1. McGraw-Hill/Irwin STRATEGIC MANAGEMENT Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor6 Corporate-Level Strategy: Creating Value through Diversification

2. Chapter 6 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor 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 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 The various means of engaging in diversification—mergers and acquisitions, joint ventures/strategic alliances, and internal development The value of real options analysis (ROA) in making resource allocation decisions under conditions of high uncertainty Managerial behaviors that can erode the creation of value Learning Objectives TRANSPARENCY-51 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

3. Chapter 6 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor Creating Value through Related and Unrelated Diversification Related Diversification: Economies of Scope Leveraging Core Competences 3M leverages its competences in adhesives technologies to many industries, including automotive, construction, and telecommunications. Sharing Activities McKesson, a large distribution company, sells many product lines, such as pharmaceuticals and liquor, through its super warehouses. Related Diversification: Market Power Pooled Negotiating Power The Times Mirror Company increases its power over customers by providing “one-stop shopping” for advertisers to reach customers through multiple media—television and newspapers—in several huge markets such as New York and Chicago. Vertical Integration Shaw Industries—a giant carpet manufacturer—increases its control over raw materials by producing much of its own polypropylene fiber, a key input to its manufacturing process. Exhibit 6.1 Unrelated Diversification: Parenting, Restructuring, and Financial Synergies Corporate Restructuring and Parenting The corporate office of Cooper Industries adds value to its acquired businesses by performing such activities as auditing their manufacturing operations, improving their accounting activities, and centralizing union negotiations. Portfolio Analysis Novartis, formerly Ciba-Geigy, uses portfolio analysis to improve many key activities, including resource allocation as well as reward and evaluation systems. TRANSPARENCY-52 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

4. Chapter 6 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor Simplified Stages of Vertical Integration: Shaw Industries Exhibit 6.2 TRANSPARENCY-53 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Raw materials Manufacturing of final product Distribution

5. Chapter 6 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor Benefits and Risks of Vertical Integration Benefits Secure a source of raw materials or distribution channels Protection 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 Exhibit 6.3 TRANSPARENCY-54 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

6. Chapter 6 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor The BCG Portfolio Matrix Notes: 1. Each circle represents one of the corporation’s business units. The size of the circle represents the relative size of the business unit in terms of revenues. 2. Relative market share, measured by the ratio of the business unit’s size to that of its largest competitor, is plotted along the horizontal axis. 3. Market share is central to the BCG matrix. This is because high relative market share leads to unit cost reduction due to experience and learning curve effects and, consequently, superior competitive position. Exhibit 6.4 TRANSPARENCY-55 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

7. Chapter 6 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor Ten Biggest Mergers of All Time and Their Effect on Shareholder Wealth* Exhibit 6.5 TRANSPARENCY-56

8. Chapter 6 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor The Seven Habits of a Less-Than-Effective Merger HABIT #1Be proactive: “Act or be acted upon.” REALITYCompany was slow to see the potential of electronic planning devices which initially cut into product sales. HABIT #2Begin with the end in mind: “You carefully think through the product or the service that you want to provide in terms of your market target, then you organize all the elements... to meet that objective.” REALITYThe company delayed selling off noncore assets, such as a commercial printing business, which occupied management time and cut into profit margins. Now it’s being sold off. HABIT #3Put first things first: “Organize and execute around priorities.” REALITYAfter the 1997 merger between Covey’s company and Franklin Resources, management didn’t trim overlapping jobs—thus increasing overhead and hurting margins. Exhibit 6.6 HABIT #4Think win/win: “There’s plenty for everybody.... One person’s success is not achieved at the expense or the exclusion of the success of others.” REALITYThe two sales staffs were combined, but initially the compensation systems were not. That caused resentment among those who made less. HABIT #5Seek first to understand, then to be understood: “An effective salesperson first seeks to understand the needs, the concerns, the situation of the customer.” REALITYMost sales staff was kept at Utah headquarters, so the company was unable to assess changing client needs out in the field. HABIT #6Synergize: “We create new alternatives—something that wasn’t there before.” REALITYThe combined company maintained two headquarters, limiting opportunities to build on each other’s strengths. HABIT #7Sharpen the saw: “Preserv[e] and enhanc[e] the greatest asset that you have—you.... Renew the four dimensions of your nature—physical, spiritual, mental, and social/emotional.” REALITYCompany was true to this principle by giving workers Sundays off. But that meant closing its 127 stores on a busy shopping day. Source: Grover, R. 1999. Gurus who failed their own course. Business Week, November 8, 125-126. TRANSPARENCY-57