CHAPTER 6Corporate-Level Strategy Creating Value through Dive

CHAPTER 6
Corporate-Level Strategy: Creating Value through
Diversification
Copyright Anatoli Styf/Shutterstock
1
Learning Objectives
After reading this chapter, you should have a good
understanding of:
6-1 The reasons for the failure of many diversification efforts.
6-2 How managers can create value through diversification
initiatives.
6-3 How corporations can use related diversification to achieve
synergistic benefits through economies of scope and market
power.
6-4 How corporations can use unrelated diversification to
attain synergistic benefits through corporate restructuring,
parenting, and portfolio analysis.
6-5 The various means of engaging in diversification –
mergers and acquisitions, joint ventures/strategic alliances, and
internal development.
6-6 Managerial behaviors that can erode the creation of value.
©McGraw-Hill Education.

2
Corporate-Level Strategy
Consider . . .
What businesses should a corporation compete in?
How can these businesses be managed so they create “synergy”
– that is, create more value by working together than if they
were freestanding units?
Corporate-level strategy = a strategy that focuses on gaining
long-term revenue, profits, and market value through managing
operations in multiple businesses. Determining how to create
value through entering new markets, introducing new products,
or developing new technologies is a vital issue in strategic
management, but maintaining a focus on “creating value” is
essential to long-term success. Research shows that a majority
of acquisitions of public corporations result in value destruction
rather than value creation. Therefore, these questions must be
continually asked and answered.
3
Making Diversification Work
(1 of 2)
Diversification initiatives must create value for shareholders
through
Mergers and acquisitions
Strategic alliances
Joint ventures
Internal development
Diversification should create synergy.
Business 1 plus Business 2 equals More than two.

Diversification = the process of firms expanding their
operations by entering new businesses. Diversification
initiatives – whether through mergers and acquisitions, strategic
alliances and joint ventures, or internal development – must be
justified by the creation of value for shareholders. But this is
not always the case. Firms typically pay high premiums when
they acquire a target firm. So why should companies even
bother with diversification initiatives? The answer is synergy,
which means “working together,” and synergistic effects should
be multiplicative – one plus one should equal more than two.
4
Making Diversification Work
(2 of 2)
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,
distribution channels via vertical integration
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 businesses are those that share resources. Unrelated
businesses have few similarities in products or industries,
However the corporate office can add value through such
activities as robust information systems or superb human
resource practices. Benefits derived from horizontal (related
diversification) and hierarchical (unrelated diversification)
relationships are not mutually exclusive. Many firms that
diversify into related areas benefit from information technology

expertise in the corporate office. Similarly, unrelated
diversifiers often benefit from the “best practices” of sister
businesses even though their products, markets, and
technologies may differ dramatically. An example would be a
corporate parent with strong support activities in the value
chain such as information systems or human resource practices.
5
Related Diversification
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, enhance differentiation
Related businesses gain market power by:
Pooled negotiating power
Vertical integration
Related diversification = a firm entering a different business in
which it can benefit from leveraging core competencies, sharing
activities, or building market power. Economies of scope = cost
savings from leveraging core competencies or sharing related
activities among businesses in a corporation. Core competencies
= a firm’s strategic resources that reflect the collective learning
in the organization. Sharing activities = having activities of two
or more businesses’ value chains done by one of the businesses.
A firm can also enjoy greater revenues if two businesses attain
higher levels of sales growth combined than either company
could attain independently (this is the synergistic effect). Firms
also can enhance the effectiveness of their differentiation
strategies by means of sharing activities among business units.
A shared order-processing system, for example, may permit new
features and services that a buyer will value. Market power =

