Corporate-Level Strategy: Creating Value Through Diversification.............................................................................

Chapter 6: Corporate-Level Strategy: Creating Value through Diversification
Chapter 6
Corporate-Level Strategy: Creating Value through
Diversification.............................................................................. 6-2
Making Diversification Work: An Overview.......................................... 6-5
Related Diversification: Economies of

Scope and Revenue Enhancement............................................................ 6-5
Leveraging Core Competencies....................................................................................... 6-6

Sharing Activities............................................................................................................. 6-7
Related Diversification: Market Power................................................... 6-8
Pooled Negotiating Power............................................................................................... 6-8

Vertical Integration.......................................................................................................... 6-9
Unrelated Diversification: Financial Synergies and Parenting............. 6-10
Corporate Parenting and Restructuring.......................................................................... 6-10

Portfolio Management..................................................................................................... 6-11
Caveat: Is Risk Reduction a Viable Goal of Diversification?......................................... 6-12
The Means to Achieve Diversification...................................................... 6-13
Mergers and Acquisitions................................................................................................ 6-13

Strategic Alliances and Joint Venture.............................................................................. 6-16
Internal Development....................................................................................................... 6-17
How Managerial Motives Can Erode Value Creation............................ 6-18
Growth for Growth’s Sake............................................................................................... 6-18

Egotism............................................................................................................................ 6-18
Antitakeover Tactics......................................................................................................... 6-19
Issue for Debate ......................................................................................... 6-20
Reflecting on Career Implications............................................................ 6-21

Summary..................................................................................................... 6-22
End-of-Chapter Teaching Notes 6-25
Connect Resources 6-32
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Chapter 6
Corporate-Level Strategy:
Creating Value through Diversification
Summary/Objectives
PowerPoint Slide 2: Learning Objectives
Whereas business-level strategy (Chapter 5) deals with the question of how to compete in a
given industry, corporate level strategy addresses two related issues. These are: (1) what
businesses should we compete in, and (2) how can these businesses be managed in a way to
create “synergy,” that is, more value by working together than if they were free-standing units.
This chapter is divided into six major sections:
1. We begin by posing the question of why some corporate-level strategic efforts fail,
and others succeed? We emphasize the importance of diversification activities
that create shareholder value, whether through mergers and acquisitions, strategic
alliances and joint ventures, or internal development.
2. We address how related diversification can help a firm attain economies of scope
through either leveraging core competencies or sharing activities (such as
production facilities or distribution facilities).
3. We discuss how firms can benefit from related diversification through greater market
power. Here, we address pooled negotiating power and vertical integration.
4. The fourth section discusses how firms can benefit from unrelated diversification.
There are two key means to this end: corporate parenting and restructuring, as
well as portfolio management.
5. The fifth section focuses on the means that firms can use to achieve diversification.
The means include mergers and acquisitions, strategic alliances and joint
ventures, and internal development. We discuss the advantages and disadvantages
associated with each of these.
6. We close the chapter with a section on how managerial motives can erode value
creation as firms pursue diversification initiatives. These include growth for
growth’s sake, egotism, and antitakeover tactics (e.g., greenmail, poison pills).
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Lecture/Discussion Outline
The Newell-Jarden case in LEARNING FROM MISTAKES discusses Newell’s decision to

acquire Jarden. The acquisition appeared to offer significant value creation potential, but it has
not worked out the way the firms anticipated.
Discussion Question 1: In what ways did Newell expect to generate value by acquiring
Jarden?
EXHIBIT 6.2 identifies the ways in which acquisitions can create value. Newell thought
they could generate value in a number of ways. First, they saw opportunities in restructuring
Jarden. Newell thought Jarden was not run as efficiently as possible, with the individual
business units being run fairly autonomously. By applying Newell’s more centralized business
model on Jarden, the firm thought it could generate significant savings. Second, the firm thought
it could improve efficiencies by sharing activities, such as having shared research and
development, supply chain, and back office operations. Third, since they used some of the same
inputs and sold their products through the same retailers, Newell likely anticipated that they
could leverage pooled negotiating power.
Discussion Question 2: Why was Newell so overly optimistic about the value it could
generate?
There were at least four reasons that made the firm overly optimistic about the value
potential in this acquisition. First, the firm was likely overconfident in their ability to extract
value from this acquisition. The firm had succeeded with a series of smaller acquisitions and had
expected that they could impose their typical integration plan on Jarden. They hadn’t considered
how this acquisition differed in size and in the success of the target from their prior acquisitions.
Second, and related, they hadn’t considered cultural differences with Jarden that made
integration difficult. This included the specialization and autonomy of employees, such as sales
staff, that bristled in the Newell system. Third, they didn’t account for strategic differences
between the firms. Many of Jarden’s products were more differentiated than Newell’s, and
Newell didn’t understand that the normal sales, distribution, and promotion processes Newell
used may not fit all of Jarden’s products. Fourth, they didn’t anticipate the challenges in the retail
environment or the growing power of Amazon and Walmart that would put the squeeze on
Newell’s sales and profits.
Discussion Question 3: What mistakes did Newell make in its pursuit and post-merger
integration of Jarden?
In its earnestness to buy Jarden, Newell did not appear to undertake or at least fully
consider a full due diligence analysis of Jarden. Such an analysis allows firms to assess the
financial and strategic value for and complementarity with the acquiring firm. This would have
identified the cultural and strategic differences between the two firms that hampered post-
acquisition integration efforts. Additionally, the push for the acquisition may have been partly
driven by the ego Michael Polk, the CEO of Newell. He saw tremendous value here and may
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have wanted to cement his legacy as a visionary CEO by bringing together two major
manufacturers. In the post-acquisition period, the firm jumped in and made substantive changes
before it fully understood the strategy and operating methods of Jarden. They also didn’t appear
to do a great job of engaging with the employees of Jarden to understand their interests and
concerns about the Newell way of operating
The SUPPLEMENT below points out that even successful firms can struggle with
acquisitions and that there are a number of reasons that acquisitions can fail. P&G went through
a lengthy examination of its acquisition experiences to learn and improve.
Extra Example: Procter and Gambles Struggles with and Learns from Acquisitions
When A.G. Lafley was the CEO of Procter and Gamble, he commissioned a study to assess the level of success and
failure the firm had experienced with its acquisitions. He was shocked to find that, when they looked at the
acquisitions P&G had undertaken from 1970–2000, less than 30 percent of them met the investment objectives of
the acquisition and were deemed successful. They further found that failures typically resulted from one or more of
the following five factors: (1) absence of a winning strategy for the combination, (2) not integrating the acquired
unit well or quickly enough, (3) expected synergies didn’t materialize, (4) cultures weren’t compatible, and (5)
leadership couldn’t play well together. Thus, one of the root causes related to a lack of strategic logic. The other four
revolved around the inability to make a potentially valuable acquisition work, often because of personal or cultural
differences.
However, Lafley didn’t stop there. He was determined to have P&G learn from its mistakes. He and his team took
the results of this assessment and changed their acquisition integration processes. They saw their success rate with
acquisitions rose from 30 percent to 60 percent over the 2001–2010 time period, partly as a result of this exercise.
Source: Dillon, K. 2011. I think of my failures as a gift. Harvard Business Review. 89(4): 86–89.
Some general questions to spur discussion and debate:
Discussion Question 4: Why is it typically necessary to integrate the acquiring and

acquired firm to have an acquisition succeed?
Discussion Question 5: Why is it so difficult to integrate firms together after an

acquisition?
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I. Making Diversification Work: An Overview
PowerPoint Slide 4: Corporate-Level Strategy

PowerPoint Slide 5: Reasons for Diversification Failures
PowerPoint Slide 6 and 7: Making Diversification Work
Despite the gloomy performance of some M&As, not all deals erode profitability. Examples of
successful mergers include British Petroleum’s acquisition of Amoco and Arco, Disney’s
acquisitions of Pixar and Marvel, and Google’s acquisition of Android. The question becomes,
why do some diversification efforts fail, and others succeed?
At the end of the day, diversification initiatives—whether via mergers and acquisitions,
strategic alliances and joint ventures, or internal development—must be justified by the creation
of value for shareholders. Firms can either diversify into related or unrelated businesses.
With related diversification, the primary benefits are to be derived from horizontal
relationships—businesses sharing intangible resources (i.e., core competencies) and tangible
resources (e.g., production facilities, distribution channels). For example, Procter & Gamble
enjoys many synergies from having multiple businesses that share distribution resources.
With unrelated diversification, the primary benefits are derived largely from vertical
relationships, that is, value that is created by the corporate office. This would include
infrastructure activities such as information systems and corporate culture/leadership, sound
businesses practices that have been honed by the corporation over time, and human resource
practices.
EXHIBIT 6.2 provides an overview of how we will address the various means by which
firms create value through both related and unrelated diversification. The exhibit also includes an
overview of some of the examples that we have in this chapter.
II. Related Diversification: Economies of Scope and Revenue Enhancement
PowerPoint Slide 8: Related Diversification

