Professional Documents
Culture Documents
Strategic Corporate-Level
Management Strategy: Creating
(BA 491) Value through
Diversification
STRATEGIC MANAGEMENT
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Making Diversification Work
• Diversification initiatives must create value for
shareholders
• Mergers and acquisitions
• Strategic alliances
• Joint ventures
• Internal development
• Diversification should create synergy
Business Business
1 2
Business Business
1 2
Technology Information
Procurement
development systems
Business
1
• Economies of scope
• Cost savings from leveraging core
competencies or sharing related activities
among businesses in the corporation
• Leverage or reuse key resources
Favorable reputation
Expert staff
Management skills
• Core competencies
• The glue that binds existing businesses
together
• Engine that fuels new business growth
• Collective learning in a firm
How to coordinate diverse production skills
How to integrate multiple streams of technologies
Benefits
• A 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.
Risks
• Costs 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.
Negotiating
Search costs
costs
Negotiating
Search costs
Market costs
transaction
Costs of
Enforcement
written
costs
Monitoring contract
costs
Growth
Business
Business Business
Business Business
Business
unitunit unit
unit unitunit
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
• Acquisitions or mergers
• Pooling resources of other companies with a
firm’s own resource base
• Joint venture
• strategic alliance
• Internal development
• New products
• New markets
• New technology
As of July 1, 2002.
Source: K. H. Hammonds, “The Numbers Don’t Lie,” Fast Company, September 2002, p. 80.
Exhibit 6.5 Ten Biggest Mergers and Acquisitions of All Time and Their Effect on Shareholder Wealth
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 31
Strategic Alliances and Joint Ventures
Entering new
• Introduce successful product
markets or service into a new market
• Lacks requisite marketing
expertise
Doesn’t understand customer
needs
Doesn’t know how to promote the
product
Doesn’t have access to proper
distribution channels
Entering new
• Join other firms to reduce
markets manufacturing (or other) costs
in the value chain
Reducing
• Pool capital
costs in value • Pool value-creating activities
chain
• Pool facilities
• Economies of scale
Entering new
• Develop or diffuse new
markets technologies
• Use expertise of two or more
companies
Reducing
costs in value • Develop products
chain technologically beyond the
capability of the companies
Developing acting independently
diffusing new
technology
• Improper partner
• Each partner must bring desired
complementary strengths to partnership
• Strengths contributed by each should be
unique
• Partners must be compatible
• Partners must trust one another