Chapter

Corporate-Level Strategy:
Creating Value through
Diversification
A Diversified Company has 2 levels of strategy
A Diversified Company has 2 levels of strategy

Business-Level Strategy (Competitive Strategy)

Corporate-Level Strategy (Company-wide Strategy)

A Diversified Company has 2 levels of strategy

Business-Level Strategy (Competitive Strategy)

How to create competitive advantage in each business in

which the company competes
A Diversified Company has 2 levels of strategy

Business-Level Strategy (Competitive Strategy)

How to create competitive advantage in each business in

which the company competes
- low cost - focused low cost
- differentiation - focused
- integrated low differentiation
cost/differentiation
A Diversified Company has 2 levels of strategy

Business-Level Strategy (Competitive Strategy)

How to create competitive advantage in each business in

which the company competes
- low cost
- differentiation
- integrated low
cost/differentiation
Corporate-Level Strategy
- focused low cost
- focused
differentiation
(Company-wide Strategy)

How to create value for the corporation as a whole

Corporate Strategy concerns 2 key questions:
Corporate Strategy concerns 2 key questions:

What businesses should the corporation be in?

Corporate Strategy concerns 2 key questions:

What businesses should the corporation be in?

How should the corporate office manage the

array of business units?
 Corporate Strategy concerns 2 key questions:

What businesses should the corporation be in?

How should the corporate office manage the

array of business units?

Corporate Strategy is what makes the corporate whole

add up to more than the sum of it business unit parts
Making Diversification Work
 Diversification initiatives must create value for
shareholders

 Diversification should create synergy

Business Business
1 2
Synergy
 Related diversification (horizontal
relationships)
 Sharing tangible resources
 Sharing intangible resources

Manufacturing Specialized Patents,

facilities skills copyrights, etc.

Production Distribution Favorable

facilities channels reputation

Business Business
1 2
Synergy
 Unrelated diversification (hierarchical
relationships)
 Value creation derives from corporate office
 Leveraging support activities

Business
Human Firm 2
resource mgmt infrastructure

Technology Information
Procurement
development systems
Business
1
Related Diversification
Related Diversification: Economies of
Scope and Revenue Enhancement

 Economies of scope
 Cost savings from leveraging core competencies
or sharing related activities among businesses in
the corporation
 Leverage or reuse key resources
 Favorable reputation
 Expert staff
 Management skills
 Efficient purchasing operations
 Existing manufacturing facilities
Three Criteria of Core Competencies
 Three criteria (of core competencies) that
Superior lead to the creation of value and synergy
Customer
value

• Core competencies must enhance

competitive advantage(s) by creating
superior customer value
• Develop strengths relative to
competitors
• Build on skills and innovations
• Appeal to customers
Three Criteria of Core Competencies
 Three criteria (of core competencies) that
Superior lead to the creation of value and synergy
Customer
value

• Different businesses in the firm must

Businesses be similar in at least one important
similar in way way related to the core competence
related to core
competency • Not essential that products or
services themselves be similar
• Is essential that one or more
elements in the value chain
require similar essential skills
• Brand image is an example
Three Criteria of Core Competencies
 Three criteria (of core competencies) that
Superior lead to the creation of value and synergy
Customer
value

• Core competencies must be difficult

Businesses for competitors to imitate or find
similar in way substitutes for
related to core
competency • Easily imitated or replicated core
competencies are not a sound
basis for sustainable advantages
Difficult to
imitate or find • Specialized technical skills
substitutes for acquired only in company work
experience are an example
Sharing Activities
 Corporations can also achieve synergy by sharing
tangible and value-creating activities across their
business units
 Common manufacturing facilities
 Distribution channels
 Sales forces
 Sharing activities can provide two payoffs
 Cost savings
 Revenue enhancements
Cost Savings through Sharing Activities
 Most common type of synergy
 Savings obtained through
 Eliminating duplicate jobs
 Eliminating duplicate facilities
 Eliminating related expenses
 Savings may be offset by
 Greater costs of coordinating shared activities
 Costs of compromising design or performance of a shared
activity
Enhancing Revenue through Sharing
Activities

 Acquiring firm and its target may achieve a

higher level of sales growth together than
either could have achieved on its own
 Combined distribution channels can escalate
sales of the acquiring company’s products
 Enhanced effectiveness of differentiation
strategies
Related Diversification: Market Power

 Two principal means to achieve synergy

through market power
 Pooled negotiating power
 Vertical integration
 Government regulations may restrict this
power
Pooled Negotiating Power
 Similar businesses
Bargaining working together can
Bargaining Bargaining have stronger
powerpower
power
bargaining position
relative to
Business Business
1 2  Suppliers

 Customers

 Competitors
Vertical Integration
 Benefits
Dependency  Secure source of supply of
• Suppliers
raw materials
• Customers
 Secure distribution channels
Business
2  Protection and control over
Dependency assets and services
 Access to new business
Dependency opportunities and
• Suppliers technologies
• Customers
 Simplified procurement and
Business
1 administrative procedures
Vertical Integration
 Risks
 Costs and expenses
associated with increased
overhead and capital
Business expenditures
2  Loss of flexibility resulting
Dependency
from inability to respond
quickly to changes in the
external environment
 Problems associated with
Business unbalanced’ capacities or
1 unfilled demand along the
value chain
 Additional administrative
costs
Vertical Integration
In making decisions associated with vertical integration,
four issues should be considered
1. Are we satisfied with our present suppliers and
distributors.
2. Activities in the industry value chain that are a viable
source of future profits?
3. Is demand stable?