PowerPoint Slide 10: Related Diversification: Leverage Core Competencies
PowerPoint Slide 11: Related Diversification: Sharing Activities
Related diversification enables a firm to benefit from horizontal relationships across different
businesses in the diversified corporation. There are two means for accomplishing this: (1)
leveraging core competencies, and (2) sharing activities.
Such horizontal relationships across businesses enable the corporation to benefit from
economies of scope that refers to cost savings due to the breadth of operations. Additionally, a
firm can enjoy greater revenues if two businesses attain higher levels of sales growth combined
than either business could independently.
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The SUPPLEMENT below provides the example of John Deere—a firm whose
diversification strategy is moving them from being an equipment manufacturer to a financial
services company.
Extra Example: John Deere Becomes a Bank to Keep Selling Tractors
John Deere has been in business for over 180 years. Today, it does over $25 billion in business and is the world’s
largest manufacturer of agriculture equipment. Now, it has also become a major lender to farmers. With low prices
for corn, soybeans, and wheat, farmers are finding their finances stretched and banks less willing to lend to them.
John Deere has entered the gap. It has lent out billions of dollars to farmers to finance the purchase of equipment
and also offers leasing programs to farmers who don’t want to commit to the six figures it takes to buy a major piece
of John Deere’s equipment. With the challenge for farmers increasing, Deere now offers short-term credit to farmers
to pay for the seed, fertilizer, and chemicals needed to produce a crop.
Deere is taking these actions to prop up the sales of its products. Farm income has dropped by half in the last five
years, and farm debt is the highest it’s been in 30 years. Deere’s efforts are making it possible for farmers to
continue to replace their equipment and keep Deere’s sales from falling through the floor. As Jayma Sandquist, VP
of marketing at John Deere Financial said, “our core mission is to support sales of equipment.” Even with its efforts,
Deere’s sales have fallen by over a third in the last five years but providing financing has kept the drop from being
much worse. Also, Deere is able to leverage its relationship with farmers to grow its financing business which now
accounts for over a third of the corporation’s profits.
Deere’s actions also come at substantial risk for the firm. If crop prices remain low, the company and farmers are
likely just delaying the pain that will come when farms fail. The firm is already starting to feel the pinch. The
amount of overdue loans that Deere has on its books and the amount of loans the firm is writing off as bad debt have
both doubled in recent years. If crop prices increase, this tide will turn, and farmers will be likely to get their debt
under control. If not, there could soon be a debt crisis for the farming sector and for Deere.
In the end, by becoming the lender of last resort, Deere is keeping its factories humming and its sales at a decent
level. What is unclear is whether this diversification will result in deeper and longer pain for the firm in the future.
Source: Newman, J, & Tita, B. 2017. America’s farmers turn to the bank of John Deere. Wall Street Journal. July
19: A1, A10.
A. Leveraging Core Competencies
We begin with the imagery of a tree to illustrate the concept of core competencies. Core
competencies represent the root system (not the leaves) and competitors can make a big mistake
if they believe a firm’s strength is in their leaves (by analogy). Core competencies may be
considered to be the “glue” that binds existing businesses together or as the engine that fuels new
business growth.
Core competencies—to create synergy for a corporation—must satisfy three conditions:
 The core competence must enhance competitive advantage(s) by creating superior

customer value. (Gillette)
 Different businesses in the corporation must be similar in at least one important
way to benefit from the core competence. (Fujifilm)
 The core competencies must be difficult for competitors to imitate or find
substitutes for. (Amazon)
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STRATEGY SPOTLIGHT 6.1 discusses how Geely leveraged Volvo’s core

competencies to become a stronger player in the global auto market.
Discussion Question 6: What are the ways Geely’s acquisition of Volvo leveraged the
value creating potential of acquisitions? If you were advising one of Geely’s competitors,
would you recommend they mimic Geely’s actions? Why or why not?
Teaching Tip: Although many companies have core competencies, not all seem to be
able to leverage them. You may ask students to speculate why so many firms fail to
leverage their core competencies. Possible reasons may include failure to recognize
opportunities to leverage, lack of complementary competencies, or problems with culture,
structure, and reward systems within the organization. This serves to reinforce the
integrative nature of strategy formulation and implementation and the interconnections
among the various aspects of organizational strategies, structures, and systems.
B. Sharing Activities
Synergy can also be achieved by sharing tangible activities across business units. These
include value-creating activities such as common manufacturing facilities, distribution channels,
and sales forces.
Sharing activities provide two potential benefits: cost savings and revenue enhancements.
1. Deriving Cost Savings through Sharing Activities
Cost savings come from many sources such as eliminating jobs, facilities, and related
expenses that are no longer needed when functions are consolidated. We provide the examples of
Shaw Industries, a leading player in the carpet industry, and General Motors.
2. Enhancing Revenue and Differentiation through Sharing Activities
At times, an acquiring firm and its target may attain a higher level of sales growth
together than either company could do on its own. We provide the example of Starbucks’
acquisition of several small food and drink firms that the firm then expands throughout its store
network to ramp up sales growth of these small brands.
Firms can also increase the effectiveness of their differentiation strategies via sharing
activities among business units.
The SUPPLEMENT below discusses how Mattel is trying to enhance its revenues by
diversifying into feature films.
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Extra Example: Mattel is Trying to Use Movies to Enhance its Sales
Mattel owns some of the most iconic toy brands in the world, including Barbie, Hot Wheels, American Girl, and
Fisher-Price. Generations of kids have grown up playing with Mattel toys, but the firm has hit a hard stretch in
recent years. Its sales declined by 27 percent from 2013 to 2018, and its stock price fell by 75 percent over the same
period.
Ynon Kreiz, the firm’s CEO has a plan for reinvigorating the firm. His plan is to transform the firm into a media
company that leverages the value of its characters and toys. Kreiz eyes the success of other firms that have
appropriated the value of their characters. Disney has shown the path for decades by leveraging the value of its
characters across a range of media platforms. Closer to home, Kreiz sees Hasbro’s success bringing Transformers
and G.I. Joe to the big screen. Hasbro has seen increased income directly from the movies, but more importantly,
movies stoke up demand for what would otherwise be seen as mature products with limited growth potential.
While Mattel has considered movie opportunities with its characters for years, it has significantly ramped up its
efforts on this front under Kreiz’s leadership. The company has announced eight film projects with four studios.
It’s working with Warner Bros on a Barbie film that will star Margot Robbie as well as a Hot Wheels movie. MGM
is working on an American Girl film. Paramount, in cooperation with Tom Hanks, is developing an adventure
movie focusing on Major Matt Mason, a Mattel astronaut action figure. Mattel is working with multiple studies to
accelerate their move into film. As Robbie Brenner, Mattel’s executive championing the movie effort, stated
working with multiple studios allows the firm to “progress concurrently on a number of projects at scale.” If they’d
signed on with one studio “it would have taken years to do eight projects.
Time will tell if Mattel can succeed like Disney and Hasbro in having strong businesses in movies and in related
products.
Source: Lashinsky, A. 2019. Rewriting a toy story. Fortune, December: 99-103.
III. Related Diversification: Market Power
PowerPoint Slide 12: Related Diversification: Market Power

PowerPoint Slide 13: Example: Question
PowerPoint Slide 14: Related Diversification: Vertical Integration, Issues
PowerPoint Slide 15: Related Diversification: Vertical Integration, Transaction Costs
Here, we address two principal means by which firms attain synergy through market power:
pooled negotiating power and vertical integration. Note that managers have limits on their ability
to use market power for diversification—government regulations can sometimes restrict the
ability of a business to gain very large shares of a particular market. (Also, we discuss how
Walgreens wanted to acquire all of Rite Aid, but regulators Walgreens limited the deal to less
than half of Rite Aid’s stores before it was willing to approve the deal.)
A. Pooled Negotiating Power
Similar businesses working together or the affiliation of a business with a strong parent
can strengthen an organization’s bargaining power in relation to suppliers and customers as well
as enhance its position vis-à-vis its competitors. We provide the comparison of an independent
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food producer with the situation in which the same business is part of a giant player such as
Nestlé.
B. Vertical Integration
Vertical integration represents an expansion or extension of the firm by integrating

preceding or successive productive processes. That is, the firm incorporates more processes
toward the original source of raw materials (backward integration) or toward the ultimate
consumer (forward integration). STRATEGY SPOTLIGHT 6.2 provides the example of Tesla’s
efforts to vertically integrate its auto business.
We address the benefits and risks of vertical integration. They are summarized in
EXHIBIT 6.3.
In making decisions associated with vertical integration, five issues need to be

considered:
1. Is the company satisfied with the quality of the value that its present suppliers and
distributors are providing?
2. Are there activities in the industry value chain that are presently being outsourced
or performed by others independently that are viable sources of future profits?
3. Is there a high level of stability in the demand for the organization’s products?
4. Does the company have the necessary competencies to execute the vertical
integration strategies?
5. Will the vertical integration initiative have potential negative impacts on the
firm’s stakeholders?
We discuss how vertical integration can be analyzed from the transaction cost
perspective.
We note that every transaction involves transaction costs: search costs, negotiating,
contracting, monitoring, and enforcement. Another problem—transaction—specific investments
—occurs when purchasing a specialized input from outside.
Vertical integration, on the other hand involves a different set of costs—administrative.

