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

6

Corporate-Level Strategy: Creating Value through

Diversification

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ExternalAnalysis

InternalAnalysis

Business Level

Strategies

Corporate Level

Strategies

ImplementStrategies:

-Structure-Control-Leadership

Measure &Evaluate

Performance

Vision,

Mission &

Objectives

Comprehensive Strategic Management Model

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Learning Objectives

• After reading this chapter, you should have a good understanding of:

- How managers can create value through diversification initiatives.- The reasons for the failure of many diversification efforts.- How corporations can use related diversification to achieve

synergistic benefits through economies of scope and market power.- How corporations can use unrelated diversification to attain

synergistic benefits trough corporate restructuring, parenting, and portfolio analysis.

- The various means of engaging in diversification-mergers and acquisitions, joint ventures/strategic alliances, and internal development.

- Managerial behaviors that can erode the creation of value.

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Corporate Level Strategy

• Corporate strategy refers to the overall strategy for a diversified company.

• It is concerned with the mix of businesses the company should compete in, and the ways in which strategies of individual units should be coordinated and integrated.

• Corporate strategy is what makes the corporate whole add up to more than the sum of its business parts.

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Example of a Diversified Company

• General Electric’s products and services include:

- Appliances- Aviation- Consumer Electronics- Electrical Distribution- Energy- Finance – Business;

Consumer

- Healthcare- Lighting- Media &

Entertainment- Oil & Gas- Plastics- Rail- Security- Water

Source: www.ge.com

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Diversification & Synergy

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

• Diversification initiatives must create value must create value for shareholders

Business 1

Business 2

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Leveraging Core Competencies

• Core competencies- The glue that binds existing businesses

together/Engine that fuels new business growth

- Strategic resources that reflect the collective learning in a firm

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Three Criteria of Core Competencies

• Three criteria (of core competencies) that lead to the creation of value and synergy

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

- Different businesses in the firm must be similar in at least one important way related to the core competence (P&G Tide Dry Cleaners)

- Core competencies must be difficult for competitors to imitate or find substitutes for (Sharp LCD screens)

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Related Diversification - Sharing Activities

• Corporations can also achieve synergy by sharing tangible and value-creating activities across their business units

- Deriving Cost Savings (elimination of jobs, facilities, economies of scale in purchasing)

- Enhancing Revenue and Differentiation (Gillette acquiring Duracell)

• Can also negatively affect the image (Mercedes-Benz and Chrysler)

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Related Diversification: Market Power

• Two principal means to achieve synergy through market power

- Pooled negotiating power- Vertical integration

• When a firm becomes its own supplier and distributor (backward + forward integration)

• Government regulations may restrict this power

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Unrelated Diversification: Financial Synergies and Parenting

• Corporate Parenting- The positive contributions of the corporate

office• Restructuring of businesses

- Asset Restructuring- Capital Restructuring- Management Restructuring

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Portfolio Management

KeyEach circle represents one of the firm’s business units

Size of circle represents the relative size of the business unit in terms of revenue

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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

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Strategic Alliances and Joint Ventures

•Strategic Alliances- Partnerships between and organization and a foreign

company in which both share resources and knowledge in developing new products or building new production facilities.

•Joint Venture- A specific type of strategic alliance in which the partners

agree to form a separate, independent organization for some business purpose.

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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

- Pool capital- Pool value-creating activities- Pool facilities

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Strategic Alliances and Joint Ventures

• Develop or diffuse new technologies- Use expertise of two or more companies- Develop products technologically beyond the capability of

the companies acting independently

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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

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Managerial Motives Can Erode Value Creation

• Growth for growth’s sake• Egotism• Antitakeover tactics

- Greenmail- Golden parachute