firms’ abilities to profit through restricting or controlling
supply to a market or coordinating with other firms to reduce
investment. Pooled negotiation power = the improvement in
bargaining position relative to suppliers and customers. Be
careful, though: acquiring related businesses can enhance a
corporation’s bargaining power, but it must be aware of the
potential for retaliation. Vertical integration = an expansion or
extension of the firm by integrating preceding or successive
production processes. Vertical integration occurs when a firm
becomes its own supplier or distributor.
6
Question
(1 of 2)
Sharing core competencies is one of the primary potential
advantages of diversification. In order for diversification to be
most successful, it is important that
the similarity required for sharing core competencies must be in
the value chain, not in the product.
the products use similar distribution channels.
the target market is the same, even if the products are very
different.
the methods of production are the same.
Answer: A. See the discussion of core competencies and the
criteria for success.
7
Related Diversification:
Leveraging Core Competencies
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.
Core competencies = a firm’s strategic resources that reflect the
collective learning in the organization. This collective learning
includes how to coordinate diverse production skills, integrate
multiple streams of technologies, and market diverse products
and services. Core competencies = the glue that binds existing
businesses together, achieved by transferring accumulated skills
and expertise across business units in a corporation. Core
competencies can lead to the creation of value and synergy, but
these core competencies must enhance competitive advantage(s)
by creating superior customer value – by building on existing
skills and innovations in a way that appeals to customers, as at
Apple. Different businesses in the firm must also be similar in
at least one important way related to the core competence. It’s
not essential that products or services themselves be similar; it
is essential that one or more elements in the value chain require
similar essential skills – IBM’s computing power is an example.
Finally, core competencies must be difficult for competitors to
imitate or find substitutes for. Specialized technical skills
acquired during a company’s work experience, such as at
Amazon, are an example.
8
Sharing Activities
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
Sharing activities = having activities of two or more businesses’
value chains done by one of the businesses. Tangible value-
creating activities can include common manufacturing facilities,
distribution channels, and sales forces. Cost savings are
generally highest when one company acquires another from the
same industry in the same country. Sharing activities inevitably
involve costs that the benefits must outweigh such as the greater
coordination required to manage a shared activity. Sharing
activities can also increase the effectiveness of differentiation
strategies. For instance, a shared order-processing system may
permit new features and services that a buyer will value.
However, sharing activities among businesses in a corporation
can have a negative effect on a given business’s differentiation.
An example is when Ford owned Jaguar and customers found
out it shared its basic design and manufacturing with the
Mondeo; customers had a lower perceived value of Jaguar.
9
Market Power
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

Market power = firms’ abilities to profit through restricting or
controlling supply to a market or coordinating with other firms
to reduce investment. Pooled negotiating power = the
improvement in bargaining position relative to suppliers and
customers. Similar businesses working together or the
affiliation of the business with a strong parent can strengthen an
organization’s purchasing clout. However, managers must
carefully evaluate how the combined businesses may affect
relationships with actual and potential customers, suppliers, and
competitors – they may retaliate! Vertical integration = an
expansion or extension of the firm by integrating preceding or
successive production processes. Vertical integration occurs
when a firm becomes its own supplier or distributor. The firm
can incorporate more processes toward the original source of
raw materials (backward integration) or toward the ultimate
consumer (forward integration).
10
Example: Question
Shaw Industries, a giant carpet manufacturer, increases its
control over raw materials by producing much of its own
polypropylene fiber, a key input into its manufacturing process.
This is an example of
leveraging core competencies.
pooled negotiating power.
vertical integration.
sharing activities.
Answer: C. See Exhibit 6.3. See the Shaw Industries website at
http://shawfloors.com/
11
Example: Related Diversification:

Vertical Integration
Example: Simplified Stages of Vertical Integration: Shaw
Industries
Jump to Appendix 1 for long description.
Vertical integration can be a viable strategy for many firms.
Shaw Industries is a carpet maker that has attained a dominant
position in the industry via a strategy of vertical integration.
Shaw has successfully implemented strategies of both forward
AND backward integration.
12
Vertical Integration, Issues
Is the company satisfied with the quality of the value that its
present suppliers & distributors are providing?
Are there activities in the industry value chain presently being
outsourced or performed independently by others that are a
viable source of future profits?
Is there a high level of stability in the demand for the
organization’s products?
Does the company have the necessary competencies to execute
the vertical integration strategies?
Will the vertical integration initiatives have potential negative
impacts on the firm’s stakeholders?

