slide 12

1. Chapter Six
Corporate-Level Strategy:
Creating ValueCreating Value through
Diversification

2. CHAPTER 6
McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin
After studying this chapter, you should
have a good understanding of:
• How managers can create value through diversification
initiatives
• The reasons for the failure of many diversification
efforts(textbook,p.193 exhibit 6.1.Unsuccessful firms?)
 How corporations can use related diversification to
achieve synergistic benefits through economies of scope
and market power
 How corporations can use unrelated diversification to
attain synergistic benefits through corporate
restructuring, parenting, and portfolio analysis(BCG
model)
 The various means of engaging in diversification_ mergers
and acquisitions, joint ventures/strategic alliances, and
internal development {in detail from slide.28}
• Managerial behaviors that can erode the creation of value
Learning
Objectives
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3. Corporate-level strategy(CS): Overview
The Corporate-level strategy concerns two issues:
What mixWhat mix of businesses (of businesses (Selection)) should the firm compete in?
 Multiple means to achieving diversification (e.g. Microsoft and IntelMicrosoft and Intel have
dramatically enhanced their revenues, profit and market values
though a wide variety of diversification initiatives, including
mergers and acquisitions, joint ventures /strategic alliances, and
internal development)
 HowHow should be these businessesthese businesses Managed?_?_ is to manage theis to manage the
portfolio ofportfolio of business units so that eachso that each isis developingdeveloping and contributingand contributing
toto corporate purposescorporate purposes.. e.g., Intel Capital has invested $4 B in 1000
Com-ies, over 15 years: 160 sold to anther firms &150 publicly listed, netnet
income $ 214mlnincome $ 214mln added to parent Company, in 2006.
E.g., Textron, Inc., a successful conglomerate corporation(multiple profiles) that
pursues profits through a range of businesses in unrelated industries. Textron has
four core business segments: Aircraft - 32% of revenues , Automotive - 25% ; Industrial -
39% ; and Finance - 4% of revenues.

4. Dr. PHEA V., 2016
CS Summary
 The success of a diversified firm depends upon its ability to manageability to manage
their portfolio of businesses for creating value through their related & unrelated
businesses(Exhibit 6.2):
 ensuring that the businesses are successful over the long-term of sustainablelong-term of sustainable
competitive advantagescompetitive advantages,
 developingdeveloping business units, and sometimes ensuring that each business is
compatible (harmonious) with others in the portfolio.
 Reach _ defining the issues that are corporate responsibilities;
these might include:
 Identifying the overall goals of the corporation,
 The types of businesses in which the corporation should be involved,
 And the way in which businesses will be integrated and managed.
 Management Practices _Corporations decide how business
units are to be governed through:
 Direct corporate intervention (centralization) or
 More or less autonomous government (decentralization) that relies on
persuasion(Performance) and rewards( integrate with culture& boundary
corporation).

5. Summary: Creating Value through Related and Unrelated
Diversification
 Related DiversificationRelated Diversification__ Businesses seeks to develop synergiesdevelop synergies by sharing and
coordinating Intangible and Tangible Res.:
 Economies of Scope _ economy from differential combination ( down
turned cost from combinative differential linkage of activities into one
objective. .Means to attained such as
 Leveraging Core Competences(combine organization's resources &
capabilities )
 Sharing Activities_ Managing Activities(PA&SA) andBusiness
Interrelationships
– Businesses sharing and coordinating staff and other resources across business units, investing financial resources
across business units, and using business units to complement other corporate business activities.
 Market Power_ firms’ abilities to profit through limiting or controllinglimiting or controlling supply to a market or sharing &
coordinatingcoordinating with other firms to reduce investment. Means to attained such as
 Pooled Negotiating Power _ similar businesses working together of a business with strengthening a
firm’s position and provides a wide variety of products to its customers.(e.g., Wal-Mart _One-stop shopping )
 Vertical Integration(backward & forward S.)_ when a firm becomes its own supplier or
distributor ( in condition Stability of customer demand _ Increase tendency )
Exhibit 6.2
 Unrelated DiversificationUnrelated Diversification: value creation derived from vertical corporate
relationship between parent and business units:
 Corporate Restructuring and Parenting(See, Slides#21)
Financial Synergies_ Portfolio Analysis (SW-analysis_ BCG model, Slides#28)
TRANSPARENCY-53