Thus, if transaction costs are higher than administrative costs, vertical integration should occur.
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IV. Unrelated Diversification: Financial Synergies and Parenting
PowerPoint Slide 16: Unrelated Diversification

PowerPoint Slide 17: Unrelated Diversification: Parenting and Restructuring
PowerPoint Slide 18: Unrelated Diversification: Portfolio Management
PowerPoint Slide 19: Unrelated Diversification: Portfolio Management, BCG
PowerPoint Slide 20: Unrelated Diversification: Portfolio Management, Limitations
PowerPoint Slide 21: Example: Goal of Diversification = Risk Reduction?
We now address unrelated diversification. Here, unlike related diversification, there are few
benefits to be derived from horizontal relationships, that is, the leveraging of core competencies
or the sharing of activities across business units in a corporation.
In unrelated diversification, the benefits are to be gained from vertical (or hierarchical)
relationships, i.e., the creation of synergies from the interaction of the corporate office with the
individual business units. There are two main sources of such synergies:
 The corporate office can contribute to “parenting” and restructuring of (often

acquired) businesses.
 The corporate office 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.
A. Corporate Parenting and Restructuring
The positive contribution of the corporate office has been referred to as the “parenting
advantage.” Many parent companies, like Berkshire Hathaway and Virgin Group, create value
through management expertise. We provide the example of KKR, a private equity firm, whose
parenting approach is used to improve the performance of multiple segments of the acquired
firms’ value chains.
Restructuring is another means by which the corporate office can add substantial value to
a business. Here, the corporate office tries to find either poorly performing firms with unrealized
potential or firms in industries on the threshold of significant, positive change. We address three
types of restructuring: Asset Restructuring, Capital Restructuring, and Management
Restructuring.
For restructuring strategies to work, corporate management must have both the insight to
detect undervalued companies (otherwise the cost of acquisition would be too high), or
businesses competing in industries with high potential for transformation. Also, they must have
the requisite skills and resources for turning the businesses around—even if they are new and
unfamiliar businesses.
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B. Portfolio Management
Here, the key concept is the idea of a balanced portfolio of businesses. This consists of
businesses whose profitability, growth, and cash flow characteristics complement each other and
add up to satisfactory overall corporate performance.
1. Description and Potential Benefits
The Boston Consulting Group’s growth/share matrix is among the best known of these
approaches. 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. EXHIBIT 6.4
illustrates the BCG matrix. We describe the labels for each of the four quadrants of the matrix—
stars, question marks, cash cows, and dogs.
In using a portfolio strategy approach, a corporation tries to create synergies and

shareholder value in a number of ways. Since the businesses are unrelated, synergies that
develop are the result of the actions of the corporate office interacting with the individual units,
i.e., vertical relationships, instead of across business units, i.e., horizontal relationships.
Discussion Question 7: What are the main advantages of portfolio approaches? (e.g.,
provides good snapshot to help allocate resources, helps determine attractiveness of
acquisitions, can provide funds to business units at favorable rates, corporate office can
provide high-quality review of business units, and, provides a basis for developing
strategic goals and reward and evaluation systems)
The SUPPLEMENT below provides an example of how VF used portfolio logic when it
decided to exit the jeans business.
Extra Example: VF Spins Off Lee and Wrangler
VF is one of the world’s biggest apparel maker and was widely known for the iconic jeans brands, Lee and
Wrangler. But in 2019, VF spun off the jeans brands as a new business called Kontoor. With this spin off, VF
concentrated its efforts on its other businesses, including Vans shoes and North Face outerwear.
What led VF to decide to get out of the jeans business? The short answer is that the business looked more like a dog
than a star. The growth rate in the basic jeans business is very low, driven by the maturity of the market and the shift
from jeans to athleisure clothing as an everyday wear choice. Additionally, Wrangler and Lee’s market share has
been declining as major retailers, such as Walmart, increasingly push store brands. Not surprisingly, the jeans
business experienced a 13% drop in profits in 2018. “(Jeans) has been the weak link in the portfolio,” Jane Hali,
head of investment research firm Jane Hali & Associates, said. “Now they can concentrate on the outdoor coalition
and Vans, a much more unified and strong stable of brands.”
Source: Kumar, U. 2018. VF to spin off Lee and Wrangler jeans into public company. reuters.com. August 13: np.
Discussion Question 8: What do you think are some of the benefits (drawbacks) of VF’s
spin off of the jeans businesses?
6-11
2. Limitations
We then provide some of the limitations and disadvantages of portfolio approaches such
as the BCG matrix.
Discussion Question 9: What are the primary limitations of portfolio approaches? (too
simplistic—only two dimensions, ignores potential synergies across businesses, process
can become too mechanical, may rely on overly strict rules to allocate resources, and,
the imagery may lead to overly simplistic prescriptions)
We close out the section with the example of how one company, Cabot Corporation,
experienced erosion in its market position when it “blindly” adopted the portfolio approach.
C. Caveat: Is Risk Reduction a Viable Goal of Diversification?
In this section we briefly address the issue of whether or not diversification should be
undertaken in order to reduce risk that is inherent in a firm’s variability in revenues and profits
over time. While it may make sense at “first glance,” there are some limitations to such an
approach. First, a firm’s stockholders can diversify their portfolio at much lower cost than a
corporation. And, second, economic cycles, as well as their impact on a given industry (or firm)
are very difficult to predict with any degree of accuracy.
However, such a diversification rationale can, at times, be justified. We discuss how

General Electric has benefited from diversification by lowering the variability (or risk) in their
performance over time.
The SUPPLEMENT below addresses two of the more difficult issues in studying
diversification: what really is the difference between related and unrelated diversification? Is it
possible to reduce risk even with a related diversification strategy or is conglomerate
diversification the only path to risk reduction?
Extra Example: Johnson & Johnson’s Diversification Strategy
Is Johnson & Johnson pursuing a strategy of related diversification or conglomerate (unrelated) diversification? Let
us see what businesses they are in. J&J is organized into three major product groups: consumer products, medical
devices and diagnostics, and pharmaceuticals. The consumer products group sells such well-known brands as baby
shampoo and oil, Listerine mouth wash, Nicorette anti-smoking gum, and Neutrogena skin care products. The
medical diagnostics and devices group includes a wide variety of products such as such as sutures, blood tests,
endosurgery tools, and artificial joints. The products of the pharmaceutical group include Concerta for attention
deficit disorder, Remicade for arthritis, and Prezista for HIV/AIDS. On the one hand, one can say that all these
products are in the health care industry. On the other hand, there is not much in common between shampoo, artificial
joints, and arthritis drugs in terms of technology, marketing, or distribution. That is, while J&J is not clearly a
conglomerate, the furthest corners of its product empire bear little relatedness.
Has this extensive product portfolio helped or hurt J&J? Their experience is that it certainly reduces risk, a benefit
that is normally associated with conglomerate diversification. For example, in 2009, two of their key drug patents
expired but the loss in revenue was substantially offset by the strong growth by medical diagnostics and devices
group.
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Finally, has J&J been able to derive any synergies across their seemingly unrelated products? The answer is an
emphatic yes. Collaboration between engineers from the devices group and scientists from the pharma group led to a
path-breaking discovery: tiny metal stents used to open blocked arteries that are coated with a drug to prevent the
artery from narrowing again. Launched in 2002, the drug-eluting Cypher stent has already generated over $10
billion in sales!
Source: Colvin, G. & Shambora, J. 2009. J&J: Secrets of success. Fortune. May 4: 118.
Discussion Question 10: Can you contrast J&J’s strategy with that of other companies
in the health care industry? What differences stand out?
V. The Means to Achieve Diversification
PowerPoint Slide 22: Means of Diversification

