Strategic Management Concepts Competitiveness and Globalization 12th Edition Hitt Solutions Manual

Strategic Management Concepts
Competitiveness and Globalization 12th

Edition Hitt Solutions Manual
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Chapter 6: Corporate-Level Strategy
Chapter 6
Corporate-Level Strategy
LEARNING OBJECTIVES
1. Define corporate-level strategy and discuss its purpose.

2. Describe different levels of diversification achieved using different corporate-level
strategies.
3. Explain three primary reasons firms diversify.
4. Describe how firms can create value by using a related diversification strategy.
5. Explain the two ways value can be created with an unrelated diversification strategy.
6. Discuss the incentives and resources that encourage diversification.
7. Describe motives that can encourage managers to over diversify a firm.
CHAPTER OUTLINE
Opening Case: Disney Adds Value Using a Related Diversification Strategy LEVELS
OF DIVERSIFICATION
Low Levels of Diversification
Moderate and High Levels of Diversification
Reasons for Diversification
VALUE-CREATING DIVERSIFICATION: RELATED CONSTRAINED AND
RELATED LINKED DIVERSIFICATION
Operational Relatedness: Sharing Activities
Corporate Relatedness: Transferring of Core Competencies
Market Power
UNRELATED DIVERSIFICATION
Efficient Internal Capital Market Allocation
Restructuring of Assets
Strategic Focus: GE and United Technology are Firms that Have Pursued Internal
Capital Allocation and Restructuring Strategies
Strategic Focus: Ericsson’s Substantial Market Power
VALUE-NEUTRAL DIVERSIFICATION: INCENTIVES AND RESOURCES
Incentives to Diversify
Resources and Diversification
Strategic Focus: Coca Cola’s Diversification to Deal with Its Reduced Growth in Soft
Drinks
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
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VALUE-REDUCING DIVERSIFICATION: MANAGERIAL MOTIVES TO

DIVERSIFY
SUMMARY
MINI-CASES
REVIEW QUESTIONS
MINDTAP RESOURCES
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LECTURE NOTES
Chapter Introduction: Chapters 4 and 5 looked at strategy at the level of the business
and focused on the factors and approaches that can lead to competitive advantage and
superior performance. Chapter 6 takes this a step further by standing back to consider
strategy at a higher level - corporate strategy. The concern here is for the performance
benefits that are derived from putting together an effective “portfolio of businesses” - that
is, putting businesses together in a way that makes sense and can generate synergies
between units. The discussion of this chapter builds toward a summary presented in
Figure 6.4. It might be helpful to review that figure carefully before starting into the
material of the chapter.
OPENING CASE
Disney Adds Value Using a Related Diversification Strategy
The Walt Disney Company has pursued a related diversification strategy by using its
movies to create franchises and platforms around its popular cartoon and action movie
figures. While competitive content providers have weakened to lower TV ratings, Disney
was strengthened through its other businesses including consumer products, interactive
consumer products, interactive parks and resorts, and studio entertainment parks, and a
strong cable franchise. Disney’s strategy is successful because its corporate strategy,
compared to its business level strategy, adds value across its set of businesses above what
the individual businesses could create individually. In addition, the corporation has broad
and deep knowledge about its customers that is a corporate level capability in terms
advertising and marketing. This capability allows it to cross sell products highlighted in
its movies through its media distribution outlets, parks and resorts, as well as consumer
product businesses.
Teaching Note
While many content creating competitors are facing revenue losses due to lower
TV ratings, The Walt Disney Company is growing through a related
diversification strategy by using its movies to create franchises and platforms
around its popular cartoon and action movie figures. Ask students to evaluate
these related franchises and platforms to support its movie content. Why is this
strategy successful in creating value?
1 Define corporate-level strategy and discuss its purpose.
Remember that in Chapters 4 and 5 the discussion centered on selecting and implementing a
business-level or competitive strategy - actions a firm should take to compete in a single
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industry or product market - and the actions and responses that affect the competitive
dynamics of a single industry or product market.
In contrast, when a firm diversifies its operations by operating business in several industries,
corporate-level strategy becomes a primary focus. This means that a diversified firm has two
levels of strategy: business-level (or competitive) and corporate-level (or company-wide), the
latter of which entails selecting a strategy that focuses on the selection and management of a
mix of businesses.
Corporate-level strategies detail actions taken to gain a competitive advantage through the
selection and management of a mix of businesses competing in several industries or product
markets. Primary concerns of corporate-level strategy are:
 What businesses should the firm be in?
 How should the corporate office manage its group of businesses?
 How can the corporation as a whole add up to more than the sum of its business parts?
The ultimate measure of the value of a firm’s corporate-level strategy is that the businesses in
the firm’s portfolio are worth more under current management (and by following the firm’s
corporate-level strategy) than they would be under different ownership or management.
Teaching Note
Indicate to students that the unique organizational structure that is required by this
strategy is discussed in Chapter 11.
LEVELS OF DIVERSIFICATION
Diversified firms vary according to two factors:

 The level of diversification
 Connection or linkages between and among business units
Figure Note
Five levels of diversification are listed and each is defined in Figure 6.1. It is
recommended that you refer students to Figure 6.1 as you begin to discuss levels of
diversification in more detail.
FIGURE 6.1
Levels and Types of Diversification
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Figure 6.1 should be used as a reference point during your discussion of diversification
types. Students’ attention should be directed to inter-unit linkages depicted on the right side
of Figure 6.1.
Levels and types of diversification defined in Figure 6.1 and discussed in more detail in the
next sections of this chapter are:
Low levels of diversification:

 Single business
 Dominant business
Moderate to high levels of diversification:

 Related-constrained diversification
 Related-linked diversification (mixed related and unrelated)
Very high levels of diversification:

 Unrelated diversification
Describe different levels of diversification achieved using

