Chapter 6
Corporate-Level Strategy: Creating Value through
Diversification………………………………………………………..….……... 180 (6-2)
Making Diversification Work: An Overview………………………..…….……. 183 (6-5)
Related Diversification: Economies of
Scope and Revenue Enhancement…………………………………..…….…….….. 184 (6-6)
Leveraging Core Competencies…………………………………………………………………….…….. 184 (6-7)
Sharing Activities………………………………………………………………………………….….…….…. 186 (6-8)
Related Diversification: Market Power………………….…….…….…….….…. 187 (6-9)
Pooled Negotiating Power……………………………………………………………………………….…. 187 (6-9)
Vertical Integration……………………………………………………………………………….….…….…. 188 (6-10)
Unrelated Diversification: Financial Synergies and Parenting………….. 191 (6-10)
Corporate Parenting and Restructuring…………………………………………………………….…. 191 (6-11)
Portfolio Management………………………………………………………………………..….….…….… 192 (6-11)
Caveat: Is Risk Reduction a Viable Goal of Diversification?…………………………………… 194 (6-13)
The Means to Achieve Diversification………………………………..…….……... 195 (6-14)
Mergers and Acquisitions……………………………………………………………..….….…….…….… 195 (6-14)
Strategic Alliances and Joint Venture………………………………………………….…….…….…... 202 (6-18)
Internal Development…………………………………………………………………………………………. 203 (6-19)
How Managerial Motives Can Erode Value Creation..…….…….….…..... 204 (6-20)
Growth for Growth’s Sake……………………………………………………………………………….….. 204 (6-20)
Egotism………………………………………………………………………………………..…….…….….….. 204 (6-20)
Antitakeover Tactics……………………………………………………………………………………….….. 205 (6-21)
Issue for Debate …………………………………………………………….….….…….…. 206 (6-21)
Reflecting on Career Implications……………………………………..….…….….. 207 (6-22)
Summary……………………………………………………………………………….…….… 207 (6-24)
Corporate-Level Strategy
Creating Value through Diversification
Summary/Objectives
Whereas business-level strategy (Chapter 5) deals with the question of how to compete in
a given industry, corporate level strategy addresses two related issues. These are: (1) what
businesses should we compete in, and (2) how can these businesses be managed in a way to
create “synergy,” that is, more value by working together than if they were free-standing units.
This chapter is divided into six major sections:
1. We begin by posing the question why do some corporate-level strategic efforts fail
and others succeed? We emphasize the importance of diversification activities that
create shareholder value, whether through mergers and acquisitions, strategic
alliances and joint ventures, or internal development.
2. We address how related diversification can help a firm attain economies of scope
through either leveraging core competencies or sharing activities (such as
production facilities or distribution facilities).
3. We discuss how firms can benefit from related diversification through greater market
power. Here, we address pooled negotiating power and vertical integration.
4. The fourth section discusses how firms can benefit from unrelated diversification.
There are two key means to this end: corporate parenting and restructuring, as
well as portfolio management.
5. The fifth section focuses on the means that firms can use to achieve diversification.
The means include mergers and acquisitions; strategic alliances and joint
ventures; and internal development. We discuss the advantages and disadvantages
associated with each of these.
6. We close the chapter with a section on how managerial motives can erode value
creation as firms pursue diversification initiatives. These include growth for
growth’s sake, egotism, and anti-takeover tactics (e.g., greenmail, poison pills).
Lecture/Discussion Outline
The Flip Video case in LEARNING FROM MISTAKES points out how Cisco saw early
market success with its acquisition of Flip but how quickly this value eroded as Cisco was not
able to follow up its initial success with new products in this rapidly changing market. This is a
clear example of failed diversification.
When Cisco purchased Flip in 2009 for $590 million, the company saw its purchase as a
chance to move boldly into the consumer market. Cisco is a powerhouse in the computer
network industry and was looking to expand into new territory with the Flip purchase. However,
Cisco shut down the Flip business only two years later.
Cisco failed with the Flip acquisition for two main reasons. First, Flip operated in an
industry very different than Cisco’s core operations. Cisco is a computer networking firm that
sells hardware and software to corporate users. As a result, Cisco didn’t really have the
competencies necessary to compete in the consumer video systems market. Second, large
diversified firms can become bureaucratic and slow in responding to market changes. This was
critical in the failure of Flip since Cisco was slow to respond to a key market shift. Consumers
wanted devices that would allow them to seamlessly upload video to social media sites, but Flip
was slow to add this capability to its cameras. In the end, Flip lost its ability to compete with the
range of competing products, including smart phones and tablets, which offered the capability to
capture and share video images.