PowerPoint Slide 23: Mergers and Acquisitions
PowerPoint Slide 24: Mergers and Acquisitions: Motives
PowerPoint Slide 25: Mergers and Acquisitions: Limitations
PowerPoint Slide 27: Mergers and Acquisitions: Divestment Objectives
PowerPoint Slide 28: Mergers and Acquisitions: Divestment Success
PowerPoint Slide 29: Strategic Alliances and Joint Ventures: Motives
PowerPoint Slide 30: Strategic Alliances and Joint Ventures: Limitations
PowerPoint Slide 31: Internal Development
In the first three sections of the chapter we addressed the types of diversification (i.e., related and
unrelated). Now we address the means to attain diversification. These include:
 mergers and acquisitions

 strategic alliances and joint ventures
 internal development
A. Mergers and Acquisitions
Discussion Question 11: What are the major advantages and disadvantages of mergers
and acquisitions?
Growth through mergers and acquisitions (M&A) has played a critical role in the success
of many corporations in a wide variety of high technology and knowledge-intensive industries.
Here, market and technology changes can occur very rapidly and unpredictably. In addition to
speed, M&A can also be a valuable means of obtaining resources that can help an organization to
expand its product offerings and services. M&A also can help companies enter new market
segments.
EXHIBIT 6.5 illustrates the enormous volume in global mergers and acquisitions since
2004. While there are ebbs and flows in the level of M&A activity that relate to economic
conditions, there are billions of dollars worth of deals every year.
6-13
The track record of acquisitions is less than stellar as described in the text. There are a
number of reasons why acquisitions fail most of the time. The SUPPLEMENT below describes
Parker Hannifin’s extraordinary track record with acquisitions and the reasons behind their
success.
Extra Example: Parker’s Successful M&A Strategy
Parker, the Cleveland-based industrial products manufacturer makes an average of ten acquisitions every year. What
is truly impressive is not just the number but the remarkable success they have had with these acquisitions. What do
they do right?
 Parker works very hard to retain the employees of the acquired organization by communicating frequently
with employees and implementing an orderly integration process.
 The company assigns an “integration manager” to each acquired firm to get to know its employees at all
levels and to make sure that they understand Parker’s goals.
 They acquire only firms that they understand very well. Acquisition targets are often their former
competitors. This way they already know the customers, the markets, and even the margins.
 They send a team of supply-chain and sales managers to each acquired firm so that they can share the best
practices to get the lowest prices from their suppliers and the highest prices from their customers.
 They send an innovation team to acquired companies to help them launch new products.
 They make sure that they don’t ram their practices down the throats of acquired firms. Instead, the emphasis
is on making the managers of these firms even more successful than before.
 If the managers can’t get the results they want, they don’t hesitate to replace them.
Source: Hymovitz, C. 2008. In deal-making, keep people in mind. Wall Street Journal. May 12: np.
Discussion Question 12: Do you think the above strategies will work if the acquisitions
are in unrelated industries?
1. Motives and Benefits
In this section, we address the potential advantages of mergers and acquisitions. These
include:
 Obtaining valuable resources that can help an organization to expand its product
offerings and services (examples: Google and Apple)
 Provide the opportunity for firms to attain the three bases of synergy—leveraging
core competencies, sharing activities, and building market power (examples:
eBay’s acquisition of GSI Commerce)
 Lead to consolidation within an industry and can force other players to merge
(example: the airline industry)
 Enter new segments
STRATEGY SPOTLIGHT 6.3 discusses how JAB Holdings changed its focus with a
series of acquisitions.
The SUPPLEMENT below outlines how Dollar Tree benefitted by acquiring one of its
key competitors Family Dollar.
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Extra Example: Consolidation in the Dollar Store Market
The dollar store industry is dominated by three major players: Dollar General, Dollar Tree, and Family Dollar. In
early 2015, Dollar Tree, the second largest player in this market, acquired Family Dollar, the industry’s third largest
firm, to create the largest dollar store firm. In completing this consolidation merger, Dollar Tree extracted value in
multiple ways. First, the market became less competitive since there are now fewer competitors in the market space.
Second, the combined firm will have increased market power with its suppliers. Finally, the firm shares warehouse
and distribution facilities to improve firm efficiency.
From 2015 to 2019, the firm’s earnings before interest and taxes nearly doubled, and its stock price rose by nearly
50 percent.
Source: Tully, S. 2015. How the dollar store war was won. fortune.com. May 1: np; finance.yahoo.com.
One of the problems with acquisitions is that acquirers tend to overpay. Acquisition
premiums are often in the range of 30 percent–60 percent in normal times. The SUPPLEMENT
below discusses why economic downturns are a good time to make acquisitions.
Extra Example: Parker Continues to Acquire in Down Times
From 2008 until 2012, economic conditions were very weak across the globe. While the United States moved out of
its recession fairly quickly, other countries, especially in Europe, remained mired in recession. For Parker, this
spelled opportunity. Parker, a global firm in motion and control technologies, is a serial acquirer, a firm that
undertakes acquisitions regularly as a part of its normal business operations. It found the economic turbulence of
recent years to provide an opportunity. The economic troubles in a number of countries resulted in significant
declines in the market value of potential acquisition targets, increasing their attractiveness as acquisition targets.
These troubles have also reduced the number of potential acquiring firms competing with Parker as many firms have
shifted their attention to shoring up their own core operations rather than undertaking acquisitions.
Parker used this period to acquire a number of companies in geographic regions in which Parker wanted to grow.
For example, in 2012, Parker acquired a number of firms in India, including PIX Transmissions and John Fowler
PLC. Parker also acquired Olaer Group, a British-based firm that manufacturers hydraulic system parts. While this
firm is U.K.-based, it sells its products in fourteen countries. These acquisitions allow parker to diversify its product
portfolio and geographic reach. By undertaking these acquisitions during a down economic time, Parker was able to
achieve its strategic goal to become a broad-based, global player at attractive prices.
Source: Anonymous. 2012. Parker completes acquisition of the Olaer Group in the United Kingdom. Prnewswire.
July 2: np. Anonymous. 2012. Proactive acquisitions by Parker. Finance.yahoo.com. July 13: np.
Discussion Question 13: The clothing retailing industry is going through a massive
downturn in recent years. Do you think this is a good time for leading firms to acquire
weaker players?
EXHIBIT 6.6 summarizes the potential benefits of M&As.
2. Potential Limitations
Here, we discuss some of the possible drawbacks of mergers and acquisitions. These
include:
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 The takeover premium can be very high (examples: Household International’s

acquisition of Beneficial an 83 percent premium; and, Conseco paid an 82 percent
premium to acquire Green Tree Financial).
 Competing firms can often imitate any advantages realized or copy synergies that
result from the M&A.
 Managers’ credibility and ego can sometimes get in the way of sound business
decisions.
 Cultural issues can doom the intended benefits from M&A endeavors (example:
merger between SmithKline and Beecham Group).
The SUPPLEMENT below discusses a troubled merger of two major media companies.
Extra Example: A Tragic Corporate Marriage in the Cable TV World
On paper, the acquisition of Scripps Networks Interactive by Discovery Communications seemed to make a lot of
sense. The two cable TV channel firms offered a complementary set of channels specializing in reality-based
programming. The combined firm could generate efficiencies by combining corporate functions, with Discovery
estimating it will reap $350 million in efficiency gains. The two systems could share best practices to improve the
efficiency and capabilities of their networks. Finally, the combined entity has stronger bargaining power relative to
cable and satellite TV service providers than each of the firms had on their own.
However, below the surface, the logic for the acquisition appears less compelling. Rather than building strength, the
combination brought together a large set of struggling channels that are losing out as customers change their TV
habits. As customers move to smaller cable or satellite packages or to small bundles of streamed channels, the
networks owned by the combined firms, such as the Discovery Channel, TLC, HGTV, and the Food Network, find
their viewer base declining. With this trend, it is hard to justify the 34 percent premium Discovery agreed to pay for
Scripps.
Source: Gottfried, M. 2017. Reality bites for Discovery and Scripps. wsj.com. July 31; np.
EXHIBIT 6.7 summarizes the potential limitations of M&As.
3. Divestment: The Other Side of the “M&A Coin”
Corporate managers often find it necessary to divest businesses from their portfolios.
Divesting can enhance a firm’s competitive position by reducing costs, freeing up resources,
enabling management to focus on core business activities, and raising cash to fund existing
businesses. We also draw on research by the Boston Consulting Group to identify seven
principles for successful divestitures.
B. Strategic Alliances and Joint Ventures
Discussion Question 14: What are the major advantages and limitations of strategic
alliances and joint ventures?
Strategic alliances and joint ventures are assuming an increasingly prominent role in the
strategy of leading firms, both large and small. Such cooperative relationships have many
potential advantages. Among these are (our text examples are included):
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1. Entry into new markets (the partnership of Zara’s alliance with Tata to enter the
Indian market)
2. Reducing manufacturing (or other) costs in the value chain (the alliance between
the PGA and LPGA to market golf and negotiate with networks)
3. Developing and diffusing new technologies
STRATEGY SPOTLIGHT 6.4 discusses how Honda is using alliances to incorporate