2
different corporate-level strategies.
LOW LEVELS OF DIVERSIFICATION
Firms that follow single- or dominant-business strategies have low levels of diversification.
A single business is a firm where more than 95 percent of its revenues are generated by the
dominant business. Firms such as the Wrigley Co. are examples of single-business firms.
Wrigley Co. has dominated the global gum-related industry as the largest manufacturer of
chewing gum, specialty gums, and gum bases. Its brands, Doublemint, Spearmint, and Juicy
Fruit, led the market.
Teaching Note
Wrigley has chosen to focus its attention on its historic (since 1915) core business. It
competes effectively (and successfully) against large diversified firms, including RJR
Nabisco (Beechnut and Carefree) and Warner-Lambert (Trident and Dentyne).
Focusing on its core business has enabled Wrigley’s top-level managers to maintain
strategic control of the business. As a result, Wrigley maintains a clear, strategic
focus and is highly competitive in its core business (though it is beginning to
diversify somewhat in recent years).
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A dominant business is a firm that generates between 70 and 95 percent of its sales within a
single business area.
Teaching Note
UPS is an example of a dominant business firm because, although 22 percent of
revenue comes from international operations, it generates 60 percent of its revenue
from its US package delivery service.
Moderate and High Levels of Diversification
A related-diversified firm is one that earns at least 30 percent of its revenues from sources
outside the dominant business and whose units are related to each other - e.g., by the sharing
of resources and by product, technological, and distribution linkages.
Related-constrained firms also earn at least 30 percent of their revenues from the dominant
business, and all business units share product, technological, and distribution linkages, as
illustrated in Figure 6.1. Kodak, Procter & Gamble, and Campbell’s Soup Company are
related-constrained firms.
Related linked (mixed related and unrelated) firms, such as Campbell Soup and P&G,
generate at least 30 percent of their total revenues from the dominant business, but there are
few linkages between key value-creating activities.
Unrelated-diversified (or highly diversified) firms do not share resources or linkages, as

illustrated in Figure 6.1. Firms that pursue unrelated diversification strategies - often known
as conglomerates - include United Technologies, Samsung, and Textron.
Though there are more unrelated diversified firms in the US than in most other countries,
conglomerates (firms following unrelated diversification strategies) dominate the private
sector economy in Latin America and in several emerging economies (such as China, South
Korea, and India).
Teaching Note
Many firms that have at one time pursued unrelated diversification strategies are
restructuring to focus on a less diversified mix of businesses, a move that may reflect:
 An inability to manage high levels of diversification
 Recognition that a lower level of diversification would improve the match between
the firm’s core competencies and environmental opportunities and threats
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3 Explain three primary reasons firms diversify.
REASONS FOR DIVERSIFICATION
Teaching Note
The content of this section of the chapter generally is limited to a discussion of Table
6.1, which provides some of the reasons that firms implement diversification
strategies. The various value-related motives for diversification are discussed in more
detail in the remainder of the chapter as specific diversification strategies are
discussed.
Firms may implement diversification strategies to enhance or increase the strategic

competitiveness of the overall organization, and thus the value of the firm increases.
Value can be created through either related or unrelated diversification if the strategies
enable the firm’s mix of businesses to increase revenues and/or decrease costs when
implementing business-level strategies.
Firms may implement diversification strategies that are either value neutral or result in
devaluation of the firm. They may attempt to diversify:
 To neutralize a competitor’s market power
 To reduce managers’ employment risk (i.e., risk of the CEO being unemployed when a
dominant-business firm fails as compared to this risk when a single business fails when it
is only one part of a diversified firm)
 To increase managerial compensation because of the positive relationships between
diversification, firm size, and compensation
Table Note
Reasons or motives for implementing diversification strategies are presented in Table
6.1. They are discussed in the following chapter sections.
TABLE 6.1
Reasons for Diversification
Firms follow diversification strategies for many reasons. These can be grouped into three
broad sets of motives:
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Motives to create value:

 Economies of scope (related diversification) through activity-sharing and the transfer of
core competencies
 Market power motives (related diversification) by vertical integration or blocking
competitors via multipoint competition
 Financial economies motives (unrelated diversification) to improve efficiency of capital
allocation through an internal capital market or by restructuring the portfolio of
businesses
Motives that are value-neutral with respect to strategic competitiveness are used to:
 avoid violations of antitrust regulations
 take advantage of tax incentives
 overcome low performance
 reduce the uncertainty of future cash flows
 reduce overall firm risk
 exploit tangible resources
 exploit intangible resources
Managerial or value-reducing motives are used to:

 diversify managerial employment risk
 increase managerial compensation
Figure Note
As illustrated in Figure 6.2, firms seek to create value by sharing activities and
transferring skills or corporate core competencies. This figure can help students
organize their thoughts about the options firms have to exploit various forms of
relatedness.
FIGURE 6.2
Value-Creating Strategies of Diversification: Operational and Corporate Relatedness
Firms seek to create value from economies of scope through two basic kinds of operational
economies: sharing activities and transferring skills (corporate core competencies). However,
the levels of the two will lead to different corporate strategies with different advantages
associated with each.
Combinations of Economies Resulting Strategy Economies for Advantage
High operational/ Vertical integration Market power

Low corporate
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Low operational/ Unrelated diversification Financial economies

Low corporate
High operational/ Both operational and Rare capability and can create
High corporate relatedness diseconomies of scope
High operational/ Related-linked Economies of scope
High corporate diversification
VALUE-CREATING DIVERSIFICATION:
RELATED CONSTRAINED AND RELATED LINKED DIVERSIFICATION
Firms implement related diversification strategies in order to achieve and exploit economies
of scope and build a competitive advantage by building on existing resources, capabilities,
and core competencies.
For firms that operate in multiple industries or product markets, economies of scope
represent cost savings attributed to entering an additional business and sharing activities or
using capabilities and core competencies developed in another business that can be
transferred to a new business without significant additional costs.
The difference between activity sharing and core competence sharing is based on how
different resources are used jointly to create economies of scope:
 To create economies of scope, tangible resources such as plant and equipment or other
business-unit physical assets often must be shared. Less tangible resources, such as
manufacturing know-how, also can be shared.
 Know-how transferred between separate activities with no physical or tangible resource
involved is a transfer of a corporate-level core competence, not an operational sharing of
activities.
A key to creating value through sharing essentially separate activities is to share know-how
or skills rather than physical or tangible resources.
Operational Relatedness: Sharing Activities
Because all of its businesses share product and technological and distribution linkages,
activity sharing is common among related-constrained diversified firms, such as Procter &
Gamble.
P&G’s paper towel and disposable diaper units can share many activities due to their
common characteristics:
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 Each business uses paper products as a key input, so they are likely to share key facets of
procurement and inbound logistics, as well as primary manufacturing activities.
 Because all three businesses produce consumer products that are sold in similar (if not the
same) outlets, they will likely share outbound logistics, distribution channels, and possibly
sales forces.
Firms also must recognize that although activity sharing is intended to reduce costs through
achieving economies of scope, there are incremental costs related to sharing activities (costs
that are created by sharing). These costs must be recognized and taken into account when
planning activity sharing or scope economies may not result.
Activity sharing can also result in new risks since closer linkages between business units
create tighter interrelationships and/or interdependencies. For example, if two business units
share production facilities and sales in one unit’s products decline to the point that revenues
no longer cover the costs of shared production, then each business unit’s ability to achieve
strategic competitiveness may be adversely affected.
Regardless of the risks that accompany activity sharing, research indicates that activity
sharing - or the potential for activity sharing - can increase the value of the firm. Some
findings are summarized here:
 Acquiring firms in the same industry - a horizontal acquisition - where sharing of
activities and resources is implemented results in improved performance and higher
returns to shareholders.
 Selling off units where resource sharing is a possible source of economies of scope results
in lower returns to shareholders than does selling off business units unrelated to the firm’s
core business.
 Firms with more related units have less risk.
Describe how firms can create value by using a related