6. Creating Value through Related D.

Economies of Scope
 Leveraging Core Competences
– Using core competencies to enhance customer value. The following are
some examples of such as innovation and creativity, efficiency, quality, and
customer responsiveness((provide access to a wide variety of markets_ offer the
superior value through lower costs.):):
 Excellent product development capabilities _Product quality and reliability (e.g. Apple Co .)
 Outstanding customer service _Comprehensive customer service (e.g. Toyota)
 New product innovation & Technical superiority(e.g. ability to combine technologies into innovative products )
 Ability to hire, motivate, and retain a team of brilliant scientists in a particular technology, and
ability to integrate and coordinate various groups in the organization.(creativity)
– Operating in multiple businesses that are related torelated to a firm’s core
competence (e.g., TOYOTA has also diversified into many areas, including
manufactured homes are 85% completed at the plant before being transported
by road and built in just six hours _ scale 4-6m) : contribute significantly to the
end-product benefits to the consumer.
– To be a source of sustained competitive advantages, CC must be difficult for
competitors to imitate or to find substitute _ Unique competitive capabilities are
difficult for competitors to imitate.
e.g., Sharp succeed in Videocassette recorders with its innovative LCD viewfinder and.
include Philip's expertise in optical media and Sony's ability to miniaturize electronics.

7. Creating Value through Related D.
 Sharing Activities_ Sharing resources(T&I) across business units:
– Cost saving came from many sources: ESc in purchasing and
Functional consolidation _ develop synergies(see into footnote) by
sharing and coordinating staff and other resources across business
units are concerned such as : Improved economies of scale(MES);
Remove duplicative costs; Sharing of best practices between the two
companies & Increased significant synergies across network
coverage and infrastructure).
– Enhancing revenue (Downsides):
 Failing costs of coordinating use of common activities by
different business units. (e.g., CBA on using business units to
complement other corporate business activities)
 Risk of brands cannibalization (e.g., Gillette acquired Duracell &
Parker Pen products through it’s distribution channels )
e.g., Gillette acquired Duracell a right, its expectation that selling
Duracell through Gillette’s existing channels. Gillette sold Duracell
products in 25 new markets at first year after acquisition and
substantially increased sales in established international markets . And
also Gillette acquired Parker Pen_ additional $25mln in sale by taking

8. Creating Value through Related
Diversification(Cont.)
Market Power_ firms’ abilities to create profit through limiting or
controlling supply to a market or coordinating with other firms to
reduce investment to a market (e.g., Gillette acquired a right Duracell
& Parker Pen_ achieve synergistic benefits).
 Pooled Negotiating Power_ similar businesses working together of a
business with strengthening a firm’s position and provides a widestrengthening a firm’s position and provides a wide
variety of productsvariety of products to its customers.(e.g., Wal-Mart)
– Consolidating an industry can also increase a firm’s market power
_e.g., Hello & Smart have merged as part of a $155 million
agreement.
 Vertical Integration(backward & forward S.)_ when a firm becomes
its own supplier or distributor ( in condition Stability of customer
demand _ Increase tendency ):
– E.g., McDonald Co.,
TRANSPARENCY-53

9. Dr. PHEA Vanna 2012
Related diversification
Vertical integration: Four issues to consider(CEO)
1. Quality of current supply chain partners (suppliers
and distributors){e.g. Nike and Reebok invested to China
Cambodia, VN & Indonesia where labor cost are low}_ Q
2. Outsourced activities as viable sources of future
profits{Ford & GM undertaking forward integration St-gy to
be bigger players in these high profit activities}_ Allocation Re.
3. Stability of demand for firm’s products (in times of
high or low demand)_Power of Buyers Tendency
4. Need for additional production capacity actually absorbed for
existing products(Product quality may be enhanced to differentiate the
product from competitors by maintaining, adding new features and support
services and finding new uses., or selling it to another firm that is willing to
continue the product). Need for improving efficiency.