new technologies into its automobiles.
There are also many potential limitations associated with strategic alliances and joint
ventures. Problems often arise when there is low trust among the partners and minimal attention
given to nurturing close working relationships, there are limited opportunities for developing
synergies, and there are not complementary strengths.
The SUPPLEMENT below addresses some useful tips for making partnerships work.
Extra Example: Tips for Making Partnerships Work
Here is what some experts advise for successful partnerships:
1. Demonstrate the value of your partnership to gain your partner’s confidence. Your partner will then be
much more open to your ideas.
2. Establish rules of engagement with your partner, including boundaries and responsibilities, early.
3. Focus on your partner’s best interests. Avoid becoming too revenue-focused when partnering.
4. Find partners with skills that complement—not rival—your own.
5. Respect your partners.
6. Watch out for hidden agendas, such as a partner looking to tap into your expertise so it can get an
upper hand going forward.
7. If the cultural shoe fits, wear it. Find partners with perspective and methodologies that mirror your
own.
Source: Cirillo, R. 2000. Joining forces. VARBusiness. October 2: 52–53.
Discussion Question 15: What would be some of the negative consequences if these
“tips” were not followed?
C. Internal Development
Firms can also diversify via corporate entrepreneurship and new venture development. In
today’s economy, internal development (or intrapreneurship) is such an important topic by which
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companies expand their businesses that we dedicate a major portion of an entire chapter to it
(Chapter 12—which also addresses corporate entrepreneurship).
Among the advantages of internal development is the ability to capture all of the value of
innovative endeavors (as opposed to sharing with partners). Generally, firms may be able to
accomplish it at a lower cost than relying on external funding. There are also potential
disadvantages such as the time-consuming nature of intrapreneurship—which is particularly
important in fast-changing competitive environments.
Discussion Question 16: How can internal development endeavors be made more
effective?
VI. How Managerial Motives Can Erode Value Creation
PowerPoint Slide 32: Managerial Motives

PowerPoint Slide 33: Managerial Motives: Antitakeover Tactics
In this section, we address some of the managerial motives that can erode, rather than enhance,
value creation. These include “growth for growth’s sake,” excessive egotism, and the creation of
a wide variety of antitakeover tactics.
A. Growth for Growth’s Sake
There are huge incentives for executives to grow the size of the firm. These include extra
prestige (such as higher rankings in the Fortune 500) and compensation as well as the excitement
that is generated by making the “big play.”
We provide the examples of how Joseph Bernardino’s overemphasis on growth at

Andersen Worldwide played a key role in the firm’s demise.
B. Egotism
As we all know, a healthy ego makes a leader more confident and able to cope with
change. However, sometimes pride is at stake, and individuals will go to great lengths to win—or
at least not back down. Such behavior is often detrimental to the firm.
We provide several examples of rather hostile interactions among executives after their
merger. Such clashes can certainly lead to the erosion of some of the intended benefits of
diversification. We also discuss “lessons learned” by GE’s Jack Welch—situations in which ego
got in the way of better judgment.
The SUPPLEMENT below discusses how egotism caused Mattel to fail miserably with
an acquisition.
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Extra Example: Mattel Falls Prey to Egotism with the Learning Company
In 1999, Mattel found itself in a difficult situation. Its growth was slowing, its flagship product, Barbie, was losing
market share, and it did not have a strong position in computer-based games. Mattel CEO, Jill Barad, thought that
the solution was for Mattel to shift its attention to the faster growing computer-based interactive games market. To
move aggressively in this market, she decided to acquire the Learning Company, a maker of interactive and
educational games. The price was steep—$3.5 billion which was 4.5 times the Learning Company’s annual revenue.
It turned out to be a very expensive move. Mattel found that the Learning Company was generating little free cash
flow and had a stable of aging brands. To make matters worse, Mattel didn’t have the skills to renew the product
portfolio of the Learning Company. Mattel lost two-thirds of its market value after the acquisition. Jill Barad lost her
job, and the Learning Company was sold off for a paltry $27 million.
One of the key mistakes with this acquisition was that Mattel was overconfident in its ability to run the Learning
Company. They thought that their managerial talent and knowledge could be easily transferred to run the Learning
Company. What they found, instead, was that the skills needed to run a computer software company were very
different from those needed to run a toy company. Also, they had little appreciation for the differences in the market
dynamics of the software business. Mattel would have been much better served by focusing its attention on being the
strongest competitor possible in their core market, a market where they should have had the competencies needed to
build a competitive advantage.
Source: Hirsch, E. & Rangan, K. 2013. The grass isn’t greener. Harvard Business Review. 91(1): 21–23.
Discussion Question 17: How can such egotistic behavior be minimized? (e.g., reward
and control systems, executive selection, culture, etc.)
C. Antitakeover Tactics
Antitakeover tactics are rather common. These are efforts by management to prevent
hostile or unfriendly takeovers by unwelcome suitors. Often, it is in management’s best interests
to undertake such actions—but typically they are not in the interests of the firm’s shareholders.
We discuss three types of antitakeover tactics: greenmail, golden parachutes, and

poison pill.
Teaching Tip: Ask the students how the managerial behaviors that erode shareholder
value can be minimized. This provides you with an opportunity to reintroduce the
underlying concepts of corporate governance that we introduced in Chapter 1 and will be
discussed at length in Chapter 9. The core elements of corporate governance are a
committed and well-informed board of directors, shareholder activism, and effective
incentive and reward systems for executive officers.
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VII. Issue for Debate
The case examines Disney’s move into streaming services.
Discussion Question 18: Is Disney’s making the right decision to develop its own
exclusive streaming system rather than using Netflix and other streaming services to
deliver its content?
Disney potentially benefits in forward integrating by more fully controlling the

distribution of its products. Their movies and characters are valuable resources, and by
distributing the content directly, Disney controls pricing, how they are marketed, when they are
released, and other aspects of product management. Additionally, Disney has more direct
contact with customers, providing them better data on who their customers are, what their
purchasing patterns are, and what their preferences are. This should help with content
development. Finally, Disney gets to capture more of the value of an end consumer since they
no longer are required to share income with Netflix.
The key issue is whether Disney hurts itself by limiting the distribution channels they
use. Some Netflix customers may choose not to sign up for Disney+, costing Disney access to
these customers. The question is whether Disney’s catalog is so desirable that most customers
will sign up for it as one of their streaming services. Also, Disney does not have extensive
experience running a streaming service, and if they struggle to provide reliable service, as they
did on the launch day of the service, they could alienate customers.
Discussion Question 19: Is the defection of Disney, Warner Bros. and Comcast from
Netflix’s streaming services going to seriously harm Netflix?
The key here is to get students talking about why they get or used to get Netflix. If it is to
gain access to Netflix’s original content or to the library of millions of movies Netflix still has,
the defections should not be a significant negative for the firm. It may benefit since it won’t have
to pay licensing fees to Disney. On the other hand, if students see that the value of Netflix is
declining such that they have cut or are considering cutting their subscription because they want
Disney’s lineup of Disney, Pixar, Star Wars, and Marvel films, it could put a big dent in
Netflix’s income.
Discussion Question 20: What are the long-term consequences of these actions for
Disney and Netflix? For consumers?
There is no way to know for sure what the answers are. I look for students to pull out the
implications from their prior answers to discuss whether Disney is improving its ability to draw
in and extract value from customers or if it is going to lose access to a large number of
customers. For Netflix, the question revolves around whether they are primarily going to be a
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distributor of other studios’ media or if they are going to be a vertically integrated developer and
distributor of content, competing directly with Disney and other vertically integrated firms.
Students can discuss what the consequences are of each option.
For consumers, we appear to be going to a more fragmented market. In the past,

