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

6Corporate-Level Strategy:

Creating Value through

Diversification

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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?

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Making Diversification Work

Diversification initiatives must create value for

shareholders

Diversification should create synergy

Business1

Business2

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Synergy

Related businesses (horizontal relationships)

Unrelated businesses (hierarchical relationships)

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Related Diversification

Economies of scope

Market power

Core competencies

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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 relatedto the core competence

Core competencies must be difficult for competitors to

imitate

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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

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Vertical Integration: Benefits and Risks

Exhibit 6.4 Benefits and Risks of Vertical Integration

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Unrelated Diversification

Most benefits from unrelated diversification are

gained from vertical (hierarchical) relationships

Corporate Parenting

Corporate Restructuring

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Corporate Management Must

Have insight to detect undervalued companies

or businesses with high potential fortransformation

Have requisite skills and resources to turn thebusinesses around

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Portfolio Management

Key

Each circle

represents one ofthe firms

business units

Size of circlerepresents therelative size of thebusiness unit interms of revenue

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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

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Different Approaches to Diversification

Acquisitions or mergers

Pooling resources of other companies with a

firms own resource base

Internal development

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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

Develop or diffuse new technologies

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Some Challenges

Partnership Challenges

Managerial Challenges