4. How high is the proportion of additional production

capacity actually absorbed by existing products or by
the prospects of new and similar products?
Analyzing Vertical Integration: The
Transaction Cost Perspective

Negotiating
Search costs
costs

Market
transaction Costs of
Enforcement
written
costs
contract

Monitoring
costs
Unrelated Diversification
Unrelated Diversification: Financial
Synergies and Parenting

 Most benefits from unrelated diversification

are gained from vertical (hierarchical)
relationships
 Parenting and restructuring of businesses
 Allocate resources to optimize
 Profitability
 cash flow
 Growth
 Appropriate human resources practices
 Financial controls
Corporate Parenting
 Parenting—creating value
Corporate
within business units
office  Experience of the corporate
office
• Plans
 Support of the corporate
• Budgets office
• Procurement
• Legal functions
• Financial functions
• Human resource management

Business Business Business

unit unit unit
Corporate Restructuring
Corporate
 Find poorly performing
office firms
 With unrealized potential
• Sell off parts  On threshold of significant
• Reduce payroll
• Change strategies positive change
• Change management
• Infuse new technologies
• Reduce unnecessary expenses

Business
Business Business
Business Business
Business
unitunit unit
unit unitunit
Corporate Restructuring
 Corporate management must
 Have insight to detect undervalued companies or
businesses with high potential for transformation
 Have requisite skills and resources to turn the
businesses around
 Restructuring can involve changes in
 Assets
 Capital structure
 management
 Portfolio Management

Key
Each circle
represents one of
the firm’s
business units
Size of circle
represents the
relative size of the
business unit in
terms of revenue
Portfolio Management
 Creation of synergies and shareholder value
by portfolio management and the corporate
office
 Allocate resources (cash cows to stars and
some question marks)
 Expertise of corporate office in locating attractive
firms to acquire
Portfolio Management
 Creation of synergies and shareholder value
by portfolio management and the corporate
office
• Provide financial resources to business units
on favorable terms reflecting the
corporation’s overall ability to raise funds
• Provide high quality review and coaching for
units
• Provide a basis for developing strategic
goals and reward/evaluation systems
Means to Achieve
Diversification
 Acquisitions or mergers
 Pooling resources of other companies with a firm’s
own resource base
 Joint venture
 strategic alliance
 Internal development
 New products
 New markets
 New technology
 Mergers and Acquisitions
Value Created Value Destroyed
Deal Year Since Combination Since
Combination
AOL/Time Warner 2001 _____ $148 billion
Vodafone/Mannesmann2000 _____ $299 billion
Pfizer/Warner-Lambert 2000 _____ $78 billion
Glaxo/SmithKline 2000 _____ $40 billion
Chase/J. P. Morgan 2000 _____ $26 billion
Exxon/Mobil 1999 $ 8 billion _____
SBC/Ameritech 1999 _____ $68 billion
WorldCom/MCI 1998 _____ $94 billion
Travelers/Citicorp 1998 $109 billion _____
Daimler/Chrysler 1991 _____ $36 billion

As of July 1, 2002.
Source: K. H. Hammonds, “The Numbers Don’t Lie,” Fast Company, September 2002, p. 80.

Exhibit 6.5 Ten Biggest Mergers and Acquisitions of All Time and Their Effect on Shareholder Wealth
Strategic Alliances and Joint Ventures

Entering new  Introduce successful product

markets
or service into a new market
 Lacks requisite marketing
expertise
 Doesn’t understand customer
needs
 Doesn’t know how to promote
the product
 Doesn’t have access to proper
distribution channels
Strategic Alliances and Joint Ventures

Entering new  Join other firms to reduce

markets
manufacturing (or other)
costs in the value chain
Reducing  Pool capital
costs in value
chain  Pool value-creating activities
 Pool facilities
 Economies of scale
Strategic Alliances and Joint Ventures

Entering new  Develop or diffuse new

markets
technologies
 Use expertise of two or more
Reducing companies
costs in value  Develop products
chain technologically beyond the
capability of the companies
Developing
acting independently
diffusing new
technology
Unmet Expectations: Strategic Alliances
and Joint Ventures

 Improper partner
 Each partner must bring desired complementary
strengths to partnership
 Strengths contributed by each should be unique
 Partners must be compatible
 Partners must trust one another
Real Options Analysis
 Stock options (financial assets)
 Real options ( real assets or physical things)
 Investments can be staged
 Strategic decision-makers have “tollgates”
 Increased knowledge about outcomes at the time
of the next investment decision
Managerial Motives Can Erode Value
Creation

 Growth for growth’s sake

 Egotism
 Antitakeover tactics
 Greenmail
 Golden parachute
 Poison pills