In making vertical integration decisions, five issues should be
considered. If the performance of organizations in the vertical
chain is satisfactory, it may not, in general, be appropriate for a
company to perform these activities itself. However, even if a
firm IS outsourcing value-chain activities to companies that are
doing a credible job, it may be missing out on substantial profit
opportunities. Note: high demand or sales volatility are not that
conducive to vertical integration. With a high level of fixed
costs in plant and equipment as well as operating costs that
accompany endeavors toward vertical integration, widely
fluctuating sales demand can either strain resources (in times of
high demand) or result in unused capacity (in times of low
demand). Finally, successfully executing strategies of vertical
integration can be very difficult and can require significant
competencies. In addition, managers must carefully consider the
impact that vertical integration may have on existing and future
customers, suppliers, and competitors.
13
Vertical Integration, Transaction Costs
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
Transaction cost perspective = a perspective that the choice of a
transaction’s governance structure, such as vertical integration

or market transaction, is influenced by transaction costs,
including search, negotiating, contracting, monitoring, and
enforcement costs, associated with each choice. Transaction
costs are the sum of the above costs. These transaction costs can
be avoided by internalizing the activity, in other words, by
producing the input in-house. However, vertical integration
gives rise to administrative costs as well. Coordinating different
stages of the value chain now internalized within the firm
causes administrative costs to go up. Decisions about vertical
integration are, therefore, based on a comparison of transaction
costs and administrative costs. If transaction costs are lower
than administrative costs, it is best to resort to market
transactions and avoid vertical integration. On the other hand, if
transaction costs are higher than administrative costs, vertical
integration becomes an attractive strategy.
14
Unrelated Diversification
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 = a firm entering a different business
that has little horizontal interaction with other businesses of a
firm. Benefits of unrelated diversification come from the
vertical or hierarchical relationships, or creation of synergies
from the interaction of the corporate office with the individual
business units. The corporate office can contribute to parenting

and restructuring of often acquired businesses or can add value
by viewing the entire corporation as a family or portfolio of
businesses and allocating resources to optimize corporate goals
of profitability, cash flow, and growth. Parenting advantage =
the positive contributions of the corporate office to a new
business as a result of expertise and support provided, and not
as a result of substantial changes in assets, capital structure, or
management. Restructuring = the intervention of the corporate
office in a new business that substantially changes the assets,
capital structure, and/or management, including selling off parts
of the business, changing the management, reducing payroll and
unnecessary sources of expenses, changing strategies, and
infusing the new business with new technologies, processes, and
reward systems. Portfolio management = a method of (a)
assessing the competitive position of a portfolio of businesses
within a corporation, (b) suggesting strategic alternatives for
each business, and (c) identifying priorities for the allocation of
resources across the businesses.
15
Unrelated Diversification:
Parenting & Restructuring
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.
Parenting relates to the positive contributions of the corporate
office to a new business as a result of expertise and support

provided in areas such as legal, financial, human resource
management, procurement, and the like. Corporate parents al so
help subsidiaries make wise choices in their own acquisitions,
divestitures, and new internal development decisions. With a
restructuring strategy the corporate office tries to find either
poorly performing firms with unrealized potential or firms in
industries on the threshold of some significant, positive change.
The parent intervenes, often selling off parts of the business;
changing the management; reducing payroll and unnecessary
sources of expenses; changing strategies; and infusing the
company with new technologies, processes, reward systems, and
so forth. When the restructuring is complete, the firm can either
“sell high” and capture the added value or keep the business and
enjoy financial and competitive benefits. In order for this to
work, the corporate parent must have the requisite skills and
resources to turn the businesses around, even if they may be in
new and unfamiliar industries.
16
Portfolio Management
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
The key purpose of portfolio models is to assist a firm in
achieving a balanced portfolio of businesses. A balanced
portfolio consists of businesses whose profitability, growth, and
cash flow characteristics complement each other and add up to a
satisfactory overall corporate performance. Portfolio analysis
allows the corporation (1) to allocate resources among the

business units according to prescribed criteria (i.e., use cash
flows from the “cash cows” to fund promising “stars”); (2)
identify attractive acquisitions; (3) provide financial resources
on favorable terms; (4) provide high-quality review and
coaching for the individual businesses; (5) provide a basis for
developing strategic goals and rewards/evaluation systems for
business managers.
17
Portfolio Management, BCG
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 6.4 The Boston Consulting Group (BCG) Portfolio
Matrix
Jump to Appendix 2 for long description.
In the BCG approach, each of the firm’s strategic business units
(SBUs) is plotted on a two-dimensional grid in which the axes
are relative market share and industry growth rate. Relative
market share is measured by the ratio of the business units size
to that of its largest competitor. Growth rate is estimated from
market data. The four quadrants of the grid include stars: firms
with long-term growth potential that should continue to receive
substantial investment funding; question marks: SBUs operating
in high-growth industries with relatively weak market shares
where resources should be invested in them to enhance their
competitive positions; cash cows: SBUs with high market shares
in low-growth industries that have limited long-run potential
but represent a source of current cash flows to fund investments