10. Vertical Integration : Benefits and Risks
 Benefits(Stable E.)
• Secure a source of raw materials or distribution channels(lower price and Quality)
• Protection and control over valuable assets and primary activities
• Access to new business opportunities
• Simplified procurement and administrative procedures(or value chain _
Understanding the linkages between activities can lead to more optimal make-or-
buy decisions that can result in either a cost advantage or a differentiation
advantage.)
 Risks(Unstable E.)
• Costs and expenses associated with increased overhead and capital expenditures
• Additional administrative costs associated with managing a more complex set of
activities
• Loss of flexibility resulting from large investments(difficulty to change direction)
• Problems associated with unbalanced capacities along the value chain(between PA&
SA_ identify internal potential for creating value)
Exhibit 6.4
TRANSPARENCY-55

11. Dr. PHEA Vanna 2014
Unrelated diversification
CorporateCorporate
officeoffice
Business
unit
Business
unit
Business
unit
Corporate parenting (provide and support
functions to Bus)& restructuring( Asset, Capital &
Management restructuring _ e.g., Nissan Co.) ,
and corporate portfolio management
UD_ Financial synergies
Next slide
Creating value through corporate
relationship between parent and
business units(Interaction)

12. Corporate parenting(Cont.)
• Corporate parent provides (P)
– Improved budgeting and planning _ ( the financial
institutions collectively that deal with medium-term and long-term capital
subsidiary and loans by the provider to a range of purchasers(or
Business units) can be increased its market sharesincreased its market shares through improving
product quality(Reputation), pricing (ESc), and promotional expenditures
(Increased bargaining power with suppliers and channel members. ).
• Centralized support functions(S)
 Industry and government relations (e.g., legal & development policy.)
 HRM systems (Consequently, corporate level participate as active advisors
and directors work with management teams to establish realistic strategic and
operational objectives.(e.g. Restructure _acquisitions, divestiture or
liquidation) ,and new internal development _ improving system or new change
the general administrative functions through Effective recruiting, development,
and retention mechanisms for employees(Reward and incentive programs to
motivate all employees), Quality work environment to maximize overall employee
performance and minimize absenteeism &Quality relations with trade unions.
UD_ Financial synergies

13. Dr. PHEA Vanna 2010
Unrelated diversification_ Financial synergies
Restructuring
Through purchasing, reorganizing(e.g., changing
the management and strategic objectives_51%), and divesting
parts of businesses (it should be liquidated if there is
little prospect for it to gain market share for accumulation financial
resources or reinvestment into new projects _49%).
 3 major types ( Asset, Capital &
Management restructuring _ e.g.,
Nissan Co.)

14. Nissan’s leader_ Carlos GhosnNissan’s leader_ Carlos Ghosn
I. Asset restructuring: involves the sale of unproductive
assets {e.g., Carlos Ghosn has cut thousands of Nissan
jobs, shut down the first of five domestic plants, and
auctioned off prized assets such as Nissan's aerospace
unit(not necessarily about outspending rivals on R&D)}or
acquisitions that strengthen the core business (e.g., Ability to
integrate the multiple technologies and coordination of diverse production skills.).(see into footnote)
II.Capital restructuring: change in debt-equity mix_
vertical integration(increase market power) &sharing
activity(cost saving ) among business units. (e.g. Corporate
parenting may support & provide additional equity capital to Bus that
a firm may seek to increase its market share .
Dr. PHEA V.,2015

15. Nissan’s leader_ Carlos Ghosn (cont.)
Nissan’s leader_ Carlos Ghosn, cut cost to Nissan debt
from 13B to 10B and raise stock price 38%,2000; for the six
months ended in September and expects record profits of $2.3
billion for fiscal 2001; and 2006 Renault & Nissan alliance _
collective market capitalization from 20.4B to 84.9B)_If the
Icebreaker succeeds in restoring Nissan's health, industry talk is that
he may return to Renault as its boss.
III. Management restructuring: changes in composition of top
management team, organizational structure, and/or reporting
relationships in purpose the effective coordination among all
the groups in the organization .While a company may be able to
hire a team of brilliant scientists in a particular technology & involved
in bringing a product to market (Outsourcing) .
Dr.PHEA Vanna,2014

