IPPTChap006a

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Copyright © 2014 McGraw-Hill Educati on. All rights reser ed. !o reproduction or distri"ution without the p rior written consent o# McGraw-Hill Education .

Corporate-LevelStrategy:CreatingValuethrough

Diversifcation chapter 6


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Learning Objectives6-2

After reading this chapter, you should havea good understanding of:

LO6.1 The reasons for the failure of manydiversi cation e orts.

LO6. How managers can create value throughdiversi cation initiatives.

LO6.! How corporations can use relateddiversi cation to achieve synergistic bene tsthrough economies of scope and mar et power.


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Learning Objectives

LO6." How corporations can use unrelateddiversi cation to attain synergistic bene ts throughcorporate restructuring, parenting, and portfolio

analysis.LO6.# The various means of engaging indiversi cation ! mergers and ac"uisitions, #ointventures$strategic alliances, and internal

development.LO6.6 %anagerial behaviors that can erode thecreation of value.

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Corporate-Level Strategy

Consi$er%

&hat businesses should a corporationcompete in'

How can these businesses be managed sothey create (synergy) ! that is, createmore value by wor ing together than ifthey were freestanding units'

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*usiness +

*usiness

%orethantwo

&a'ing Diversifcation(or'

Diversifcation initiatives must createvalue for shareholders through %ergers and ac"uisitions -trategic alliances oint ventures /nternal development

0iversi cation should create synergy

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&a'ing Diversifcation(or'

A rm may diversify into related businesses *ene ts derive from horizontal relationships

-haring intangible resources such as coreco)petencies in mar eting-haring tangible resources such as productionfacilities

A rm may diversify into unrelatedbusinesses *ene ts derive from hierarchical relationships

1alue creation derived from the corporate o2ce3evera in su ort activities in the value chain

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*elate$ Diversifcation

*elate$ $iversifcation enables a rmto bene t from hori4ontal relationshipsacross di erent businesses

+cono)ies o, scope allow businessesto: 3everage core co)petencies

Share relate$ activities 5n#oy greater revenues elated businesses gain )ar'et po er

by: oole$ negotiating po er

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/uestion0

-haring core co)petencies is one of theprimary potential advantages of$iversifcation . /n order for diversi cation to

be most successful, it is important thatA. the similarity re"uired for sharing corecompetencies must be in the value chain, not inthe product.

*.the products use similar distribution channels.

7. the target mar et is the same, even if theproducts are very di erent.

0. the methods of production are the same.

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*elate$ Diversifcation:Leveraging Core Co)petencies

Core co)petencies re8ect thecollective learning in organi4ations. 7anlead to the creation of value and synergyif9

They create superior customer value

The value chain elements in separatebusinesses re"uire similar s ills They are di2cult for competitors to

imitate or nd substitutes for

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*elate$ Diversifcation:Sharing ctivities

7orporations can also achieve synergyby sharing activities across theirbusiness units.

-haring tangible value;creatingactivities can provide payo s: 7ost savings through elimination of #obs,

facilities related e


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*elate$ Diversifcation:&ar'et o er

&ar'et po er can lead to the creationof value and synergy through9

oole$ negotiating po er =aining greater bargaining power with

suppliers customers

Vertical integration ; becoming itsown supplier or distributor through *ac ward integration >orward integration

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+2a)ple: /uestion0

Sha 3n$ustries , a giant carpetmanufacturer, increases its control over rawmaterials by producing much of its own

polypropylene ber, a ey input into itsmanufacturing process. This is an e


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*elate$ Diversifcation:Vertical 3ntegration

+2hibit 6.! Si)plife$ Stages o, Vertical 3ntegration: Sha

3n$ustries

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*elate$ Diversifcation:(hy Vertical 3ntegration0

+. /t is the company satis ed with the "uality of thevalue that its present suppliers distributors areproviding'

. Are there activities in the industry value chainpresently being outsourced or performedindependently by others that are a viable source offuture pro ts'

