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

2. 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

3. 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.

4. Making Diversification Work  Diversification  the process of firms expanding their operations by entering new businesses. 6-4

5. 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 6-5

6. 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. 6-6

7. Leveraging Core Competencies  Core competencies  a firm’s strategic resources that reflect the collective learning in the organization. 6-7

8. 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 6-8

9. 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 6-9

10. 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. 6-10

11. Vertical Integration 6-11 Exhibit 6.3

12. Unrelated Diversification  Unrelated diversification  a firm entering a different business that has little horizontal interaction with other businesses of a firm. 6-12

13. 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. 6-13

14. BCG Portfolio Matrix 6-14 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

15. 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 6-15