CH 06

Corporate-
Level Strategy:
Creating Value
through
Diversification
Chapter 6
Copyright 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale
or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website,
in whole or part.
Learning Objectives
6-2
After reading this chapter, you should have a good

understanding of:
LO6.1 The reasons for the failure of many
diversification efforts.
LO6.2 How managers can create value through
diversification initiatives.
LO6.3 How corporations can use related
diversification to achieve synergistic benefits
through economies of scope and market power.
Copyright 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Learning Objectives
6-3
LO6.4 How corporations can use unrelated

diversification to attain synergistic benefits through
corporate restructuring, parenting, and portfolio
analysis.
LO6.5 The various means of engaging in
diversification mergers and acquisitions, joint
ventures/strategic alliances, and internal
development.
Corporate-Level Strategy
6-4
Consider . . .
What businesses should a corporation compete in?

How can these businesses be managed so they
create synergy that is, create more value by
working together than if they were freestanding
units?
Making Diversification Work
6-5
Diversification initiatives must create value for

shareholders through
Mergers and acquisitions
Strategic alliances
Joint ventures
Internal development
Diversification should create synergy
Business 1 plus Business 2 equals More than
two
Making Diversification Work
6-6
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, distribution channels via vertical
integration
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
6-7
Related diversification enables a firm to

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

Leverage core competencies
Sharing related activities
Enjoy greater revenues, enhance differentiation
Related businesses gain market power by:

Pooled negotiating power
Vertical integration
Related Diversification:
Leveraging Core Competencies
6-8
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
Sharing Activities
6-9
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
Market Power
6-10
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
Vertical Integration
6-11
Example: Simplified Stages of Vertical Integration: Shaw

Industries
Vertical Integration
6-12
1. Is the company satisfied with the quality of the value

that its present suppliers & distributors are providing?
2. Are there activities in the industry value chain
presently being outsourced or performed
independently by others that are a viable source of
future profits?
3. Is there a high level of stability in the demand for the
organizations products?
4. Does the company have the necessary competencies
to execute the vertical integration strategies?
5. Will the vertical integration initiatives have potential
negative impacts on the firms stakeholders?
Unrelated Diversification
6-13
Unrelated diversification enables a firm to

benefit from vertical or hierarchical relationships
between the corporate office & individual
business units through
The corporate parenting advantage
Providing competent central functions
Restructuring to redistribute assets
Asset, capital, & management restructuring
Portfolio management
BCG growth/share matrix
Unrelated Diversification:
Parenting & Restructuring
6-14
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 debt
equity mix, adding debt or equity
Management restructuring involves changes in
the top management team, organizational
structure, & reporting relationships
Portfolio Management
6-15
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
6-16
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 6.4 The Boston Consulting Group (BCG) Portfolio

MatrixCopyright 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
6-17
Limitations of portfolio models:
SBUs are compared on only two dimensions & each

SBU is considered a standalone entity
Are these the only factors that really matter?
Can every unit be accurately compared on that
basis? What about possible synergies?
Following strict & simplistic rules for resource

allocation can be detrimental to a firms long-term
viability
Example: Goal of Diversification =
Risk Reduction?
6-18
Diversification can reduce variability in

revenues & profits over time. However
Stockholders can diversify portfolios at a much

lower cost & economic cycles are difficult to
predict, so why diversify?
Example = General Electrics businesses:

Aircraft engines, power generation equipment,
locomotive trains, large appliances, healthcare
products, financial products, lighting, mining, oil &
gas
Means of Diversification
6-19
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
New venture development
Mergers and Acquisitions
6-20
Mergers involve a combination or consolidation

of two firms to form a new legal entity:
The two firms are on a relatively equal basis
Acquisitions involve one firm buying another

either through stock purchase, cash, or the
issuance of debt
Mergers and Acquisitions
6-21
Exhibit 6.5 Global Value of Mergers and Acquisitions ($

trillion)
Source: Thomson Financial, Institute of Mergers, Acquisitions, and Alliances (IMAA) analysis
Mergers and Acquisitions: Motives
6-22
In high-technology & knowledge-intensive

industries, speed is critical: acquiring is faster
than building.
M&A allows a firm to obtain valuable resources

that help it expand its product offerings &
services.
M&A helps a firm develop synergy:

