Managerial motives that are not aligned with shareholder value creation can undermine the potential benefits of diversification strategies. Proper governance and incentives are needed to ensure strategies like mergers, acquisitions, alliances and joint ventures are undertaken to generate true synergies rather than serving other managerial aims.

1. 6
Corporate-Level Strategy:
Creating Value through Diversification
McGraw-Hill/Irwin
Strategic Management: Text and Cases, 4e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

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?

3. Making Diversification Work
• Diversification initiatives must create value for
shareholders
– Mergers and acquisitions
– Strategic alliances
– Joint ventures
– Internal development
• Diversification should create synergy
Business Business
1 2

4. Synergy
Related businesses (horizontal relationships)
Sharing tangible resources
Sharing intangible resources
Unrelated businesses (hierarchical relationships)
Value creation derives from corporate office
--Leveraging support activities

5. Creating Value
Related Diversification: Economies of Scope
Leveraging core competencies
Sharing activities
Related Diversification: Market Power
 Pooled negotiating power
 Vertical integration

6. Creating Value
Unrelated Diversification
Corporate Parenting
Corporate Restructuring
Portfolio Management

7. Related Diversification: Economies of
Scope and Revenue Enhancement
Economies of scope
 Cost savings from leveraging core competencies or
sharing related activities among businesses in the
corporation
 Leverage or reuse key resources
-Favorable reputation
-Expert staff
-Management skills
-Efficient purchasing operations
-Existing manufacturing facilities

8. Leveraging Core Competencies
Core competencies
 the glue that binds existing businesses together
 engine that fuels new business growth
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

9. Three Criteria of Core Competencies
– Core competencies must enhance competitive
advantage(s) by creating superior customer value
• Develop strengths relative to competitors
• Build on skills and innovations
• Appeal to customers
– Different businesses in the firm must be
similar in at least one important way related
to the core competence
• Not essential that products or services themselves be similar
• Is essential that one or more elements in the value chain
require similar essential skills
• Brand image is an example

10. Three Criteria of Core Competencies
– Core competencies must be difficult for
competitors to imitate or find substitutes
for• Easily imitated or replicated core competencies are not a
sound basis for sustainable advantages
• Specialized technical skills acquired only in company
work experience are an example

11. Question
The concept of core competencies can be illustrated
by the imagery of the diversified corporation as a
tree. Describe what the different parts of a tree
would represent in a corporation.

12. 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
• Sharing activities provide two payoffs
– Cost savings
– Revenue enhancements

13. Related Diversification: Market Power
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

14. Related Diversification: Market Power
Vertical integration
 Occurs when a firm becomes its own supplier or
distributor
Backward integration—a firm produces its own
inputs.
Forward integration—a firm operates its own
distribution system for delivering its outputs.

15. Corporate Parenting & Restructuring
 Corporate Parenting
– Parenting —creating value within business units
• Experience of the corporate office
• Support of the corporate office
 Corporate Restructuring
– Find poorly performing firms
• With unrealized potential
• On threshold of significant positive change

16. Corporate Restructuring (Cont.)
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
Restructuring can involve changes in
– Assets
– Capital structure
– Management

17. Portfolio Management
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

18. Portfolio Management
• Creation of synergies and shareholder value by
portfolio management and the corporate office
– Allocate resources (cash cows to stars and some
question marks)
– 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

19. Portfolio Management Downsides
• They are overly simplistic
• They view each business as separate
• The process may become overly largely mechanical
• The reliance on rules for resource allocation can be
detrimental to a firm’s long-term viability
• The imagery while colorful may lead to troublesome
and overly simplistic prescriptions

20. Means to Achieve Diversification
 Acquisitions or mergers
 Joint venture
 Strategic alliance
 Internal development
– New products
– New markets
– New technology

21. Mergers and Acquisitions
• Acquisitions
-- one firm buys another either through a stock
purchase, cash, or the issuance of debt
• Mergers
-- entail a combination or consolidation of two firms
to form a new legal entity

22. Mergers and Acquisitions Downsides
• The takeover premium that is paid for an
acquisition is very high
• Competing firms often can imitate any advantage
realized or copied synergies
• Managers credibility and ego can sometimes get
in the way of sound business decisions.
• There can be many cultural issues that may
doom the intended benefits from M&A endeavors

23. Strategic Alliances and Joint Ventures
• Introduce successful product or service into a
new market
• Join other firms to reduce manufacturing (or
other) costs in the value chain
• Develop or diffuse new technologies

24. Unmet Expectations: Strategic
Alliances and Joint Ventures
• Improper partner
• Partners must be compatible
• Partners must trust one another

25. Managerial Motives Can
Erode Value Creation
• Growth for growth’s sake
• Egotism
• Antitakeover tactics
– Greenmail
– Golden parachute
– Poison pills