16. Dr. PHEA Vanna 2014
Corporate portfolio management
How do managers examine the relationships among
business units held by a single firm? E.g., GM must be the
better understanding of :
1/. assessing the competitive position of an overall
portfolio of business (CE _ firm’s T&I resources)
2/. suggest strategic alternatives for each of business _a
plan, idea, etc. to consistent with GE_ (e.g., USA , Mexico and South
Korea are organized into strategic business units_ sharing activities among
business units : joint venture &alliances ).
3/. identify priorities for resources allocation(Q,C & JIT
control system_distribution facilities to minimize shipping times& excellent
material and inventory control systems).
BCG matrix is one of several approaches
Unrelated diversification_ Financial synergies

17. The BCG Portfolio MatrixExhibit 6.5
0.1X
0.5X
0.4X
0.3X
0.2X
2X
1.5X
1X
10X
4X
18%
16%
10%
0
22%
2%
4%
6%
8%
20%
14%
12%
TRANSPARENCY-56
Stars_ SBUs compete in high
growth potential(long-term) & high
market share ( economies of scale,
Sales growth in a stagnant industry and
Reputation)_Stars may generate cash,
but the market is growing rapidly they
require investment to maintain their
lead. If successful, a star will become
a cash cow when its industry
matures.
Question Marks_ high growth
potential, but low market share _
These business units require
resources to grow market share,
but whether they will succeed and
become stars is unknown. enhance
their competitive positions _ e.g.,
Duracell & Parker Pen increase
market through Gillette’s distribution
channels)
Cash Cows_ low growth
potential, but high market share in a
mature or Sales growth in a stagnant
industry(Cash cows require little
investment and generate cash that
can be used to invest in other
business units(Capital restructuring:
Corporate parenting may provide &
support to SBUs )
Dogs _low growth potential & low
market share(experts recommend
that they be divested). Unless a dog has
some other strategic purpose, it should be
liquidated if there is little prospect for it to gain
market share_ business unit has a small
market share in a mature industry
BusinessGrowthRate
Relative Market Share (Ecs, Reputation, Sales growth in a
stagnant industry & Increased bargaining power with suppliers and channel members. )
Size of circle represents the relative size of the
business unit in terms of revenues

18. Dr. PHEA Vanna 2015
Means to achieving
diversification
• Three basic means
I. Mergers and acquisitions
II. Partnerships are a Joint ventures or strategic
alliances (Cooperative strategies_ Pooling firm
resources and Pooled negotiating market power)
III. Internal development (Corporate entrepreneurship)

19. Dr. PHEA Vanna 2014
Mergers and acquisitions
• Merger: integration of two firms’ operations on a relatively
are approximate equals( or In a merger of firms is the
combination of the assets and liabilities of two firms to form a
single business entity(or both businesses dissolve and fold their
assets and liabilities into a newly created third entity.). There
often is an exchange of stock in which one firm issues new
shares to the shareholders of the other firm at a certain ratio.
• Acquisition: Purchase by a firm of controlling (45%,….) or 100%
interest in another firm (The acquisition can be made through a direct
purchase or through a merger agreement that involves the exchange of
assets, and outsourcing (e.g., purchasing a functional service for the
company).The term acquisition tends to be used when a larger firm absorbs
a smaller firm (e.g., Microsoft bought Nokia or Smart absorbs Star cell )
 Recent increase since 2002 of merger and acquisition activity
(in 2006 increase to $3.99 trillion : Exhibit 6.6)

20. Dr. PHEA Vanna 2014
Motivations of mergers & acquisitions
(advantage)
• Speed: purchasing existing assets and
operations is faster than internal development
• Acquisition of resources that can lead to
expansion of product lines (e.g., purchasing a
functional service for the company from outsourcing)
• Enter new market segments
• Creating synergies ((e.g., leverage core
competencies , sharing activities, and building
market power : Synergy takes the form of revenueSynergy takes the form of revenue
enhancement and cost savingsenhancement and cost savings..,, see into Slides#16-17see into Slides#16-17 ))