?. /s there a high level of stability in the demand for

the organi4ation@s products'. 0oes the company have the necessary

competencies to e


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*elate$ Diversifcation:(hy Vertical 3ntegration0

The transaction cost perspective 5very mar et transaction involves some

transaction costs : -earch costs Cegotiating costs 7ontract costs

%onitoring costs 5nforcement costs Ceed for transaction speci c investments Administrative costs

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4nrelate$ Diversifcation

4nrelate$ $iversifcation enables arm to bene t from vertical or

hierarchical relationships between the

corporate o2ce individual businessunits through9

The corporate parenting a$vantage

Droviding competent central functions *estructuring to redistribute assets Asset, capital, management restructuring

ort,olio )anage)ent *7= growth$share matri<

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4nrelate$ Diversifcation:arenting 5 *estructuring

arenting allows the corporate o2ce tocreate value through managemente


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4nrelate$ Diversifcation:ort,olio &anage)ent

ort,olio )anage)ent involves abetter understanding of the competitiveposition of an overall portfolio or family

of businesses by9 -uggesting strategic alternatives for each

business /dentifying priorities for the allocation of

resources Esing *oston 7onsulting =roup@s F*7=G

growth$share matri<

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5ach circlerepresents oneof the rm@s

business units. The si4e of thecirclerepresents the

relative si4e ofthe businessunit in terms ofrevenue.

+2hibit 6.# he 7oston Consulting 8roup 97C8 ort,olio&atri2

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3imitations of portfolio models: -*Es are compared on only two dimensions

each -*E is considered a standalone

entityAre these the only factors that really matter'7an every unit be accurately compared on thatbasis' &hat about possible synergies'

An oversimpli ed graphical modelsubstitutes for managers@ eollowing strict simplistic rules forresource allocation can be detrimental to a

rm@s long;term viability

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+2a)ple: 8oal o, Diversifcation ;*is' *e$uction0

Diversifcation can reduce variability inrevenues pro ts over time. However9 -toc holders can diversify portfolios at a

much lower cost economic cycles aredi2cult to predict, so why diversify'

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&eans o, Diversifcation

Diversifcation can be accomplishedvia &ergers ac


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&ergers an$ c


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&ergers an$ c


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&ergers an$ c


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&ergers an$ c


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&ergers an$ c


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/uestion0

Divest)ent can be the common result of anac"uisition. 0ivesting businesses canaccomplish many di erent ob#ectives. These

includeA. enabling managers to focus their e orts more

directly on the rm@s core businesses.*. providing the rm with more resources to spend

on more attractive alternatives.7. raising cash to help fund e


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&ergers an$ c


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&ergers an$ c


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Strategic lliances 5 >oint Ventures: &otives

Strategic alliances joint venturesare cooperative relationships withpotential advantages: Ability to enter new mar ets through

=reater nancial resources=reater mar eting e


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Strategic lliances 5 >oint Ventures: Li)itations

Ceed for the proper partner: Dartners should have complementary

strengths Dartner@s strengths should be uni"ue

Eni"ueness should create synergies-ynergies should be easily sustained defended

Dartners must be compatible willing totrust each other

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3nternal Develop)ent

Corporate entrepreneurship newventure development motives : Co need to share the wealth with alliance

partners Co need to face di2culties associated with

combining activities across the value chains Co need to merge diverse corporate

cultures Limitations :

Time;consuming

Ceed to continually develop new

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&anagerial &otives

&anagerial )otives : %anagers mayact in their own self interest ! erodingrather than enhancing value creation

through 8ro th ,or gro th?s sa'e

Top managers gain more prestige, higherran ings, greater incomes, more #ob security

/t@s e


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&anagerial &otives:ntita'eover actics

ntita'eover tactics include: 8reen )ail 8ol$en parachutes oison pills

7an bene t multiple sta eholders ! not #ust management

7an raise ethical considerations becausethe managers of the rm are not actingin the best interests of the shareholders

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