Leveraging core competencies
Sharing activities
Building market power
Mergers and Acquisitions:
Limitations
6-23
Takeover premiums for acquisitions are typically

very high
Competing firms can imitate advantages
Competing firms can copy synergies
Managers egos get in the way of sound business

decisions
Cultural issues may doom the intended benefits

Divestment
6-24
Divestment objectives include:
Cutting the financial losses of a failed acquisition

Redirecting focus on the firms core businesses
Freeing up resources to spend on more attractive
alternatives
Raising cash to help fund existing businesses
Divestment
6-25
Successful divestiture involves:
Removing emotion from the decision

Knowing the value of the business youre selling
Timing the deal right
Maintaining a sizable pool of potential buyers
Telling a story about the deal
Running divestitures systematically through a
project office
Communicating clearly and frequently
Strategic Alliances &
Joint Ventures: Motives
6-26
Strategic alliances & joint ventures are

cooperative relationships between two (or more)
firms with potential advantages:
Ability to enter new markets through

Greater financial resources
Greater marketing expertise
Ability to reduce manufacturing or other costs in

the value chain
Ability to develop & diffuse new technologies

Strategic Alliances &
Joint Ventures: Limitations
6-27
Need for the proper partner:
Partners should have complementary strengths
Partners strengths should be unique

Uniqueness should create synergies
Synergies should be easily sustained & defended
Partners must be compatible & willing to trust

each other
Internal Development
6-28
Corporate entrepreneurship & new venture

development motives:
No need to share the wealth with alliance

partners
No need to face difficulties associated with
combining activities across the value chains
No need to merge diverse corporate cultures
Limitations:
Time-consuming
Need to continually develop new capabilities
Managerial Motives
6-29
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
6-30
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

CH 06

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

CH 06

Enviado por

Direitos autorais:

Formatos disponíveis

Corporate-

After reading this chapter, you should have a good

LO6.4 How corporations can use unrelated

What businesses should a corporation compete in?

Diversification initiatives must create value for

A firm may diversify into related businesses

Related diversification enables a firm to

Economies of scope allow businesses to:

Related businesses gain market power by:

Core competencies reflect the collective

They create superior customer value

Corporations can also achieve synergy by

Sharing tangible & value-creating activities can

Cost savings through elimination of jobs, facilities

Market power can lead to the creation of value

Pooled negotiating power

Example: Simplified Stages of Vertical Integration: Shaw

1. Is the company satisfied with the quality of the value

Unrelated diversification enables a firm to

Parenting allows the corporate office to create

In restructuring the parent intervenes:

Portfolio management involves a better

Suggesting strategic alternatives for each business

Identifying priorities for the allocation of resources

Using Boston Consulting Groups (BCG)

Exhibit 6.4 The Boston Consulting Group (BCG) Portfolio

Limitations of portfolio models:

SBUs are compared on only two dimensions & each

Following strict & simplistic rules for resource

Diversification can reduce variability in

Stockholders can diversify portfolios at a much

Example = General Electrics businesses:

Diversification can be accomplished via

Mergers & acquisitions

Pooling resources of other companies with a firms

Internal Development through

Mergers involve a combination or consolidation

The two firms are on a relatively equal basis

Acquisitions involve one firm buying another

Exhibit 6.5 Global Value of Mergers and Acquisitions ($

In high-technology & knowledge-intensive

M&A allows a firm to obtain valuable resources

M&A helps a firm develop synergy:

Takeover premiums for acquisitions are typically

Competing firms can imitate advantages

Competing firms can copy synergies

Managers egos get in the way of sound business

Cultural issues may doom the intended benefits

Divestment objectives include:

Cutting the financial losses of a failed acquisition

Successful divestiture involves:

Removing emotion from the decision

Strategic alliances & joint ventures are

Ability to enter new markets through

Ability to reduce manufacturing or other costs in

Ability to develop & diffuse new technologies

Need for the proper partner:

Partners should have complementary strengths

Partners strengths should be unique

Partners must be compatible & willing to trust

Corporate entrepreneurship & new venture

No need to share the wealth with alliance

Managerial motives: Managers may act in their