Blocking competitors through multipoint competition
Financial economies (unrelated diversification)
Efficient internal capital allocation
Uncertain future cash flows
Risk reduction for firm
Diversifying managerial employment risk
Increasing managerial compensation
Value-Creating Strategies of Diversification High Low Operational and Corporate Relatedness Corporate Relatedness: Transferring Skills into Businesses through Corporate Headquarters Operational Relatedness: Sharing Activities between Businesses High Low Related Constrained Diversification Vertical Integration (Market Power) Unrelated Diversification (Financial Economies) Related Linked Diversification (Economies of Scope) Both Operational and Corporate Relatedness (Rare capability that creates diseconomies of scope)
FIGURE 6.2 Value-Creating Diversification Strategies: Operational and Corporate Relatedness
The resources required to create value through diversification—cash and tangible resources (e.g., plant and equipment)
Value creation is determined more by appropriate use of resources than by incentives to diversify.
Managerial Motives to Diversify
Managerial risk reduction
Desire for increased compensation
FIGURE 6.4 Summary Model of the Relationship between Firm Performance and Diversification Source: R. E. Hoskisson & M. A. Hitt, 1990, Antecedents and performance outcomes of diversification: A review and critique of theoretical perspectives, Journal of Management, 16: 498.