CorporateLevel

Strategy:
Creating
Value
through
Diversificati
chapter 6
on
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Education

Making Diversification
Work

6-2

Diversification initiatives must create

value for shareholders through

Mergers and acquisitions

Strategic alliances
Joint ventures
Internal development

Diversification should create synergy

Making Diversification
Work

6-3

A firm may diversify into related

businesses

Benefits derive from horizontal relationships

Sharing

intangible resources such as core

competencies in marketing
Sharing tangible resources such as production
facilities

A firm may diversify into unrelated

businesses

Benefits derive from hierarchical relationships

Value

creation derived from the corporate office

Leveraging support activities in the value chain

Related Diversification
6-4

Related diversification enables a firm to

benefit from horizontal relationships across
different businesses
Economies of scope allow businesses to:

Leverage core competencies

Share related activities
Enjoy greater revenues

Related businesses gain market power by:

Pooled negotiating power

Vertical integration

Related Diversification:
Leveraging Core Competencies
6-5

Core competencies reflect the

collective learning in organizations. Can
lead to the creation of value and synergy
if

They create superior customer value

The value chain elements in separate

businesses require similar skills

They are difficult for competitors to

imitate or find substitutes for

Related Diversification:
Sharing Activities

6-6

Corporations can also achieve synergy

by sharing activities across their
business units.

Sharing tangible & value-creating

activities can provide payoffs:

Cost savings through elimination of jobs,

facilities & related expenses, or economies
of scale

Revenue enhancements through increased

differentiation & sales growth

Related Diversification:
Market Power

6-7

Market power can lead to the creation

of value and synergy through

Pooled negotiating power

Gaining greater bargaining power with

suppliers & customers

Vertical integration - becoming its

own supplier or distributor through

Backward integration

Forward integration

Related Diversification:
Vertical Integration

6-8

The transaction cost perspective

Every market transaction involves some
transaction costs:

Search costs
Negotiating costs
Contract costs
Monitoring costs
Enforcement costs
Need for transaction specific investments
Administrative costs

Unrelated Diversification
6-9

Unrelated diversification enables a firm

to benefit from vertical or hierarchical
relationships between the corporate office
& individual business units through
The corporate parenting advantage

Restructuring to redistribute assets

Providing competent central functions

Asset, capital, & management restructuring

Portfolio management

BCG growth/share matrix

Unrelated Diversification:
Parenting & Restructuring

6-10

Parenting allows the corporate office to

create value through management
expertise & competent central functions
In restructuring the parent intervenes:

Asset restructuring involves the sale of

unproductive assets
Capital restructuring involves changing the
debtequity mix, adding debt or equity
Management restructuring involves changes
in the top management team, organizational
structure, & reporting relationships

Unrelated Diversification:
Portfolio Management

6-11

Portfolio management involves a

better understanding of the competitive
position of an overall portfolio or family
of businesses by

Suggesting strategic alternatives for each

business
Identifying priorities for the allocation of
resources
Using Boston Consulting Groups (BCG)
growth/share matrix

Unrelated Diversification:
6-12

Portfolio Management
Each circle
represents one
of the firms
business units.
The size of the
circle
represents the
relative size of
the business
unit in terms of
revenue.
Exhibit 6.5 The Boston Consulting Group (BCG) Portfolio
Matrix

Means of Diversification
6-13

Diversification can be accomplished via

Mergers & acquisitions

And

divestment

Pooling resources of other companies with a

firms own resource base through
Strategic

alliances & joint ventures

Internal Development through

Corporate

entrepreneurship

Managerial Motives
6-14

Managerial motives: Managers may

act in their own self interest eroding
rather than enhancing value creation
through

Growth for growths sake

Top

managers gain more prestige, higher

rankings, greater incomes, more job security
Its exciting and dramatic!

Excessive egotism
Use of antitakeover tactics

Managerial Motives:
Antitakeover Tactics

6-15

Antitakeover tactics include:

Green mail
Golden parachutes
Poison pills

Can benefit multiple stakeholders not

just management
Can raise ethical considerations because
the managers of the firm are not acting
in the best interests of the shareholders