in “stars” and “question marks”; dogs: SBUs with weak
positions and limited potential – most analysts recommend that
they be divested.
18
Portfolio Management, Limitations
Limitations of portfolio models:
SBUs are 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 is no substitute for
managers’ experience.
Following strict & simplistic rules for resource allocation can
be detrimental to a firm’s long-term viability.
Limitations of portfolio models: comparing SBUs on only two
dimensions, viewing each SBU as a stand-alone entity and
ignoring synergies, treating the process as largely mechanical,
relying on strict rules for resource allocation, making overly
simplistic prescriptions and ignoring a firm’s potential long-
term viability.
19
Example: Goal of Diversification =
Risk Reduction?
Diversification can reduce variability in revenues & profits over
time. However…
Stockholders can diversify portfolios at a much lower cost &
economic cycles are difficult to predict, so why diversify?
Example = General Electric’s businesses:

Aircraft engines, power generation equipment, locomotive
trains, large appliances, healthcare products, financial products,
lighting, mining, oil & gas
Why is GE in so many businesses?
See http://www.ge.com/products. GE is widely diversified,
although not as greatly as they once were – they used to own
NBC – the National Broadcasting TV group, which GE merged
with Vivendi to form NBC Universal – but divested this entity
in 2011. With this divestiture, it could be argued that GE is in
the business of “imagination,” since all its remaining products,
except for the financial services business, can be considered
offshoots of founder Thomas A. Edison’s inventions that made
life easier through technology. As the chapter says, GE’s range
of diversification has resulted in stable earnings over time, and
a very low-risk profile. This allows them to borrow money at
very favorable rates, money that they, in turn, use to provide
financing to buyers of their products – hence the financial
services division! So GE’s level of diversification DOES help
the company reduce risk.
20
Means of Diversification
Diversification can be accomplished via
Mergers & acquisitions
And divestment
Pooling resources of other companies with a firm’s own
resource base through
Strategic alliances & joint ventures
Internal Development through
Corporate entrepreneurship
New venture development

Diversification, either related or unrelated, allows a firm to
achieve synergies and create value for its shareholders. There
are three basic means by which a firm can diversify. Mergers =
the combining of two or more firms into one new legal entity.
Acquisitions = the incorporation of one firm into another
through purchase. Through mergers and acquisitions,
corporations can directly acquire another firm’s assets and
competencies. A firm can also divest previous acquisitions.
Divestment = the exit of a business from the firm’s portfolio.
By using a joint venture or strategic alliance, corporations can
pool the resources of other companies with their own resource
base. Strategic alliance = a cooperative relationship between
two or more firms. Joint ventures = new entities formed within
a strategic alliance in which two or more firms, the parents,
contribute equity to form the new legal entity. Finally,
corporations may diversify into new products, markets, and
technologies through internal development. Internal
development = entering a new business through investment in
new facilities, often called corporate entrepreneurship and new
venture development. Corporate entrepreneurship involves the
leveraging and combini ng of the firm’s own resources and
competencies to create synergies and enhance shareholder
value.
21
Mergers and Acquisitions
Mergers involve a combination or consolidation of two firms to
form a new legal entity.
Relatively rare
On a relatively equal basis
Acquisitions involve one firm buying another either through
stock purchase, cash, or the issuance of debt.

The most visible and often costly means to diversify is through
acquisitions. Exhibit 6.5 illustrates the dramatic volatility in
worldwide M&A activity over the last several years. Increase in
merger and acquisition activity can indicate market optimism.
It’s an indication that markets are willing to finance these
transactions. Government policies such as regulatory actions
and tax policies can also make the M&A environment more or
less favorable. Finally, currency fluctuations can influence the
rate of cross-border acquisitions with firms in countries with
stronger currencies being in a stronger position to acquire.
22
Mergers and Acquisitions: Motives
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
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.
In certain industries speed is critical, so acquiring is faster than
building. Example = Apple acquiring Siri Inc. Acquisitions can
quickly add new technology to product offerings and meet
changing customer needs. Example = Cisco Systems.
Acquisitions can help a firm leverage core competencies, share
activities, and build market power. Example = eBay’s
acquisition of GSI Commerce, StubHub and Gmarket allows it