consumers subscribed to one cable, satellite, or streaming service to gain access to all of their
programming. In the future, customers will need to decide which programming they want and
subscribe to a number of them to gain access the content they want.
VIII. Reflecting on Career Implications
Below, we provide some suggestions on how you can lead the discussion on the career
implications for the material in Chapter 6.
 Corporate-Level Strategy: Is your current employer a single business firm or a

diversified firm? If it is diversified, does it pursue related or unrelated diversification?
Does its diversification provide you with career opportunities, especially lateral moves?
What organizational policies are in place to either encourage or discourage you from
moving from one business unit to another?
Students are often far removed from the corporate level of their organizations; many will have
only vague notions about their firm’s corporate strategy. This would be a good opportunity to
make them think about corporate strategy and how that relates to the career options they have.
 Core Competencies: What do you see as your core competencies? How can you
leverage them both within your business unit as well as across other business units?
It would be a good idea for the instructor to make connection to the personal SWOT that the
students performed earlier. The challenge is to make each individual think in terms of their core
competency. Once they have identified their core competency, the discussion can move on to
how that competency can be leveraged. This part is sometimes tricky because a student may
identify his/her musical or artistic skill as their core competency. At that point, either the
instructor can ask them, if indeed that is the case, why they did not leverage that in their life, or
instead, ask them to identify their core competency strictly within their professional context.
 Sharing Infrastructures: Identify what infrastructure activities and resources (e.g.,

information systems, legal, training) are available in the corporate office that is shared by
various business units in the firm. How often do you take advantage of these shared
resources? Identify ways in which you can enhance your performance, taking advantage
of these shared infrastructures resources.
Students will rarely have a good handle on this issue. The key point to make is that employees
can enhance and demonstrate their value to their firms by leveraging the value-enhancing
possibilities of the corporate office. It also may help employees build their social networks by
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coordinating actions with corporate officers and employees and managers in different units in the
firm.
 Diversification: From your career perspective, what actions can you take to diversify
your employment risk (e.g., coursework at a local university, obtain professional
certification such as a C.P.A., networking through professional affiliation, etc.)? In
periods of retrenchment, such actions will provide you with a greater number of career
options.
While students can often easily talk of risk in terms of a financial portfolio, they have difficulty
identifying and evaluating risk in the context of their own employment. The key is to make them
see the parallels between investment decisions and employment choices. That is, they are
investing their time, effort, and money in building human capital. Although they have thought
about the returns from that investment, most have never recognized the need to diversify the
employment risk. This could lead to a lively discussion.
IX. Summary
A key challenge of today’s managers is to create “synergy” when engaging in diversification

activities. As we discussed in this chapter, corporate managers do not, in general, have a very
good track record in creating value in such endeavors when it comes to mergers and acquisitions.
Among the factors that serve to erode shareholder values are paying an excessive premium for
the target firm, failing to integrate the activities of the newly acquired businesses into the
corporate family, and undertaking diversification initiatives that are too easily imitated by the
competition.
We addressed two major types of corporate-level strategy: related and unrelated

diversification. With related diversification, the corporation strives to enter into areas in which
key resources and capabilities of the corporation can be shared and leveraged. Synergies come
from horizontal relationships among business units. Cost savings and enhanced revenues can be
derived from two major sources. First, economies of scope can be achieved from the leveraging
of core competencies and sharing of activities. Second, market power can be attained from
greater, or pooled, negotiating power and from vertical integration.
When firms undergo unrelated diversification, they enter product markets that are
dissimilar to their present businesses. Thus, there is generally little opportunity to either leverage
core competencies or share activities across business units. Here, synergies are created from
vertical relationships between the corporate office and individual business units. With unrelated
diversification, the primary ways to create value are corporate restructuring and parenting, as
well as the use of portfolio analysis techniques.
Corporations have three primary means of diversifying their product markets. These are
mergers and acquisitions, joint ventures/strategic alliances, and internal development. There are
key trade-offs associated with each of these. For example, mergers and acquisitions are typically
the quickest means to enter new markets and provide the corporation with a high level of control
over the acquired business. However, with the expensive premiums that often need to be paid to
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shareholders of the target firm and the challenges associated with integrating acquisitions, they
can also be quite expensive. Strategic alliances among two or more firms, on the other hand, may
be a means of reducing risk since they involve the sharing and combining of resources. But such
joint initiatives also provide a firm with less control (than it would have with an acquisition)
since governance is shared between two independent entities. Also, there is a limit to the
potential “upside” for each partner because returns must be shared as well. Finally, with internal
development, a firm is able to capture all of the value from its initiatives (as opposed to sharing it
with a merger or alliance partner); however, diversification by means of internal development
can be very time consuming—a disadvantage that becomes even more important in fast-paced
competitive environments.
Finally, some managerial behaviors may serve to erode shareholder returns. Among these
are “growth for growth’s sake,” egotism, and antitakeover tactics. As we discussed, some of
these issues —particularly antitakeover tactics—raise ethical considerations because the
managers of the firm are often not acting in the best interests of the shareholders.
Chapter 6: Corporate-Level Strategy: Creating Value Through Diversification
For a company with which you are familiar, select a potential area of diversification.
Provide supporting arguments for this diversification move (e.g., if it is related diversification
it might involve leveraging core competences or sharing activities). Would you recommend
internal development, strategic alliances/joint ventures, or acquisition as the means to achieve
this diversification? Clarify your rationale.
Teaching Suggestions:
Key points to be highlighted in this exercise are:
 What businesses should a corporation compete in? How can a corporation create
“synergy” among the various business units?
You can discuss the merits and demerits of related vs. unrelated diversification.
Related diversification:
 Synergies are realized from the horizontal relationships among businesses.
 Firm creates economies of scale and scope by:
o leveraging core competencies
o sharing activities
You might want to explain the concepts of “core competencies” and “economies of
scope” here.
 Synergies are also realized from market power through pooled negotiating power and
vertical integration.
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Here you can raise questions related to the merits and demerits of vertical integration and
introduce the “transaction costs perspective,” which is very important in vertical integration
decisions.
You must also mention that creating market power would draw the attention of regulatory
authorities and therefore, there are limits on creating and using market power.
 Unrelated diversification
 Creates value by exploiting vertical relationships
 Corporate office can add tremendous value in terms of parenting and restructuring
 the businesses
 Corporate office can add value by viewing the corporation as a family or
“portfolio” of businesses and allocating resources to optimize corporate goals and
profitability. Value can also be added by creating appropriate support structure in
terms of human resource practices and financial controls for each of its business
units.
 Should a corporation necessarily diversify? Which method of diversification
should a firm employ?
Profit maximization as a goal propels a firm to grow, and diversification becomes a

means of achieving such growth. However, diversification, whether related or unrelated,
comes with its own problems and therefore raises the question of whether a firm needs to
diversify at all. You might want to give examples of some diversification efforts that
failed.
You can then discuss whether internal development, i.e., through corporate
entrepreneurship and new venture development, is better than external growth through mergers
and acquisitions or strategic alliances and joint ventures. This is an opportunity to discuss the
merits and demerits of each of these methods of diversification.
 Does diversification create value at all?
A very important question to raise: research shows that high levels of diversification, on
average, destroys rather than creates value. Why, then, do firms pursue a diversification
strategy? The issue of incentive structure in the U.S. corporations that rewards CEOs on
the size of the firm rather than its profitability and shareholder wealth maximization
needs to be discussed.
You might also want to mention that egotism and antitakeover tactics encourage CEOs to go to
any length to protect their “turfs.” They may engage in diversification that does not create any
value for the shareholders at all and, instead, destroys shareholder value.
You can raise these questions regardless of the method of diversification the students come up
with. This discussion will develop their ability to think critically about issues involved in
diversification decisions.
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End-of-Chapter Teaching Notes
Summary Review Questions
1. Discuss how managers can create value for their firm through diversification efforts. (In
text, Making Diversification Work: An Overview, LO 6-2)
Response:
Diversification is often costlier for firms than for investors, so firms are not doing their
shareholders a favor if they diversify without creating new value. Managers can create new value
by combining their operations with the new business in a way that increases the diversified
firm’s value relative to the combined value of the pre-diversified firm(s). The two primary
methods for creating value are lowering costs and increasing revenue. For lowering costs, firms
are able to operate in multiple businesses and generate a given level of total revenue more
efficiently than if there were separate firms in each business. These lower costs are due to a
number of factors, including economies of scale, leveraging core competence, shared activities,
and/or vertical integration. For increasing revenue, diversified firms are able to generate more
revenue than if there were separate firms in each business. The increased revenue can be due to
processes such as pooled negotiating power and possibly vertical integration.
2. What are some of the reasons that many diversification efforts fail to achieve desired
outcomes? (In text, Learning from Mistakes, LO 6-1)
Response:
Managers of diversification efforts often fail to do the very difficult job of effectively combining
operations in different businesses. According to the text, diversifiers:
 “failed to effectively integrate their acquisitions”
 “paid too high a premium for the target’s common stock”
 “were unable to understand how the acquired firm’s assets would fit with their own lines
of business”
 had top executives who “may not have acted in the best interests of shareholders. That is,
the motive for the acquisition may have been to enhance the executives’ power and
prestige rather than to improve shareholder returns.”
3. How can companies benefit from related diversification? Unrelated diversification?