4
diversification strategy.
CORPORATE RELATEDNESS: TRANSFERRING OF CORE COMPETENCIES
Over time, most firms develop intangible resources that can become a foundation for
corporate-level core competencies that are competitively valuable. In diversified firms, these
core competencies generally are made up of managerial and technical knowledge,
experiences, and expertise.
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There are at least two ways the related linked diversification strategy helps firms create
value:
 Any costs related to developing the competence have already been incurred
 Competencies based on intangible resources, such as marketing know-how, are less visible
and therefore are more difficult for competitors to understand and imitate
Teaching Note
As an example, Philip Morris acquired Miller Brewing at a time when competition in
the brewing industry was focused on establishing efficient operations.
 Philip Morris used marketing competencies coming from the competitive cigarette
industry.
 No brewing firm used marketing capabilities as a source of competitive advantage.
 By transferring its marketing competence to Miller, Philip Morris introduced
marketing as a source of competitive advantage to the brewing industry.
 Because its primary competitor, Anheuser-Busch, was unable to develop the
capability to respond for several years, Miller’s strategic action (mostly effective
advertising campaigns) let Miller achieve a temporary competitive advantage and
earn above-average returns.
Other firms have focused on transferring a variety or resources/capabilities across businesses

in their control.
 Virgin has transferred its marketing skills across travel, cosmetics, music, drinks, and
other retail businesses.
 Thermo Electron has employed its entrepreneurial skills in starting up a number of new
ventures and maintaining a new venture network.
 Honda has developed and transferred across its businesses its expertise in small and now
larger engines for a number of vehicle types - from motorcycles and lawnmowers to its
range of automotive products.
One way that firms can facilitate the transfer of competencies between or among business
units is to move key personnel into new management positions in the receiving unit.
However, research suggests that transferring expertise often does not lead to performance
improvement.
Teaching Note
It is good to help students understand the human dimensions of strategic decisions -
e.g., expertise transfers may be difficult or costly because of the following:
 A business-unit manager of an older division may be reluctant to transfer key
people who have accumulated knowledge and experience critical to the business
unit’s success.
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 Managers able to facilitate the transfer of core competencies may come at a

premium.
 The key people involved may not want to transfer.
 The top-level managers from the transferring division may not want the
competencies transferred to a new division to fulfill the firm’s diversification
objectives.
Market Power
Firms also may implement related diversification strategies in an attempt to gain market
power.
 Market power exists when a firm is able to sell its products at prices above the existing
competitive level or decrease the costs of its primary activities below the competitive
level, or both.
 Market power through diversification may be gained through multipoint competition, a
condition where two or more diversified firms compete in the same product areas or
geographic markets.
Firms also might gain market power by following a vertical integration strategy, which exists
when a company produces its own inputs (backward integration) or owns its own distribution
system (forward integration). A vertical integration strategy may be motivated by a firm’s
desire to strengthen its position in its core business relative to competitors by increasing its
market power.
Vertical integration enables a firm to increase market power by:

 Developing the ability to save on its operations
 Avoiding market costs
 Improving product quality
 Protecting its technology from imitation by rivals
 Having strong ties between their assets for which no market prices exist
Note
Establishing a market price would result in high search and transaction costs, so firms seek
to vertically integrate rather than remain separate businesses.
Teaching Note
As an example of vertical integration, CVS, a Walgreen’s competitor, recently
merged with Caremark, a pharmaceutical benefits manager. This represents a vertical
move for CVS from a retail-only firm to broader-based health care. However, CVS
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risks alienating Walgreen’s, which may then choose to align with another benefits
manager.
However, like other strategies that create value and aid the firm in achieving strategic
competitiveness, vertical integration may not be the perfect answer because of risks and costs
that accompany it.
 Outside suppliers may be able to provide inputs at a lower cost (and, possibly also of a
higher quality).
 The costs of coordinating vertically integrated activities may exceed the value of the
control realized.
 Vertical integration may result in the firm losing strategic competitiveness if the internal
unit does not keep up with changes in technology.
 To vertically integrate, the firm may need to build a facility with capacity that exceeds the
ability of its internal units to absorb, forcing the selling unit to sell to outside users in
order to achieve scale economies.
Many manufacturing firms no longer pursue vertical integration. In fact, deintegration is the
focus of most manufacturing firms, such as Intel and Dell, and even among large automobile
companies, such as Ford and General Motors, as they develop independent supplier
networks. Solectron Corp., a contract manufacturer, represents a new breed of large contract
manufacturers that is helping to foster this revolution in supply-chain management. Such
firms often manage their customers’ entire product lines, and offer services ranging from
inventory management to delivery and after-sales service.
E-commerce allows vertical integration to turn into “virtual integration,” permitting closer
relationships with suppliers and customers through electronic means of integration. This lets
firms reduce transaction costs while boosting supply-chain management skills and tightening
inventory control.
Ericsson’s Substantial Market Power
Ericsson is the largest global manufacturer of mobile telecommunications networks

equipment (with 38 percent global market share in 2012). It has a presence in 108 countries
and their business unit support system provides charging and billing service for 1.6 billion
people. Ericsson has three primary businesses: business unit networks, business unit support
systems, and business unit global services. As these businesses are all related to some degree
it is clear that Ericsson is following a related-constrained diversification strategy. Ericsson is
facing formidable competition from Huawei and Samsung. To stay ahead of competitors
Ericsson makes ‘major’ investments in R&D to develop new technologies and products. It
estimates that 5G wireless, federated networked cloud services, and 3D visual
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communications will be needed in the near future and it is positioning itself to be a leader in
all of these areas.
Simultaneous Operational and Corporate Relatedness
As Figure 6.2 suggests, some firms simultaneously seek operational and corporate
relatedness to create economies of scope. Because simultaneously managing two sources of
knowledge is very difficult, such efforts often fail, creating diseconomies of scope.
A Bit of Disney History: A Mini-Case
By using operational relatedness and corporate relatedness, Disney made $3 billion

on the 150 products that were marketed with its movie, The Lion King. Sony’s Men in
Black was a super hit at the box office and earned $600 million, but box office and
video revenues were practically the entire success story. Disney was able to
accomplish its great success by sharing activities regarding The Lion King theme
within its movie, theme park, music, and retail products divisions, while at the same
time transferring knowledge into these same divisions, creating a music CD, Rhythm
of the Pride Lands, and producing a video, Simba’s Pride. In addition, there were
Lion King themes at Disney resorts and Animal Kingdom parks. However, it is
difficult for analysts from outside the firm to fully assess the value-creating potential
of the firm pursuing both operational relatedness and corporate relatedness. As such,
Disney’s assets as well as other media firms such as AOL Time Warner have been
discounted somewhat because “the biggest lingering questions is whether multiple
revenue streams will outpace multiple-platform overhead.”
Explain the two ways value can be created with an unrelated

