Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Strategic Management: Text and Cases, 4e 6 Corporate-Level Strategy: Creating Value through Diversification

6 - 2 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?

6 - 3 Making Diversification Work Diversification initiatives must create value for shareholders Diversification should create synergy Business 1 Business 2

6 - 4 Synergy Related businesses (horizontal relationships) Unrelated businesses (hierarchical relationships)

6 - 5 Related Diversification Economies of scope Market power Core competencies

6 - 6 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 related to the core competence Core competencies must be difficult for competitors to imitate

6 - 7 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

6 - 8 Vertical Integration: Benefits and Risks Exhibit 6.4 Benefits and Risks of Vertical Integration

6 - 9 Unrelated Diversification Most benefits from unrelated diversification are gained from vertical (hierarchical) relationships Corporate Parenting Corporate Restructuring

Corporate 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

Portfolio Management 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

Portfolio Management Creation of synergies and shareholder value by portfolio management and the corporate office

Different Approaches to Diversification Acquisitions or mergers Pooling resources of other companies with a firm’s own resource base Internal development

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

Some Challenges Partnership Challenges Managerial Challenges