What are some of the key concepts that can explain such success? (In text, Related
Diversification: Economies of Scope and Revenue Enhancement, LO 6-3)
Response:
Related diversification is a firm entering a different business where it can benefit from
leveraging core competencies, sharing activities, or building market power. Companies can
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benefit from related diversification through economies of scope (leveraging core competencies
or sharing related activities among businesses), or market power. Market power can be exercised
through pooled negotiating power, where a diversified firm can restrict or control supply to a
market, or vertical integration into the buyer or supplier industry. Vertical integration enables a
firm to have secure access to strategic inputs and to gain efficiencies through coordinating
delivery of inputs and outputs.
Unrelated diversification is a firm entering a business that uses different core competencies and
operates in different markets. Companies can benefit from unrelated diversification by improving
the target businesses. Two ways to improve these businesses are parenting, where the company
will provide expertise and support such as improving planning, budgeting, management
performance evaluation and procurement practices. The second way to improve the target
business is through restructuring, which involves substantially changing the assets, capital
structure, and/or management. Portfolio management is a method of assessing a corporation’s
entire portfolio of businesses, and it helps managers to determine the strategic options and
contribution of each business to the corporate overall performance. For corporations with
multiple unrelated businesses, portfolio management helps to develop restructuring strategies.
4. What are some of the important ways in which a firm can restructure a business? (In
text, Unrelated Diversification: Financial Synergies and Parenting, LO 6-4)
Response:
Three types of restructuring are asset restructuring, capital restructuring, and management
restructuring. Asset restructuring involves selling off unproductive assets and product lines and
acquiring complementary assets needed to improve the business. Capital restructuring involves
improving the debt/equity ratio, adding different classes of debt and equity. Management
restructuring involves changing the composition of top management and the firm’s organization,
as well as changes to the reporting relationships and management performance evaluation
criteria.
5. Discuss some of the various means that firms can use to diversify. What are the pros and
cons associated with each of these? (In text, The Means to Achieve Diversification, LO 6-5)
Response:
Firms can diversify using mergers and acquisitions, strategic alliances and joint ventures, or
internal development. Mergers and acquisitions involve joining two separate firms into one.
Mergers and acquisitions enable firms to fully integrate operations; acquiring valuable resources
and exploit them through leveraging core competencies, sharing activities, and building market
power; consolidating the industry, and entering new market segments. The cons of mergers and
acquisitions include the financial costs of the diversification, which is especially true for
acquisitions. The resulting benefits may be easily imitated by the competition. Managers’
credibility may be associated with mergers and acquisitions, which may result in escalating
commitment to making the diversification work and thereby suboptimal decision making.
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Mergers and acquisitions involve the combination of two corporate cultures, which may lead to
issues that are costly to resolve.
Strategic alliances and joint ventures are a method of diversification that involves collaboration
with partner firms. They are a method of gaining the advantages of mergers and acquisitions
without the financial costs. The benefits of strategic alliances and joint ventures are that they
enable firms to achieve strategic objectives such as entering new markets, reducing
manufacturing (or other) costs in the value chain, and developing and diffusing new
technologies. The cons of strategic alliances and joint ventures include working with a partner
who is unwilling or unable to invest adequate resources to achieve the objectives, the necessary
investment in nurturing close working relationships with partner executives, and the investment
in human and social capital needed to forge a successful partnership.
Internal development is another way for firms to diversify, through corporate entrepreneurship.
Internal development enables firms to achieve the benefits of mergers and acquisitions without
the financial cost premium or the costs of combining two corporate cultures. The cons of internal
development include the potential time lag to enter the new business.
6. Discuss some of the actions that managers may engage in to erode shareholder value. (In
text, How Managerial Motives Can Erode Value Creation, LO 6-6)
Response:
Managers have engaged in diversification efforts that do not increase shareholder value. They
place their own self-interest ahead of shareholders’. The actions that managers take can be in the
form of growth for growth’s sake, egotism, and antitakeover tactics. Growth for growth’s sake
results from managers’ desires to work in larger, more powerful organizations, which offer more
challenges, excitement, recognition, power, and prestige to their managers. Egotism refers to
managers’ self-interest and greed. Managers’ competitive nature may lead them to acquire
businesses for personal satisfaction. Related to egotism is the personal largesse of some
executives. Antitakeover tactics include greenmail, golden parachutes, and poison pills. These
tactics can erode shareholder value, especially for existing shareholders, by either making a large
payment to a potential acquirer (greenmail), making a large payment to executives (golden
parachutes), or reducing share price through dilution (poison pills). Each of these diverts value
from shareholders to other parties.
Experiential Exercises and Application Questions
1. What were some of the largest mergers and acquisitions over the past two years? What
was the rationale for these actions? Do you think they will be successful? Explain.
Response:
(Note to instructor) The Wall Street Journal announces mergers and acquisitions on a regular
basis. A quick Internet search can yield a number of major acquisitions that have been
announced, along with news articles analyzing the reasons for and challenges of these
6-27
acquisitions. So getting information on large acquisitions should be a straightforward exercise.

As for the rationale, ask students to identify a shared core competence, shared activity, enhanced
negotiating power, or vertical integration that characterizes the merger or acquisition. If these are
present, then it is a related diversification. The characteristic identified above will indicate the
potential benefits of the diversification. Ask students to estimate the likely costs of the merger or
acquisition, including the financial cost to the acquiring firm, and compare that to the benefits.
We have found it useful to refer back to the potential for imitation and the other three sources of
sustainable competitive advantage (rare, valuable, costly to imitate, and costly to substitute). Are
these advantages of diversification sustainable?
If there is no identified shared core competence, shared activity, enhanced negotiating power, or
vertical integration, then the merger or acquisition is unrelated. Ask students to identify the likely
benefits from corporate parenting or restructuring. For this, students could look at the recent
financial performance of the acquired firm relative to the industry averages. In addition, you can
ask students to examine the portfolio of businesses of the acquired firm and conduct a portfolio
analysis.
2. Discuss some examples from business practice in which an executive’s actions appear to
be in his or her self interest rather than the corporation’s well-being.
Response:
(Note to instructor) The business sections of most major newspapers are full of examples of
executives who are greedy and in legal trouble. In addition, some students are likely to be aware
of business practices in their own experience. For each identified instance, we suggest that you
ask the student to describe the questionable practice and classify it as growth for growth’s sake,
egotism, antitakeover tactics. Also, identify the groups or individuals who are hurt by the
executive(s).
To extend the exercise, ask students if there are any modifications to corporate governance and
the legal system that would limit the damage from the executives’ actions.
3. Discuss some of the challenges that managers must overcome in making strategic
alliances successful. What are some strategic alliances with which you are familiar? Were
they successful or not? Explain.
Response:
Strategic alliances involve a number of processes, including agreement on goals of the alliance,
agreement on the investment or contribution that each partner gives, agreement on the
distribution of benefits and learning that the alliance generates, and agreement on a system for
monitoring partners’ efforts. As strategic alliances evolve and conflicts arise, these processes
may have to be renegotiated between senior managers.
6-28
The success of a strategic alliance is also not obvious. Strategic alliances are not all supposed to
last a long time. It may be possible for an alliance to fulfill its objectives fairly quickly and then
be dissolved. Also, some alliances are successful for one partner and not the other.
(Note to instructors) Students will usually be aware of the agreements for goals, investments, and
distribution of earnings. But they will tend to be less aware of the need for monitoring. To
prompt them, try asking about how one partner knows that the other is making sufficient
investments in the alliance.
In the cases where an alliance is successful for one partner but not the other, ask students how a
partner can avoid this outcome. Often, the answer involves partners developing a capacity to
learn from the alliance.
4. Use the Internet and select a company that has recently undertaken diversification into
new product markets. What do you feel were some of the reasons for this diversification
(e.g., leveraging core competencies, sharing infrastructures)?
Response:
(Note to instructors) Students should be able to identify the core competency or shared
infrastructure. Ask students to identify the likely costs and benefits of the diversification in order
to determine how successful it was. In addition, ask students what other products or markets the
firm should diversify into in the future.
4. The Newell-Jarden merger has not generated value for shareholders. Imagine you were
advising firm managers on how they could best leverage the businesses they have. Identify
the key business units in the firm. Evaluate how the firm can leverage opportunities for (1)
building on core competencies, (2) sharing infrastructure, and (3) increasing market power
across business units. Also, evaluate if the firm should divest any of its remaining business
units.
Response:
This is a challenging issue since Newell, like many firms, has struggled to identify where to try
to create value through corporate operations without destroying value of the individual business
units.
To get insight on these questions, students should review Newell’s Annual Reports and/or 10-K
filings to see both an identification of the business units of the firm and how they are currently
organized into larger strategic business units. Students can also research key products and
brands within the firm to identify potential core competencies and areas of commonality in their
value chains that could be seen as sharing opportunities.
6-29
5. AT&T is a firm that follows a strategy of related diversification. Evaluate its success (or
lack thereof) with regard to how well it has (1) built on core competencies, (2) shared
infrastructures, and (3) increased market power. (Fill answers in table below.)
Response:
AT&T is a diversified telecommunications services provider. It is the largest landline telephone

service provider, the second largest mobile telephone company, and largest satellite TV firm in
the United States.
For the table below, we provide some quick notes on these diversifications.
Rationale for Related Successful/ Why?