5
diversification strategy.
UNRELATED DIVERSIFICATION
Firms implementing unrelated diversification strategies hope to create value by realizing

financial economies, which are cost savings realized through improved allocations of
financial resources based on investments inside or outside the firm.
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Financial economies are realized through internal capital allocations (that are more efficient
than market-based allocations) and by purchasing other companies and then restructuring
their assets.
Efficient Internal Capital Market Allocation
Although capital generally is efficiently distributed in a market economy through the capital
markets, large diversified firms may be able to distribute capital more efficiently to divisions
and thus create value for the overall organization. This generally is possible because:
 Corporate offices have more detailed and accurate information on actual division
performance and future prospects.
 Investors have limited access to internal information and generally can only estimate
division performance.
One implication of increased access to information is that the internal capital market may be
able to allocate resources between investment opportunities more accurately (and at more
adequate levels) than the external capital market. There are several reasons for this:
 Information disclosed to capital markets through annual reports may not fully disclose
negative information, reporting only positive prospects while meeting all regulatory
disclosure requirements.
 External capital sources have limited knowledge of what is taking place within large,
complex firms.
 While owners have access to information, full and complete disclosure is not guaranteed.
 An internal capital market may enable the firm to safeguard information related to its
sources of competitive advantage that otherwise might have to be disclosed. Through
disclosure, the information could become available to competitors who might use the
information to duplicate or imitate the firm’s sources of competitive advantage.
Other advantages of internal capital markets:

 Corrective actions may be more efficiently structured and underperforming management
can be more effectively disciplined through the internal capital market than through
external capital market mechanisms. Thus, the internal capital market is more capable of
taking specific, finely tuned corrective actions compared to the external market.
 If external intervention is required, only drastic alternatives generally are available, such
as forcing the firm into bankruptcy or forcing the removal of top-level managers.
 With an internal capital market, the corporate office can adjust managerial incentives or
can suggest strategic changes to make the desired corrections.
Research suggests that in efficient capital markets, the unrelated diversification strategy may
be discounted. Stock markets have applied what some have called a “conglomerate discount”
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reflected in the valuation of diversified manufacturing conglomerates at 20 percent less, on

average, than the value of the sum of their parts.
The Achilles heel of the unrelated diversification strategy is that conglomerates in developed
economies have a short life cycle because financial economies are more easily duplicated
than are the gains derived from operational relatedness and corporate relatedness. This is less
of a problem in emerging economies, where the absence of a “soft infrastructure” (e.g.,
effective financial intermediaries, sound regulations, and contract laws) supports and
encourages use of the unrelated diversification strategy. In fact, in emerging economies such
as those in India and China, diversification increases performance of firms from large
diversified business groups.
STRATEGIC FOCUS
GE and United Technology are Firms that Have Pursued Internal Capital Allocation
and Restructuring Strategies
General Electric is a diversified company with a storied past. While GE’s businesses
compete in a number of different industries, because of similarities among some of them,
they are currently grouped into four divisions: GE Capital, GE Energy, GE Technology
Infrastructure, and GE Home and Business Solutions. In recent years, however, more
than 50 percent of GE’s annual revenue came from the GE Capital division. Though it
has enjoyed success throughout its history, recent performance has been unimpressive.
NBC never achieved expected success (and was recently sold) and the performance of its
financial services business has been weak since 2008 (although in 2012 it produced
revenue and profit growth). Stock price has been down for over a decade. GE appears to
be placing large acquisition bets on its green energy business and making substantial
investments to be a force in the new industrial Internet industry. It is also beginning to
see strong growth from some of its international investments.
United Technologies Corporation, an unrelated firm, has allocated resource internal

according to their best and most efficient use. Similar to GE, it often it has bought
restructured and operated businesses until it made sense to sell them. United
Technologies owns Otis Elevator, building fires and security system brands Chubb and
Kidde, Pratt & Whitney jet engines, and Carrier air conditioners besides Sikorsky
Aircraft.
Both GE and United Technology has used internal capital allocate resources among its
diversified business units efficiently. Also, both business have used the restructuring
strategy to make their business more efficient and when appropriate sold them on the
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open market, either through selloff to another acquirer or through spinoffs where two
stock prices are created, one for the legacy business and one for the spinoff firm
Restructuring of Assets
A restructuring approach to creating value in an unrelated diversified firm involves the

buying and selling of other companies (and their assets) in the external market.
Following the asset sale and layoffs, underperforming divisions (those acquired in the
purchase) are sold to other firms and remaining divisions are placed under strict budgetary
controls accompanied by the reporting of cash inflows and outflows to the corporate office.
Tyco International: A Question of Ethics

Under former CEO Dennis L. Kozlowski, Tyco International, Ltd. excelled at
exploiting financial economies through restructuring. Tyco focused on two types of
acquisitions: platform, which represented new bases for future acquisitions, and add-
on, in markets where Tyco currently had a major presence. As with many unrelated
diversified firms, Tyco acquired mature product lines. However, completing large
numbers of complex transactions resulted in accounting practices that are not as
transparent as stakeholders now demand. In fact, many of Tyco’s top executives,
including Kozlowski, were arrested for fraud, and the new CEO, Edward Breen, has
been restructuring the firm’s businesses to overcome “the flagrant accounting, ethical,
and governance abuses of his predecessor.” Actions being taken in firms such as Tyco
suggest that firms creating value through financial economies are responding to the
demand for greater transparency in their practices. Responding in this manner will
provide the information the market needs to accurately estimate the value the
diversified firm is creating when using the unrelated diversification strategy.
Success in implementing unrelated diversification strategies usually requires that firms:

 Focus on firms in mature, low technology industries
 Avoid service businesses because of their client- or sales-orientation
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Discuss the incentives and resources that encourage

6
diversification.
VALUE-NEUTRAL DIVERSIFICATION: INCENTIVES AND RESOURCES
As mentioned earlier, not all firms diversify to increase the value of the overall firm. Some
attempts at diversification are implemented to prevent the value of the firm from decreasing.
Incentives to Diversify
In most instances, managers have a choice regarding the level of diversification that their
firm should implement. In addition, both the external and internal environments are sources
of incentives or reasons that managers might use to justify diversification choices.
Antitrust Regulation and Tax Laws
In the 1960s and 1970s, government policies - in the form of antitrust enforcement and tax
laws - provided US firms with incentives to diversify the mix of businesses controlled by the
firm. Because of these policies, the vast majority of mergers during the period represented
unrelated diversification. They were classified as conglomerate mergers.
Conglomerate mergers (unrelated diversification) were encouraged in large part by the