21. Dr. PHEA Vanna 2014
Strategic alliances and joint ventures
is a partnership between businesses in which you combine efforts in a
business effort.
• Joint ventures(JV)_ represent a special case of
alliances:
Objectives in a joint venture under a contractual agreement
to conduct a specific project only : market entry ( joint
marketing ), risk/reward sharing(sharing profits and losses),
technology sharing(technology licensing ) and joint product
development , joint sales or distribution, design
collaboration, R&D and conforming to government
regulations.
 Other benefits include political connections and distribution
channel access that may depend on relationships.
The key issues to consider in a joint venture are ownership
(protect its own proprietary resources), control, length of
agreement, pricing, technology transfer, local firm

22. Dr. PHEA Vanna 2014
Strategic alliances
 The basic idea behind strategic alliances is to minimize risk
while maximizing your leverage in the marketplace.
 Equity strategic alliances(Depend on resources& capability)
• One firm buys stock of an alliance partner {the partners' strategic
goals converge(same) while their competitive goals diverge(differ)}.
 Non-equity strategic alliances(Depend on Potential GE)
• Long-term contracts and other agreements (JV)_Alliances range in
scope from an informal business relationship based on a simple contract to a joint
venture agreement in which for legal and tax purposes either a corporation .
partners' are able to learn from one another while limiting
access to their own proprietary skills(attempts to develop shared
resources, but each firm wants to develop and protect its own proprietary resources).
• Supplier contracts through negotiations and coordination
processes, cooperative marketing agreements (JV)
The partners' size, market power, and resources are small compared
to the industry leaders.

23. Dr. PHEA Vanna 2014
Cooperative strategies: Potential advantages
• Entering new markets(One of the fastest growing trends for
business & minimize risk while maximizing your leverage in the marketplace)
• Reducing costs in the value chain(Getting a better price
for goods& services_ e.g., joint sales or distribution ,technology sharing and joint
product development , )
• Development and diffusion of new technologies
Examples:
– Technology Licensing agreements(e.g., Hydbride
Technology of Toyota……)
– Equity alliances that lead to full acquisitions
• International joint ventures and strategic alliances(e.g.,
Sonny & 3M,see into next slide _internal development)

24. Dr. PHEA Vanna 2013
Internal development
• Use of firm’s own resources to develop new
businesses : Corporate entrepreneurship and new venture
development (A core competence should: 1). provide access
to a wide variety of markets, and 2.) contribute significantly to
the end-product benefits, and 3.) be difficult for competitors
to imitate.).
– e.g., Sony and 3M (Minnesota Mining& Manufacturing
Co.) :R&D and cutting edge technologies _ strategicstrategic
goal 3M cogoal 3M co. has developed its entire corporate culture to
support its total sales from products &create within the
most recent 4 year period (at lease 25%, but this strategies
make 3M to achieve 30% per year of sale through new
internally developed production lines).( #good for small#good for small
firms developed from smaller to biggestfirms developed from smaller to biggest)

25. Dr. PHEA Vanna 2010
Growth alternatives
Product/Market
Proliferation
(increase 20.4B to 84.9B)
Market
Development
(e.g.,Renault-Nissan
alliances )
New
Product Development
3M Plan recent 4 year
achieve at lease 25%,but
actually achieve 30% yearly,
Product/Market
share(e.g.,
Sony &3M)
Current
Customers
NewCurrent
Products

26. Dr. PHEA Vanna 2010
Internal development: advantages
and disadvantages
• Advantages
– Not sharing results with other firms
– Avoiding pitfalls of risks of strategic
alliances(as technology sharing and joint
product development)
– Typically achieved at lower total net cost
• Major disadvantage
– Time consuming

27. Dr. PHEA Vanna 2010
Recap
• Means to achieving diversification
– Mergers and acquisitions
– Cooperative strategies
• Joint ventures
• Strategic alliances
– Internal development

28. Dr. PHEA Vanna 2010
Corporate-level strategy:
Summary
• Corporate-level strategy: Selecting and
managing the mix of businesses
• Ultimate justification for diversification is
increasing value through synergy
• Two types of diversification
– Related
– Unrelated

29. Dr. PHEA Vanna 2010
Corporate-level strategy:
Summary
• Related diversification may create value
through: leveraging core competencies,
sharing activities, pooled negotiating
power, and vertical integration

30. Dr. PHEA Vanna 2010
Corporate-level strategy:
Summary
• Unrelated diversification may create value
through
– restructuring
– corporate parenting
– portfolio analysis