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.
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Comprehensive Strategic Management
Model External Analysis
Vision, Mission & Objectives
Business Level Strategies
Internal Analysis
Corporate Level Strategies
Implement Strategies:
-Structure -Control -Leadership
Measure & Evaluate Performance
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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 Electrics products and services include: - Appliances - Aviation - Consumer Electronics - Electrical Distribution - Energy - Finance Business; Consumer Source: www.ge.com
- Healthcare - Lighting - Media & Entertainment - Oil & Gas - Plastics - Rail - Security - Water
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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 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 (MercedesBenz 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
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
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Means to Achieve Diversification
Acquisitions or mergers Pooling resources of other companies with a firms 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 growths sake Egotism Antitakeover tactics - Greenmail - Golden parachute