Celler-Kefauver Act, which discouraged horizontal and vertical mergers. That is, federal
legislation (and enforcement by the US Department of Justice) discouraged market power
boosting via related diversification. As one measure of the effectiveness of official
“discouragement,” almost 80 percent of mergers during 1973–1977 were conglomerate
mergers.
During the 1980s, enforcement of antitrust laws slackened and firms chose to implement
horizontal merger strategies (or mergers with firms in the same [or a related] line of
business).
At the same time, investment bankers aggressively promoted merger and acquisition activity
to the extent that many acquisitions were classified as unfriendly or hostile takeovers.
Firms that had diversified (in an unrelated fashion) in the 1960s and 1970s began to
implement strategies to refocus their firms, and an era of restructuring began.
When firms generate more cash than they are able to profitably reinvest in the firm’s primary
activities, the excess funds, or “free cash flows,” should be returned to shareholders in the
6-18
form of dividends. However, during the 1960s and 1970s, dividends were taxed more heavily
than ordinary personal income. (Dividends are taxed twice: once when the firm pays taxes on
its operating income and a second time when net income is paid out to shareholders in the
form of dividends as shareholders pay a tax on dividends received at their personal income
tax rate.)
In 1986, the perspective shifted once again, as the Tax Reform Act of 1986 reduced the top
personal income tax rate from 50 percent to 28 percent. Capital gains rules were changed so
that capital gains would be taxed at the ordinary personal income tax rate, and personal
interest deductibility was eliminated.
These changes in federal tax laws that affected individual tax rates for dividends and capital
gains (with the former decreasing and the latter increasing), have created an incentive for
shareholders to favor reduced levels of diversification (after 1986) unless funded by tax-
deductible debt.
The recent changes recommended by the Financial Accounting Standards Board (FASB),
regarding the elimination of the “pooling of interests” method for accounting for the acquired
firm’s assets and the elimination of the write-off for research and development in process,
reduce some of the incentives to make acquisitions, especially related acquisitions in high-
technology industries.
Although there was a loosening of federal regulations in the 1980s and a retightening in the
late 1990s, a number of industries have experienced increased merger activity due to
industry-specific deregulation activity, including banking, telecommunications, oil and gas,
and electric utilities.
Low Performance
When firms are able to earn above-average or superior returns in a single business, they have
little incentive to diversify (as previously discussed in the Wrigley Co. example).
However, low performance may provide an incentive for diversification as a low-performing

firm may become more risk seeking in an effort to improve overall firm performance.
In response to low returns (or poor performance), firms often choose to seek greater levels of
diversification. At some point, however, poor performance slows the pace of diversification,
often resulting in restructuring divestitures of businesses to lower the level of firm
diversification.
6-19
Strategic Focus Coca-Cola’s Diversification to Deal with Its Reduced Growth in Soft Drinks
Changing consumer tastes have caused The Coca-Cola Company to diversify its drink
offerings in order to combat falling revenue and profits, which dropped noticeable from 2013
to 2015. The company is responding to a consumer demand for “healthier, tastier, more
unique and less mass market” products. Among its strategies, Coca-Cola launched its
“venture and emerging brands” (VEB) to cultivate relationships and ultimately to purchase
some of these small start-ups. Through this process, it now owns Fuse Tea, Zibo coconut
water, and the organic brand Honest Tea. It has also tinkered with other approaches such as
its Freestyle soda fountain machine “that offers more than 100 different drink choices; some,
such as Orange Coke, aren’t available in cans.” It now has these drink machines in fast food
chains such as Five Guys and Burger King. This approach has consistently raised drink sales
by double-digits every year, mostly because the volume is higher.
Figure Note
The relationship between level of performance and diversification (for firms that
already have diversified) is illustrated in Figure 6.3.
FIGURE 6.3
The Curvilinear Relationship Between Diversification and Performance
As Figure 6.3 illustrates, firms exhibiting low performance in their dominant businesses
often implement related-constrained diversification strategies that, to a certain point, result in
increased performance.
In search of even higher performance, related-diversified firms may continue to diversify, but
elect to acquire unrelated businesses.
When a firm’s core competencies do not create value in unrelated businesses, firm
performance decreases.
Teaching Note
DaimlerChrysler had to deal with the challenges that were created partly by its failed
diversification efforts. The firm faced the task of reversing this strategy, which started
with the sale of its electronics operation, divesting a 34 percent stake in Cap Gemini
(a French software services company), and liquidating Fokker (a Dutch aircraft
manufacturer). The firm also eliminated a layer of upper-level executives and shaped
a culture of responsibility and entrepreneurship, with innovation (using cross-
functional project teams) as the force supporting the new culture.
6-20
Uncertain Future Cash Flows
Firms also may implement diversification strategies when their products reach maturity (in
the product life cycle) or are threatened by external factors that the firm cannot overcome.
Thus, firms may view diversification as a survival strategy.
In the 1960s and 1970s, railroads diversified because of the threat from the trucking industry
to reduce demand for rail transportation.
Uncertainty can be derived from supply, demand, and distribution sources. For example, at
one time PepsiCo acquired Quaker Oats to fortify its growth with Gatorade and healthy
snacks, on the projection that these products would experience greater growth rates than
Pepsi’s soft drinks.
Synergy and Firm Risk Reduction
As you will recall from the discussion earlier in this chapter, firms that diversify in pursuit of
economies of scope take advantage of linkages between primary value-creating activities to
realize synergy from sharing.
Synergy exists when the value created by business units working together exceeds the value
the units create when working independently.
These linkages - and the inter-relatedness or interdependencies that result - produce joint
profitability between business units, and the flexibility of the firm to respond may be
constrained, increasing the risk of failure.
To eliminate this risk, firms may do one of two things:

 Operate in more certain environments to reduce the level of technological change and
choose not to pursue potentially profitable, yet unproven product lines
 Constrain or reduce the level of activity sharing, thus forgoing the potential benefits of
synergy
However, these decisions could lead to further diversification

 To diversify into industries where more certainty exists
 To additional, but unrelated diversification
Research suggests that a firm using a related diversification strategy is more careful in
bidding for new businesses, whereas a firm pursuing an unrelated diversification strategy
may be more likely to overprice its bid, because an unrelated bidder may not have full
6-21
information about the acquired firm. However, firms using either a related or an unrelated
diversification strategy must understand the consequences of paying large premiums.
Resources and Diversification
In addition to having incentives to diversify, a firm also must possess the correct mix of
resources - tangible, intangible, or financial - that makes diversification feasible.
However, remember that resources create value when they are rare, valuable, costly to
imitate, and non-substitutable. In other words, resources that do not have these
characteristics can be more easily duplicated (or acquired) by competitors. Thus, it may
not be possible to create value using such resources.
The excess capacity of tangible resources may be used to justify diversification, especially
when the firm sees opportunities for activity sharing. However, value-creation may be
possible only in related diversification. Remember, using tangible resources also creates
interrelationships through its activity linkages in production, marketing, procurement, and
technology, and these interdependencies often reduce firm flexibility and may, in fact,
increase the risk of failure.
Ideally, as discussed earlier, a firm’s intangible resources - because they are less visible and
less understood by competitors - should be used to facilitate and create value from
diversification.
Describe motives that can encourage managers to