to become a full-service provider of online retailing systems.
M&A can lead to consolidation within an industry, forcing other
players to merge. Example = consolidation in the airline
industry: Delta – Northwest, United – Continental. Corporations
can also enter a new market segments by way of acquisitions.
Example = Fiat acquired Chrysler to gain access to the U.S.
auto market. See Exhibit 6.6.
23
Mergers and Acquisitions: 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.
By estimates, 70 to 90% of acquisitions destroy shareholder
value. See Strategy Spotlight 6.4. Two times out of three, the
stock price of the acquiring company falls once the deal is made
public. Since the acquiring firm often pays a 30% or higher
premium for the target company, the acquirer must create
synergies and scale economies that result in sales and market
gains exceeding the premium price. This is sometimes hard to
do. Because competing firms can often imitate advantages or
copy synergies, investors may not be willing to pay a high
premium for the stock. M&A costs are paid for upfront.
Conversely, firms pay for R&D, ongoing marketing, and
capacity expansion over time. This stretches out the payments
needed to gain new competencies, but investors want to see
immediate results. If the M&A does not perform as planned,
managers who pushed for the deal may find their reputation
tarnished. Finally, creating a singular organizational culture
from multiple national or business cultures can be very
difficult. Example = SmithKline and the Beecham Group.

24
Question
(2 of 2)
Divestment can be the common result of an acquisition.
Divesting businesses can accomplish many different objectives.
These include
enabling managers to focus their efforts more directly on the
firm’s core businesses.
providing the firm with more resources to spend on more
attractive alternatives.
raising cash to help fund existing businesses.
all of the above.
Answer: D. Divestment = the exit of a business from the firm’s
portfolio. See limitations of mergers and acquisitions, and how
divesting a business can accomplish many different objectives,
as on the next slide.
.
25
Mergers and Acquisitions:
Divestment Objectives
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
Divestments, the exit of the business from the firm’s portfolio,
are quite common. Large, prestigious U.S. companies may have
divested more acquisitions than they have kept. Investing can

enhance a firm’s competitive position only to the extent that it
reduces its tangible (e.g., maintenance, investments, etc.) or
intangible (e.g., opportunity costs, managerial attention) costs
without sacrificing a current competitive advantage or the seeds
of future advantages. To be effective, divesting requires a
thorough understanding of the business unit’s current ability
and future potential to contribute to a firm’s value creation.
Modes of divestment include sell-offs, spin-offs, equity carve-
outs, asset sales/dissolution, and split-ups.
26
Mergers and Acquisitions:
Divestment Success
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
Successful divestment requires a thorough understanding of a
business unit’s current ability and future potential to contribute
to a firm’s value creation. Since the decision to divest involves
a great deal of uncertainty, it’s very difficult to make such
evaluations. In addition, because of managerial self interests
and organizational inertia, firms often delay investments of
underperforming businesses. The Boston Consulting Group has
identified the above seven principles for successful divestiture.
27
Strategic Alliances &
Joint Ventures: Motives

Strategic alliances & joint ventures are cooperative
relationships between two (or more) firms 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 and joint ventures are assuming an
increasingly prominent role in the strategy of leading firms,
both large and small. A strategic alliance can help firms better
understand customer needs, acquire know-how for promoting
the product, acquire access to the proper distribution channels.
Example = Zara cooperating with Tata in India. Strategic
alliances enable firms to pool capital, value-creating activities,
or facilities in order to reduce costs. Example = PGA and LPGA
tours joined together to save costs in marketing and joint
utilization of media platforms. Strategic alliances may also be
used to build jointly on the technological expertise of two or
more companies, enabling them to develop products beyond the
capability of other companies acting independently. Example =
alliance between Ericsson and Cisco in Strategy Spotlight 6.5
allowed for development of new telecommunication equipment.
28
Strategic Alliances &
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.
Despite their promise, many alliances and joint ventures fail to
meet expectations for a variety of reasons. The proper partner is
essential. However, unfortunately, often little attention is given
to nurturing the close working relationship and interpersonal
connections that bring together the partnering organizations.
29
Internal Development
Corporate entrepreneurship & new venture internal 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.
No need for external funding for new development.
Limitations:
Time-consuming
Need to continually develop new capabilities
Internal development = entering a new business through
investment in new facilities, often called corporate
entrepreneurship and new venture development. Internal
development is such an important means by which companies
expand their businesses that there’s a whole chapter devoted to
it – see Chapter 12. Compared to mergers and acquisitions,
firms that engage in internal development capture the value
created by their own innovative activities without having to
share the wealth with alliance partners or face the difficulties
associated with combining activities across the value chains of
several firms or merging corporate cultures. On their own, firms

