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Corporate- Level Strategy: Creating Value through Diversifica tion Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Page 1: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Corporate-Level Strategy: Creating Value

through Diversification

Chapter Six

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Page 2: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Learning Objectives

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

LO6.1 The reasons for the failure of many diversification efforts.

LO6.2 How managers can create value through diversification initiatives.

LO6.3 How corporations can use related diversification to achieve synergistic benefits through economies of scope and market power.

6-2

Page 3: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

6-3

Learning Objectives (cont.)

LO6.4 How corporations can use unrelated diversification to attain synergistic

benefits trough corporate restructuring, parenting, and portfolio analysis.

LO6.5 The various means of engaging in diversification-mergers and acquisitions, joint ventures/strategic alliances, and internal development.

LO6.6 Managerial behaviors that can erode the creation of value.

Page 4: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Making Diversification Work

Diversification the process of firms

expanding their operations by entering new businesses.

6-4

Page 5: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Making Diversification Work

What businesses should a corporation compete in?

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

6-5

Page 6: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Making Diversification Work

Diversification initiatives must create value for shareholders Mergers and acquisitions Strategic alliances Joint ventures Internal development

Diversification should be synergistic

6-6

Page 7: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Making Diversification Work

Related businesses (horizontal relationships) Sharing tangible resources Sharing intangible resources

Unrelated businesses (hierarchical relationships) Value creation derives from corporate office Leveraging support activities

6-7

Page 8: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Related Diversification

Related diversification a firm entering a different business in which it

can benefit from leveraging core competencies, sharing activities, or building market power.

6-8

Page 9: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Related Diversification

Economies of scope cost savings from

leveraging core competencies or sharing related activities among businesses in a corporation.

6-9

Page 10: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

QUESTION

McKesson, a large distribution company, sells many product lines such as pharmaceuticals and liquor through its super warehouses. This is an example of A.Achieving economies of scope through related diversification

B.Achieving market power through related diversification

C.Attaining the benefits of restructuring through unrelated diversification

D.Attaining the benefits of parenting through unrelated diversification

6-10

Page 11: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Leveraging Core Competencies

Core competencies a firm’s strategic resources that reflect the

collective learning in the organization.

6-11

Page 12: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Leveraging Core Competencies

Core competencies reflect the collective learning in a firm:

How to coordinate diverse production skillsHow to integrate multiple streams of

technologiesHow to market diverse products and services

6-12

Page 13: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Three Criteria of Core Competencies

Core competencies must enhance competitive advantages 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 or find substitutes for

6-13

Page 14: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

QUESTION

Philip Morris bought Miller Brewing and used its marketing expertise to improve Miller's market share. This justification for diversification is best described as A.Utilizing common infrastructures

B.Capitalizing on core competencies

C.Reducing corporate risk

D.Using portfolio analysis

6-14

Page 15: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Sharing Activities

Corporations can also achieve synergy by sharing tangible and value-creating activities across their business units Common manufacturing facilities Distribution channels Sales forces

6-15

Page 16: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Sharing Activities

Sharing activities provide two payoffs Cost savings Revenue enhancements

6-16

Page 17: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Market Power

Market power firms’ abilities to profit through restricting or

controlling supply to a market or coordinating with other firms to reduce investment.

6-17

Page 18: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Market Power

Pooled negotiating power The improvement in

bargaining position relative to suppliers and customers.

Vertical integration an expansion or

extension of the firm by integrating preceding or successive production processes.

6-18

Page 19: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Pooled Negotiating Power

Similar businesses working together can have stronger bargaining position relative to Suppliers Customers Competitors

Abuse of bargaining power may affect relationships with customers, suppliers and competitors

6-19

Page 20: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Vertical Integration

6-20

Exhibit 6.3

Page 21: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Vertical Integration

BenefitsA secure source of raw materials or distribution channels.Protection of and control over valuable assets.Access to new business opportunities.Simplified procurement and administrative procedures.

6-21

Page 22: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Vertical Integration

RisksCosts and expenses associated with increased overhead and capital expenditures.Loss of flexibility resulting from large investments.Problems associated with unbalanced capacities along the value chain.Additional administrative costs associated with managing a more complex set of activities.

6-22

Page 23: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Making Vertical Integration Decisions

1. Is the company satisfied with the quality of the value that our present suppliers and distributors are providing?

2. Are there activities in our industry value chain presently being outsourced or performed independently by others that are a viable source of future profits?

3. Is there a high level of stability in the demand for the organization’s products?

6-23

Page 24: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Making Vertical Integration Decisions (cont.)

4. Do we have the necessary competencies to execute the vertical integration strategies?

5. Will the vertical integration initiative have potential negative impacts on our stakeholders?

6-24

Page 25: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Transaction Cost Perspective

Transaction Cost Perspective the choice of a transaction’s governance

structure, is influenced by transaction costs, such as search, negotiating, contracting, monitoring, and enforcement costs

6-25

Page 26: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Unrelated Diversification

Unrelated diversification a firm entering a different business that has

little horizontal interaction with other businesses of a firm.

6-26

Page 27: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Corporate Parenting and Restructuring

Parenting advantage the positive contributions of the corporate

office to a new business as a result of expertise and support provided

6-27

Page 28: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Corporate Parenting and Restructuring

Restructuring The intervention of the corporate office in a

new business that substantially changes the assets, capital structure, and/or management

6-28

Page 29: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Corporate RestructuringCorporate 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

Can involve changes in Assets Capital Management

6-29

Page 30: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Portfolio Management

Portfolio management assessing the competitive position of a

portfolio of businesses within a corporation, suggesting strategic alternatives for each

business identifying priorities for the allocation of

resources across the businesses.

6-30

Page 31: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

BCG Portfolio Matrix

6-31

Key

Each circle represents one of the firm’s business units

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

Page 32: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Example

Church & Dwight has a well balanced portfolio of products, which includes Arm & Hammer Trojan condoms Oxi Clean AIM toothpastes First Response Nair Xtra laundry detergent Brillo

6-32Source: www.churchdwight.com

Page 33: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Limitations of Portfolio Management

SBUs compared on only two dimensionsSBUs viewed as stand-alone entitiesProcess becomes largely mechanicalReliance on “strict rules” regarding

resource allocation across SBUs can be detrimental

6-33

Page 34: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Means to Achieve Diversification

Acquisitions or mergersPooling resources of other companies

with a firm’s own resource base Joint venture Strategic alliance

Internal development Corporate entrepreneurship

6-34

Page 35: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Mergers and Acquisitions

Can be a means of obtaining valuable resources that can help an organization expand its product offerings and services

Can lead to consolidation within an industry and can force other players to merge

Corporations can also enter new market segments by way of acquisitions

6-35

Page 36: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Limitations

Competing firms often can imitate any advantages realized or copy synergies that result from the M&A.

There can be many cultural issues that may doom the intended benefits from M&A endeavors.

6-36

Page 37: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Strategic Alliances and Joint Ventures

Introduce successful product or service into a new market Lacks requisite marketing expertise

Join other firms to reduce manufacturing (or other) costs in the value chain Pool capital, value-creating activities,

facilities

6-37

Page 38: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

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

6-38

Page 39: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

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 compatiblePartners must trust one another

6-39

Page 40: Corporate- Level Strategy: Creating Value through Diversification Chapter Six McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All

Managerial Motives Can Erode Value Creation

Growth for growth’s sakeEgotismAntitakeover tactics

Greenmail Golden parachute Poison pills

6-40


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