7
over diversify a firm.
VALUE-REDUCING DIVERSIFICATION:
MANAGERIAL MOTIVES TO DIVERSIFY
Some managers may be motivated to diversify their firms even if there are no incentives, and
a lack of resources can constrain inclinations toward diversification. Managers’ motives for
diversification include the following:
 Diversification may enable managers to reduce employment risk (the risks related to the
loss of their jobs or a reduction in compensation) because by diversifying the firm (i.e., by
adding a number of additional businesses), managers may be able to diversify their
employment risk, as long as profitability does not decline greatly as a result of the
diversification.
6-22
 Diversification allows managers to increase their compensation because of positive

correlations between diversification, firm size, and executive compensation (based on the
logic that large firms are more difficult to manage).
Teaching Note
Indicate to students that corporate governance is covered in much greater detail in
Chapter 10. The discussion in this chapter is introductory in nature.
If properly structured and used, governance structures - such as the firm’s board of directors,
performance monitoring, executive compensation limits, and the market for corporate control
- may provide the means to exert control over managers’ tendencies to over diversify because
of self-interest motives.
However, if a firm’s internal governance structure is not strong (or functions imperfectly);
managers may diversify the firm beyond the optimal level. As a result, the overall firm may
fail to earn average returns (illustrated by Figure 6.3).
When the internal governance structure fails to restrain managers from over diversifying (and
performance declines), external governance mechanisms, such as the takeover market, may
come into play.
In the takeover market (also known as the market for corporate control), improved levels of
diversification (and improved performance) are achieved by replacing incumbent or current
managers and restructuring the firm. However, managers may be able to avoid takeovers
through defensive tactics, such as golden parachutes, poison pills, greenmail, or increasing
the firm’s leverage ratio.
In spite of the preceding comments, most managers take positive strategic actions (such as
those related to diversification) that result in overall firm profitability and contribute to the
strategic competitiveness of the firm.
In addition to the internal and external governance mechanisms discussed, managers also
may be provided with incentives to limit firm diversification to optimal levels by a concern
for their personal reputations in the labor market and the related market for managerial talent
(also known as the market for managers).
One signal that the firm may be over diversified is when operating diversified businesses
reduces, rather than improves, the overall performance of the firm.
Figure Note
6-23
It is useful to note that two factors appearing in Figure 6.4 are discussed in greater
detail in future chapters. Governance structures in Chapter 10 and strategy
implementation is covered in Chapter 11. The overall relationship between reasons
for diversification, governance, and firm performance is provided in Figure 6.4.
FIGURE 6.4
Summary Model of the Relationship Between Diversification and Firm Performance
As shown in Figure 6.4, a firm’s diversification strategy is determined by several inter-

related factors,
 Value-creating influences (economies of scope, market power, financial economics)
 Value-neutral influences (resources and incentives)
 Value-reducing influences (managerial motives to diversify)
 Internal governance
 Capital market intervention and the market for managerial talent
The relationship between diversification strategy and firm performance is moderated by:
 Capital market intervention and the market for managerial talent with which the
diversification strategy is implemented
As noted in this chapter, diversification strategies can be used to enhance a firm’s strategic
competitiveness and enable it to earn above-average returns. However, positive outcomes
from diversification are possible only when the firm achieves the appropriate level of
diversification, given its resources, capabilities, and core competencies, and taking into
account the external environmental opportunities and threats.
Mini-Case
Sany’s Highly Related Core Businesses
Sany Heavy Industry Company, Ltd. Is China’s largest producer of heavy equipment (and 5th
largest globally). Sany’s businesses consist of cranes, road construction machinery, port
machinery, and pump over machinery. Some technologies used in the production and in its
products are similar which makes transferring knowledge across these businesses easier to
accomplish. Additional similarities exist in customers and markets served. Sany invests 5
percent of sales in R&D and through the end of 2012 held 3,303 patents. It has developed
new post-doctoral research centers to attract top research scientists. Sany is positioning itself
to improve its global position through acquisitions, the establishment of subsidiaries in many
countries, and the relocation of its headquarters.
6-24
ANSWERS TO MINI CASE DISSCUSSION QUESTIONS
1. What is corporate-level strategy and why is it important?
Corporate-level strategies are strategies that detail actions taken to gain a competitive
advantage through the selection and management of a mix of businesses competing in
different product markets. They are concerned with what businesses the firm should be in
and how the corporate office should manage its group of businesses.
Corporate-level strategies are important to the diversified firm because developing and
implementing multibusiness strategies is necessary for effective utilization of resources,
capabilities, and core competencies across multiple businesses to create value. In the final
analysis, a corporate-level strategy’s value is ultimately determined by the degree to which
the businesses in the portfolio are worth more under the management of the company than
they would be under any other ownership.
2. What are the different levels of diversification firms can pursue by using different
corporate-level strategies?
Low levels of diversification. Single- and dominant-business firms represent those for which
at least 95 percent and 70 percent of total sales, respectively, come from a single business.
Several advantages accrue to these firms. For example, managers of single- and dominant-
business firms may be more capable of understanding the competitive dynamics of the
smaller number of industries in which their business (es) compete. Furthermore, managers in
these firms can develop more specialized skills, concentrating on formulating and
implementing a narrower range of business-level strategies and managing synergies between
businesses that may be easier to identify and master. However, these firms must also
overcome a number of disadvantages. For example, single- and dominant-business firms are
affected more negatively by an economic downturn that affects their single or dominant
industry. In addition, by focusing their operations, these firms cannot enjoy the advantages
that are realized only by diversified firms
Moderate to high levels of diversification. A firm generating more than 30 percent of its
revenue outside a dominant business and whose businesses are related to each other in some
manner uses a related diversification corporate-level strategy. When the links between the
diversified firm’s businesses are rather direct, a related constrained diversification strategy is
being used.
6-25
The diversified company with a portfolio of businesses with only a few links between them is
called a mixed related and unrelated firm and is using the related linked diversification
strategy. Compared with related constrained firms, related linked firms share fewer resources
and assets between their businesses, concentrating instead on transferring knowledge and
core competencies between the businesses. As with firms using each type of diversification
strategy, companies implementing the related linked strategy constantly adjust the mix in
their portfolio of businesses as well as make decisions about how to manage their businesses.
Very high levels of diversification. A highly diversified firm that has no relationships
between its businesses follows an unrelated diversification strategy. These businesses are not
related to each other, and the firm makes no effort to share activities or to transfer core
competencies between or among them.
3. What are three reasons firms choose to diversify their operations?
Firms may choose to move from a single- or dominant-business position to a more