can often develop new products or services that are relatively
lower cost, and thus rely on their own resources rather than
turning to external funding. However this may be time-
consuming, so firms may forfeit the benefits of speed that
growth through mergers or acquisitions can provide. In
addition, firms that choose to diversify through internal
development must develop capabilities that allow them to move
quickly from initial opportunity recognition to market
introduction.
30
Managerial Motives
Managerial motives: Managers may act in their own self
interest, eroding rather than enhancing value creation.
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
We cannot assume that CEOs and top executives are rational
beings. They may not always act in the best interests of
shareholders to maximize long-term shareholder value. In the
real world they may often act in their own self interest.
Managerial motives = managers acting in their own self interest
rather than to maximize long-term shareholder value. Growth
for growth’s sake = managers’ actions to grow the size of their
firms not to increase long-term profitability but to serve
managerial self-interest. There is a “tremendous allure to
mergers and acquisitions,” which can lead to desperate moves
by top managers to satisfy investor demands for accelerating
revenues, sometimes by engaging in unethical behavior.
Egotism = managers’ actions to shape their firms’ strategies to

serve their selfish interests rather than to maximize long-term
shareholder value. Egos can get in the way of a synergistic
corporate marriage. Examples = John Thain’s $35,000
commode. Antitakeover tactics = managers’ actions to avoid
losing wealth or power as a result of a hostile takeover.
31
Managerial Motives:
Antitakeover Tactics
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
Unfriendly or hostile takeovers can occur when a company’s
stock becomes undervalued. A competing organization can buy
the outstanding stock of a takeover candidate in sufficient
quantity to become a large shareholder. Then it makes a tender
offer to gain full control of the company. If the shareholders
accept the offer, the hostile firm buys the target company and
either fires the target firm’s manage ment team or strips them of
their power. There are several antitakeover tactics. Greenmail =
a payment by a firm to a hostile party for the firm’s stock at a
premium, made when the firm’s management feels that the
hostile party is about to make a tender offer. Golden parachute
= a prearranged contract with managers specifying that, in the
event of a hostile takeover, the target firm’s managers will be
paid a significant severance package. Poison pill = used by a
company to give shareholders certain rights in the event of
takeover by another firm.
32

APPENDICES
Description of Images
33
Appendix 1 Example: Related Diversification:
Vertical Integration
Return to slide.
Shaw industries’ backward integration includes polypropylene
fiber production, or raw materials. Carpeting is then
manufactured and sent to retail stores (forward integration).
34
Appendix 2 Unrelated Diversification:
Portfolio Management, B C G
Return to slide.
The graphic is divided into four sections: stars, question marks,
cash cows, and dogs. The y axis is industry growth rate divided
into percentages from 2 to 22. The x axis is the relative market
share 10 x to 0.1 x.
There are circles in each section representing B C G’s business
units. The size of the circle represents the relative size of the
business unit in terms of revenues.
In stars there are two medium-sized units and one small unit.
First unit is at 10 percent growth rate and 3 x relative market
share. Second is at 15 percent growth rate and 1.5 x share. The
smallest unit is at 21 percent growth rate and 1x share.
In question marks, one unit, a medium-sized unit is at 14

percent growth rate and 0.3 x market share. A smaller unit at 16
percent growth rate and .25 x share. And the smallest question
mark unit is at 16 percent growth rate and 1 x share.
There are three small dog units. One at .15 x share and 4
percent growth rate, one at 0.3 x share and 7 percent growth
rate, and one at 8 percent growth rate and almost to 0.1 x share.
The largest units are in the cash cows quadrant. The largest is at
4 percent growth rate and 4 x share. A medium 4 percent growth
rate and 2 x share, and a medium-sized unit at 8 percent growth
rate and 1.5 x share.
As the text says, market share is central to the B C G matrix.
This is because high relative market share leads to unit cost
reduction due to experience and learning curve effects and,
consequently, superior competitive position.
35

CHAPTER 6Corporate-Level Strategy Creating Value through Dive

Recommended

Recommended

More Related Content

More from JinElias52

More from JinElias52 (20)

CHAPTER 6Corporate-Level Strategy Creating Value through Dive