Diversification Unsuccessful?
1. Build on core competencies Successful Leveraged brand name across landline and mobile
telephone businesses. Use relationships with end
customers to cross-sell services.
2. Share infrastructures Successful Shared technology development unit across business
units. Using the same cell phone tower network to support
multiple mobile telephone brands (AT&T Mobile and
Cricket Wireless).
3. Increase market power Successful Combined units have better bargaining leverage with
suppliers for telecommunications equipment and other
supplies.
(Note to instructor) Students should be able to come up with a number of examples of how
AT&T is attempting to leverage value with its diversification efforts. We suggest you take one at
a time and ask students to demonstrate how it has contributed to shareholder value. For the first
method—build on core competencies—ask students to first identify the core competence. This
question will often be a challenge, as core competencies are complex and abstract, and therefore
difficult to articulate. But it is important to do so. For the second method—shared infrastructure
—ask students to identify the infrastructures. For the third method—increased market power—
ask students to identify the type of market power, such as bargaining power or vertical
integration. Finally, ask students to evaluate the cost of the diversification and to argue whether
the benefits exceed the costs. We suggest that you ask students to defend their diversification
decision to a room full of shareholders.
6-30
Ethics Questions
1. It is not uncommon for firms to undertake corporate downsizing and layoffs. Do you feel
that such actions raise ethical considerations? Why or why not?
Response:
Relevant ethical considerations might include whether the individuals laid off were treated fairly,
and whether management acted to maximize firm value. At the individual level, the question
would be whether those laid off received adequate severance, training, and other services to help
with the transition to a new job. Note that the ethical obligation to those laid-off individuals may
differ from the legal requirement.
At the corporate level, the question revolves around the restructuring effort. Effective strategies
of unrelated diversification and then restructuring will result in a new business unit that is worth
more than the cost of acquisition. If so, then we can infer that managers acted in the best interests
of shareholders. If not, then we can suspect that managers acted in self-interest.
2. What are some of the ethical issues that arise when managers act in a manner that is
counter to their firm’s best interests? What are the long-term implications for both the
firms and the managers themselves?
Response:
Managers have an obligation to their shareholders or, more broadly, their stakeholders. To the
extent that managers neglect stakeholders and make business decisions that serve their self-
interest, they are behaving unethically. In the chapter, we reviewed such behavior and classified
three types as growth for growth’s sake, egotism, and antitakeover tactics. These activities tend
to reduce firm value, especially shareholder value, while protecting the interests of managers.
The long-term implications for the firm are that firm value is reduced. The ability of the firm to
compete effectively and to otherwise fulfill its corporate mission are likely to be eroded. And if a
firm has managers who conducted a diversification for reasons of self-interest, and those
managers were not held accountable, then it is likely that such tactics will be repeated. As a
result, firm value will be further eroded.
As for the managers themselves, there are two possibilities. One is that the managers will stay
with their firms. In this case, the managers may continue to make diversification decisions that
erode firm value. In a classical agency problem situation, the managers may be appropriating
shareholder value. The second is that the managers will leave their firms, such as through a
golden parachute. While these managers will receive a payoff, they are not likely to ascend to the
stature they previously had.
Of course, there are exceptions. Managers who diversify in self-interest once may not repeat the
act. They may also be held accountable either by their board, the shareholders, the press, or
6-31
through legal action. It is not likely that any manager who has faced serious censure will return
to the stature he or she enjoyed.
CONNECT RESOURCES
Comprehension Case
IBM: New Healthcare Experts—Part 1
Case Analysis
IBM: New Healthcare Experts—Part 2
Apple Maps
Video Case
Disney’s Corporate Strategy
Disney's Strategic Move Dilemma: Internally Invest, Ally, or Acquire?
6-32

Corporate-Level Strategy: Creating Value Through Diversification.............................................................................

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Chapter 6: Corporate-Level Strategy: Creating Value through Diversification

Making Diversification Work: An Overview.......................................... 6-5

Related Diversification: Economies of

Leveraging Core Competencies....................................................................................... 6-6

Related Diversification: Market Power................................................... 6-8

Pooled Negotiating Power............................................................................................... 6-8

Unrelated Diversification: Financial Synergies and Parenting............. 6-10

Corporate Parenting and Restructuring.......................................................................... 6-10

The Means to Achieve Diversification...................................................... 6-13

Mergers and Acquisitions................................................................................................ 6-13

How Managerial Motives Can Erode Value Creation............................ 6-18

Growth for Growth’s Sake............................................................................................... 6-18

Issue for Debate ......................................................................................... 6-20

Reflecting on Career Implications............................................................ 6-21

PowerPoint Slide 2: Learning Objectives

The Newell-Jarden case in LEARNING FROM MISTAKES discusses Newell’s decision to

Some general questions to spur discussion and debate:

Discussion Question 4: Why is it typically necessary to integrate the acquiring and

Discussion Question 5: Why is it so difficult to integrate firms together after an

I. Making Diversification Work: An Overview

PowerPoint Slide 4: Corporate-Level Strategy

II. Related Diversification: Economies of Scope and Revenue Enhancement

PowerPoint Slide 8: Related Diversification

Extra Example: John Deere Becomes a Bank to Keep Selling Tractors

A. Leveraging Core Competencies

Core competencies—to create synergy for a corporation—must satisfy three conditions:

 The core competence must enhance competitive advantage(s) by creating superior

STRATEGY SPOTLIGHT 6.1 discusses how Geely leveraged Volvo’s core

1. Deriving Cost Savings through Sharing Activities

2. Enhancing Revenue and Differentiation through Sharing Activities

Extra Example: Mattel is Trying to Use Movies to Enhance its Sales

Source: Lashinsky, A. 2019. Rewriting a toy story. Fortune, December: 99-103.

III. Related Diversification: Market Power

PowerPoint Slide 12: Related Diversification: Market Power

A. Pooled Negotiating Power

Vertical integration represents an expansion or extension of the firm by integrating

In making decisions associated with vertical integration, five issues need to be

Vertical integration, on the other hand involves a different set of costs—administrative.

IV. Unrelated Diversification: Financial Synergies and Parenting

PowerPoint Slide 16: Unrelated Diversification

 The corporate office can contribute to “parenting” and restructuring of (often

A. Corporate Parenting and Restructuring

1. Description and Potential Benefits

In using a portfolio strategy approach, a corporation tries to create synergies and

Extra Example: VF Spins Off Lee and Wrangler

C. Caveat: Is Risk Reduction a Viable Goal of Diversification?

However, such a diversification rationale can, at times, be justified. We discuss how

Extra Example: Johnson & Johnson’s Diversification Strategy

V. The Means to Achieve Diversification

PowerPoint Slide 22: Means of Diversification

 mergers and acquisitions

A. Mergers and Acquisitions

Extra Example: Parker’s Successful M&A Strategy

1. Motives and Benefits

Extra Example: Consolidation in the Dollar Store Market

Extra Example: Parker Continues to Acquire in Down Times

EXHIBIT 6.6 summarizes the potential benefits of M&As.

 The takeover premium can be very high (examples: Household International’s

Extra Example: A Tragic Corporate Marriage in the Cable TV World

EXHIBIT 6.7 summarizes the potential limitations of M&As.

3. Divestment: The Other Side of the “M&A Coin”

B. Strategic Alliances and Joint Ventures

3. Developing and diffusing new technologies