diversified position for three general reasons. First (value creating), they do this to enhance
strategic competitiveness via increased economies of scope (e.g., by sharing activities and
transferring core competencies), market power (e.g., by blocking competitors through
multipoint competition or implementing vertical integration), and financial economies (e.g.,
from efficient internal capital allocations and business restructuring). Second (value-neutral),
firms may diversify in response to incentives. For example, they may do so to respond to
advantages from tax law, to overcome a low performance trend, or to balance out uncertain
future cash flows. Finally (value reducing), unrelated acquisitions also may be made for
managerial reasons (either to diversify managerial employment risk or to increase managerial
compensation). It is important to note that diversification is not always pursued in an effort to
enhance the firm’s strategic competitiveness; in fact, diversification may have neutral or even
negative effects on firm performance.
4. How do firms create value when using a related diversification strategy?
Activity sharing and transferring core competencies are used to obtain economies of scope
while pursuing a related diversification strategy because cost savings are attributed to
entering an additional related business using capabilities and competencies developed in one
business that can be transferred to another business without significant additional costs. In
other words, it may be possible for related firms to share production facilities or distribution
networks, or a core competency such as marketing expertise might be transferred between
related business units. However, related firms also must take into account the costs related to
activity sharing and core competency transfers, namely the cost of coordination and sharing
6-26
of control created by the interdependencies that result or the savings imputed to economies of
scope may not be realized.
Firms using a related diversification strategy may gain market power when successfully
using their related constrained or related linked strategy. Market power exists when a firm is
able to sell its products above the existing competitive level or to reduce the costs of its
primary and support activities below the competitive level, or both.
Some firms using a related diversification strategy engage in vertical integration to gain
market power. Vertical integration exists when a company produces its own inputs
(backward integration) or owns its own source of output distribution (forward integration).
5. What are the two ways to obtain financial economies when using an unrelated
diversification strategy?
Two ways to obtain financial economies when pursuing an unrelated diversification strategy
are by establishing an efficient internal capital market and by restructuring the assets of
purchased businesses.
Financial economies can be achieved by establishing an efficient internal capital market that
enables corporate managers - because they have access to more detailed and more accurate
(or more relevant) information - to make better (more value-enhancing) capital allocation
decisions relative to those made by the market. Restructuring focuses exclusively on buying
and selling other firms’ assets in the external market. This usually entails selling off
corporate headquarters facilities, laying off corporate staff, selling underperforming divisions
to other firms that may be able to enhance the division’s strategic competitiveness, and
managing the remaining business units to maximize net cash flow.
6. What incentives and resources encourage diversification?
Incentives that encourage diversification include antitrust regulation, tax laws, low firm
performance, uncertain future cash flows, and opportunities to reduce overall firm risk.
Resources that encourage diversification include both tangible and intangible resources such
as plant and equipment (excess productive capacity) and financial resources (free cash flows)
for which no attractive (positive) investment opportunities are available as the firm is
currently structured.
7. What motives might encourage managers to over diversify their firm?
6-27
Managers might be encouraged to push a firm toward a more diversified position to reduce
the risk of job loss by diversifying employment risk (so long as profitability does not suffer
excessively) or to increase their compensation. Increased levels of diversification are strongly
correlated with firm size, and firm size in turn is strongly correlated with managerial
compensation because of the increased complexity that results from increases in firm size
and diversification level.
ADDITIONAL QUESTIONS AND EXERCISES
The following questions and exercises can be presented for in-class discussion or assigned as
homework.
Application Discussion Questions
1. This chapter suggests that there is a curvilinear relationship between diversification and
performance. Ask students how this relationship can be modified so that the negative
relationship between performance and diversification is reduced and the downward curve
has less slope or begins at a higher level of diversification.
2. The Fortune 500 firms are very large, and many of them have significant product
diversification. Ask students if they believe these large firms are over diversified. Do
they experience lower performance than they should?
3. What is the primary reason for over diversification? Is it industrial policies, such as taxes
and antitrust regulation, or do firms over diversify because managers pursue their own
self-interest through increased compensation, and a reduced risk of job loss? Why? Have
students explain.
4. One rationale for pursuing related diversification is to obtain market power. In the United
States, however, too much market power may result in a challenge by the US Justice
Department (because it may be perceived as anticompetitive). Ask students in what
situations related diversification might be considered unfair competition.
5. Tell students they have two job offers, one from a dominant-business firm and one from
an unrelated diversified firm (suppose the beginning salaries are virtually identical).
Which offer would they accept and why?
6. Ask students if they believe that by the year 2015 large firms will be more or less
diversified than they are today. Why? Will the trends regarding diversification be
identical in Europe, the United States, and Japan? Explain.
7. Will the Internet make it easier for firms to diversify? Why or why not?
6-28
Ethics Questions
1. Propose the following statement: “Those managing an unrelated diversified firm face far
more difficult ethical challenges than do those managing a dominant-business firm.”
Based on their reading of this chapter, do the students this statement true or false? Why?
2. Is it ethical for managers to diversify a firm rather than return excess earnings to
shareholders? Have students provide their reasoning in support of their answers.
3. What unethical practices might occur when a firm restructures? Ask students if they
believe that ethical managers are unaffected by the managerial motives to diversify
discussed in this chapter. If so, why? In addition, do they believe that ethical managers
should help their peers learn how to avoid making diversification decisions on the basis
of the managerial motives to diversify? Why or why not?
INSTRUCTOR'S NOTES FOR MINDTAP
Cengage offers additional online activities, assessments and resources inside MindTap,
our online learning platform. The following activities can be assigned within MindTap
for students to complete.
INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES
Revolution or Evolution: Strategizing To Gain Competitive Advantage
The introduction to this chapter defines corporate-level strategy as “actions a firm takes
to gain a competitive advantage by selecting and managing a group of different
businesses competing in different product markets.” In this group exercise, students will
analyze the corporate-level strategy for a publically traded firm and how those strategies
increase the company’s value.
 Select an established publically traded firm

