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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.

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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