intervention of the corporate office in a
new business that substantially changes the
assets, capital structure, and/or management
6-24
Corporate Restructuring
• Corporate management must
 Have insight to detect undervalued
companies or businesses with high potential
for transformation
 Have requisite skills and resources to turn
the businesses around
• Can involve changes in
 Assets
 Capital
 Management
6-25
Portfolio Management
• Portfolio management
 assessing the competitive position of a
portfolio of businesses within a corporation,
 suggesting strategic alternatives for each
business
 identifying priorities for the allocation of
resources across the businesses.
6-26
BCG Portfolio Matrix
Key
Each circle
represents one of
the firm’s
business units
Size of circle
represents the
relative size of the
business unit in
terms of revenue
6-27
Portfolio Management
• Allocate resources
• Expertise of corporate office in locating attractive
firms to acquire
• Provide financial resources to business units on
favorable terms reflecting the corporation’s
overall ability to raise funds
• Provide high quality review and coaching for
units
• Provide a basis for developing strategic goals
and reward/evaluation systems
6-28
Limitations of Portfolio Management
•
•
•
•
SBUs compared on only two dimensions
SBUs viewed as stand-alone entities
Process becomes largely mechanical
Reliance on “strict rules” regarding
resource allocation across SBUs can be
detrimental
6-29
Means to Achieve Diversification
• Acquisitions or mergers
• Pooling resources of other companies with
a firm’s own resource base
 Joint venture
 Strategic alliance
• Internal development
 Corporate entrepreneurship
6-30
Mergers and Acquisitions
• Can be a means of obtaining valuable
resources that can help an organization
expand its product offerings and services
• Can lead to consolidation within an industry
and can force other players to merge
• Corporations can also enter new market
segments by way of acquisitions
6-31
Limitations
• Competing firms often can imitate any
advantages realized or copy synergies
that result from the M&A.
• There can be many cultural issues that
may doom the intended benefits from M&A
endeavors.
6-32
Strategic Alliances and Joint
Ventures
• Introduce successful product or service
into a new market
 Lacks requisite marketing expertise
• Join other firms to reduce manufacturing
(or other) costs in the value chain
 Pool capital, value-creating activities,
facilities
6-33
Strategic Alliances and Joint
Ventures
• Develop or diffuse new technologies
 Use expertise of two or more companies
 Develop products technologically beyond the
capability of the
companies acting
independently
6-34
Unmet Expectations: Strategic
Alliances and Joint Ventures
• Improper partner
 Each partner must bring desired complementary
strengths to partnership
 Strengths contributed by each should be unique
• Partners must be compatible
• Partners must trust one another
6-35
Managerial Motives Can
Erode Value Creation
• Growth for growth’s sake
• Egotism
• Antitakeover tactics
 Greenmail
 Golden parachute
 Poison pills
6-36