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Corporate-Level Strategy: Creating Value through Diversification

Corporate-Level Strategy: Creating Value through Diversification. chapter 6. Making Diversification Work. Diversification initiatives must create value for shareholders through Mergers and acquisitions Strategic alliances Joint ventures Internal development

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Corporate-Level Strategy: Creating Value through Diversification

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  1. Corporate-Level Strategy: Creating Value through Diversification chapter 6

  2. Making Diversification Work • Diversification initiatives must create value for shareholders through • Mergers and acquisitions • Strategic alliances • Joint ventures • Internal development • Diversification should create synergy

  3. Making Diversification Work • A firm may diversify into related businesses • Benefits derive from horizontal relationships • Sharing intangible resources such as core competencies in marketing • Sharing tangible resources such as production facilities • A firm may diversify into unrelated businesses • Benefits derive from hierarchical relationships • Value creation derived from the corporate office • Leveraging support activities in the value chain

  4. Related Diversification • Related diversification enables a firm to benefit from horizontal relationships across different businesses • Economies of scope allow businesses to: • Leverage core competencies • Share related activities • Enjoy greater revenues • Related businesses gain market power by: • Pooled negotiating power • Vertical integration

  5. Related Diversification: Leveraging Core Competencies • Core competencies reflect the collective learning in organizations. Can lead to the creation of value and synergy if… • They create superior customer value • The value chain elements in separate businesses require similar skills • They are difficult for competitors to imitate or find substitutes for

  6. Related Diversification: Sharing Activities • Corporations can also achieve synergy by sharing activities across their business units. • Sharing tangible & value-creating activities can provide payoffs: • Cost savings through elimination of jobs, facilities & related expenses, or economies of scale • Revenue enhancements through increased differentiation & sales growth

  7. Related Diversification: Market Power • Market power can lead to the creation of value and synergy through… • Pooled negotiating power • Gaining greater bargaining power with suppliers & customers • Vertical integration - becoming its own supplier or distributor through • Backward integration • Forward integration

  8. Related Diversification: Vertical Integration • The transaction cost perspective • Every market transaction involves some transaction costs: • Search costs • Negotiating costs • Contract costs • Monitoring costs • Enforcement costs • Need for transaction specific investments • Administrative costs

  9. Unrelated Diversification • Unrelated diversification enables a firm to benefit from vertical or hierarchical relationships between the corporate office & individual business units through… • The corporate parenting advantage • Providing competent central functions • Restructuring to redistribute assets • Asset, capital, & management restructuring • Portfolio management • BCG growth/share matrix

  10. Unrelated Diversification: Parenting & Restructuring • Parenting allows the corporate office to create value through management expertise & competent central functions • In restructuring the parent intervenes: • Asset restructuring involves the sale of unproductive assets • Capital restructuring involves changing the debt–equity mix, adding debt or equity • Management restructuring involves changes in the top management team, organizational structure, & reporting relationships

  11. Unrelated Diversification: Portfolio Management • Portfolio management involves a better understanding of the competitive position of an overall portfolio or family of businesses by… • Suggesting strategic alternatives for each business • Identifying priorities for the allocation of resources • Using Boston Consulting Group’s (BCG) growth/share matrix

  12. Unrelated Diversification: Portfolio Management Each circle represents one of the firm’s business units. The size of the circle represents the relative size of the business unit in terms of revenue. Exhibit 6.5 The Boston Consulting Group (BCG) Portfolio Matrix

  13. Means of Diversification • Diversification can be accomplished via • Mergers & acquisitions • And divestment • Pooling resources of other companies with a firm’s own resource base through • Strategic alliances & joint ventures • Internal Development through • Corporate entrepreneurship

  14. Managerial Motives • Managerial motives: Managers may act in their own self interest – eroding rather than enhancing value creation through • Growth for growth’s sake • Top managers gain more prestige, higher rankings, greater incomes, more job security • It’s exciting and dramatic! • Excessive egotism • Use of antitakeover tactics

  15. Managerial Motives: Antitakeover Tactics • Antitakeover tactics include: • Green mail • Golden parachutes • Poison pills • Can benefit multiple stakeholders – not just management • Can raise ethical considerations because the managers of the firm are not acting in the best interests of the shareholders

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