 Research and critique the firm’s corporate level strategy-evolution
 Create a timeline or infographic to share with the class sharing the research and
critique
 Create and deliver a presentation to the class discussing the company’s current
corporate level strategy, different levels of diversification and one background
story
6-29
Students will form a research consultancy, providing large firms with background on
corporate-level strategies and your recommendations for strategy for their firms. In this
group project, you will have the opportunity to practice valuable strategic management
skills, including research management, strategic thinking and teambuilding.
To modify this project as an individual assignment, consider requiring just one

deliverable – a poster, a presentation or a paper.
To enhance the project, the instructor may also challenge the students to discuss how the
company is building brand loyalty through its differentiations and/or market
segmentation using different business-level strategies.
INSTRUCTOR'S NOTES FOR BRANCHING EXERCISE
Branching Exercises are real-world activities that allow each student to work through
challenges by choosing from different decision-making options. These exercises provide
students with the opportunity to practice strategic management in a business scenario
utilizing company case studies. Students are placed in the role of a decision maker and
asked to consider the needs and priorities of stakeholders as they determine strategy
recommendations for a company.
Lockheed Martin
Lockheed Martin is a global aerospace, defense, security and advanced

technologies company. The U.S.-based company is a top U.S. government contractor and
employees 16,000 people across the globe.
Students will choose among competing strategies for developing an international

diversification international strategy as Lockheed Martin’s primary customer, the U.S.
government consumes less of its services. It is important to guide the discussion to focus
on themes presented throughout the chapter including related and unrelated
diversification strategies; as well as business and corporate-level strategies that could
exist. In particular, be sure that the class is addressing issues such as different corporate
level strategies, the risks and rewards of innovation, and the challenges of vertical
integration and the transfer of competencies.
Students will review these concepts:

 Related and Unrelated Diversification in value creation
 Different levels of Innovation
6-30
 Innovation and Research and Development

 Reasons firms diversify
 Vertical Integration vs. Transfer Competencies
The ideal path that earns a perfect score is the following:

 Choose a related diversification strategy
 Begin a venture in the private sector for space tourism
 Collaborate with an established space tourism firm, specifically Virgin Galactic
 Share activities across the current business units to produce the new shuttle
components and equipment and compile them into a complete product
 Final: Entering into a collaborative arrangement with Virgin Galactic was an
excellent plan. The other firm has established competencies in many of the areas
required to be successful that you do not have – such as customer service and
marketing. By sharing activities across your firm, you are increasing the chances
of Lockheed Martin’s success of a venture in private sector space tourism.
INSTRUCTOR'S NOTES FOR VIDEO EXERCISES
The media quiz offers additional opportunities for students to apply the concepts in the
chapter to a real-world scenario as it is described in news reports.
Title: Starbucks Buys Bakery Chain to Improve Food Quality

RT: 2:30
Topic Key: International strategy, Business-level strategy, Corporate-level strategy,
National advantage
Starbucks built a top international brand by offering coffee-related drinks. However, it

has struggled to sell its coffee drinkers on food. The corporation recently took a $100
million gamble by purchasing a small San Francisco bakery chain, retaining its French-
born owner to train partner bakers across the country. The new baked goods will fill all
8,000 U.S.-based Starbucks stores.
Suggested Discussion Questions and Answers
1. By purchasing La Boulange what competitive advantage, does Starbucks hope to

gain?
6-31
In implementing a corporate-level strategy, Starbucks redefines its business model

to allow it to increase its competitive advantage in its changing industry by
offering high-quality bakery items
2. How does Starbucks’ current market power increase its chances for success in
expanding its product offerings to include bakery items?
Starbucks’ premium brand enables it to charge higher prices for its beverage
products. Its current market power in its beverage offerings gives Starbucks the
ability to implement those same premium price points for its new bakery items.
3. Starbucks’ previous attempts to include food in its product offerings have met
with mediocre results. Currently, only one-third of customers buy food products
at Starbucks. How does using vertical integration increase Starbucks’ financial
risk by buying and operating its own bakery supplier?
Starbucks’ premium brand enables it to charge higher prices for its beverage
products. Its current market power in its beverage offerings gives Starbucks the
ability to implement those same premium price points for its new bakery items.
6-32

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Strategic Management Concepts

Competitiveness and Globalization 12th

1. Define corporate-level strategy and discuss its purpose.

VALUE-REDUCING DIVERSIFICATION: MANAGERIAL MOTIVES TO

1 Define corporate-level strategy and discuss its purpose.

Diversified firms vary according to two factors:

Low levels of diversification:

Moderate to high levels of diversification:

Very high levels of diversification:

Describe different levels of diversification achieved using

LOW LEVELS OF DIVERSIFICATION

Moderate and High Levels of Diversification

Unrelated-diversified (or highly diversified) firms do not share resources or linkages, as

3 Explain three primary reasons firms diversify.

REASONS FOR DIVERSIFICATION

Firms may implement diversification strategies to enhance or increase the strategic

Motives to create value:

Managerial or value-reducing motives are used to:

Combinations of Economies Resulting Strategy Economies for Advantage

High operational/ Vertical integration Market power

Low operational/ Unrelated diversification Financial economies

Operational Relatedness: Sharing Activities

Describe how firms can create value by using a related

CORPORATE RELATEDNESS: TRANSFERRING OF CORE COMPETENCIES

Other firms have focused on transferring a variety or resources/capabilities across businesses

 Managers able to facilitate the transfer of core competencies may come at a

Vertical integration enables a firm to increase market power by:

Ericsson’s Substantial Market Power

Ericsson is the largest global manufacturer of mobile telecommunications networks

Simultaneous Operational and Corporate Relatedness

A Bit of Disney History: A Mini-Case

By using operational relatedness and corporate relatedness, Disney made $3 billion

Explain the two ways value can be created with an unrelated

Firms implementing unrelated diversification strategies hope to create value by realizing

Efficient Internal Capital Market Allocation

Other advantages of internal capital markets:

reflected in the valuation of diversified manufacturing conglomerates at 20 percent less, on

United Technologies Corporation, an unrelated firm, has allocated resource internal

A restructuring approach to creating value in an unrelated diversified firm involves the

Tyco International: A Question of Ethics

Success in implementing unrelated diversification strategies usually requires that firms:

Discuss the incentives and resources that encourage

VALUE-NEUTRAL DIVERSIFICATION: INCENTIVES AND RESOURCES

Antitrust Regulation and Tax Laws

Conglomerate mergers (unrelated diversification) were encouraged in large part by the

However, low performance may provide an incentive for diversification as a low-performing

Uncertain Future Cash Flows

Synergy and Firm Risk Reduction

To eliminate this risk, firms may do one of two things:

However, these decisions could lead to further diversification

Resources and Diversification

Describe motives that can encourage managers to

 Diversification allows managers to increase their compensation because of positive

As shown in Figure 6.4, a firm’s diversification strategy is determined by several inter-

ANSWERS TO MINI CASE DISSCUSSION QUESTIONS

1. What is corporate-level strategy and why is it important?

3. What are three reasons firms choose to diversify their operations?

Firms may choose to move from a single- or dominant-business position to a more