6

Corporate-Level Strategy: Creating Value through Diversification

McGraw-Hill/Irwin Strategic Management: Text and Cases, 4e Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

6-2

Questions Associated with Diversification

What businesses should a corporation compete in?

How should these businesses be managed to jointly create more value than if they were freestanding units?

6-3

Making Diversification Work

Diversification initiatives must create value for shareholders
Diversification should create synergy

Business 1

Business 2

6-4

Synergy

Related businesses (horizontal relationships) Unrelated businesses (hierarchical relationships)

6-5

Related Diversification

Economies of scope Market power Core competencies

6-6

Three Criteria of Core Competencies

Core competencies must enhance competitive advantage(s) by creating superior customer value

Different businesses in the firm must be similar in at least one important way related to the core competence Core competencies must be difficult for competitors to imitate

6-7

Other Synergies

Sharing tangible and value-creating activities across corporate business units Sharing activities provide two payoffs
- Cost savings - Revenue enhancements

Similar businesses working together can have stronger bargaining position

6-8

Vertical Integration: Benefits and Risks

Exhibit 6.4 Benefits and Risks of Vertical Integration

6-9

Unrelated Diversification

Most benefits from unrelated diversification are gained from vertical (hierarchical) relationships Corporate Parenting Corporate Restructuring

6 - 10

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

6 - 11

Portfolio Management

Key
Each circle represents one of the firms business units Size of circle represents the relative size of the business unit in terms of revenue

6 - 12

Portfolio Management

Creation of synergies and shareholder value by portfolio management and the corporate office Creation of synergies and shareholder value by portfolio management and the corporate office

6 - 13

Different Approaches to Diversification

Acquisitions or mergers

Pooling resources of other companies with a firms own resource base

Internal development

6 - 14

Strategic Alliances and Joint Ventures

Introduce successful product or service into a new market Join other firms to reduce manufacturing (or other) costs in the value chain Develop or diffuse new technologies

6 - 15

Some Challenges

Partnership Challenges Managerial Challenges