Discussion Question 1: Would Flip have had a better chance at success as a stand-alone firm
than it did as part of Cisco? Why or why not?
Response guidelines: As a stand-alone firm, Flip was successful and growing. As a part of Cisco,
Flip failed. Since Flip largely failed due to Cisco’s inability to respond to market changes, Flip
From the case vignette, Cisco’s inability to manage the new business was central in the firm’s
failure. There are two main reasons for this. First, Cisco has capabilities in business networking
equipment and software. This business is very different from Flip’s business of selling video
Discussion Question 2: Cisco didn’t have the right market focus or competencies to win with
Flip. What firms could have succeeded by acquiring Flip?
Response guidelines: After discussing question 1, students should be able to think about the type
of firm that would successfully develop a presence in Flip’s business. The successful acquirer
would have two characteristics; 1) it would have some capability in the business of selling video
These ideas suggest that some well-known names in the industry, such as Apple, Google, and
A less attractive set of acquirers would be more traditional electronics firms such as Sony,
Matsushita, or Samsung. These firms may be less adept at navigating the dynamic business
We next point out that Cisco’s failure at diversification is hardly unique. Rather, many
We then summarize several studies conducted over the past thirty years that investigate
the relationship between diversification strategies and firm performance. Overall, the results are
EXHIBIT 6.1 identifies six well-known recent M&A failures. It is used to reinforce the
Discussion Question 3: Why do most diversification efforts fail?
The SUPPLEMENT below points out that even successful firms can struggle with
acquisitions and that there are a number of reasons that acquisitions can fail. P&G went through
a lengthy examination of its acquisition experiences to learn and improve.
Extra Example: Procter and Gambles Struggles with and Learns from Acquisitions
When A.G. Lafley was the CEO of Procter and Gamble, he commissioned a study to assess the level of success and
failure the firm had experienced with its acquisitions. He was shocked to find that, when they looked at the
acquisitions P&G had undertaken from 1970–2000, less than 30 percent of them met the investment objectives of
the acquisition and were deemed successful. They further found that failures typically resulted from one or more of
the following five factors: (1) absence of a winning strategy for the combination, (2) not integrating the acquired
unit well or quickly enough, (3) expected synergies didn’t materialize, (4) cultures weren’t compatible, and (5)
leadership couldn’t play well together. Thus, one of the root causes related to a lack of strategic logic. The other four
revolved around the inability to make a potentially valuable acquisition work, often because of personal or cultural
differences.
However, Lafley didn’t stop there. He was determined to have P&G learn from its mistakes. He and his team took
the results of this assessment and changed their acquisition integration processes. They saw their success rate with
acquisitions rose from 30 percent to 60 percent over the 2001–2010 time period, partly as a result of this exercise.
Source: Dillon, K. 2011. I think of my failures as a gift. Harvard Business Review. 89(4): 86–89.
Some general questions to spur discussion and debate:
Discussion Question 4: Why is it typically necessary to integrate the acquiring and
acquired firm to have an acquisition succeed?
Discussion Question 5: Why is it so difficult to integrate firms together after an
acquisition?
I. Making Diversification Work: An Overview
Despite the gloomy performance of some M&As, not all deals erode profitability.
Examples of successful mergers include British Petroleum’s acquisition of Amoco and Arco, and
the Renault-Nissan merger. The question becomes, why do some diversification efforts fail and
others succeed?
At the end of the day, diversification initiatives—whether via mergers and acquisitions,
With related diversification, the primary benefits are to be derived from horizontal
relationships—businesses sharing intangible resources (i.e., core competencies) and tangible
With unrelated diversification, the primary benefits are derived largely from vertical
relationships, that is, value that is created by the corporate office. This would include
EXHIBIT 6.2 provides an overview of how we will address the various means by which
II. Related Diversification: Economies of Scope and Revenue Enhancement
Related diversification enables a firm to benefit from horizontal relationships across
different businesses in the diversified corporation. There are two means for accomplishing this:
Such horizontal relationships across businesses enable the corporation to benefit from
economies of scope that refers to cost savings due to the breadth of operations. Additionally, a
The SUPPLEMENT below provides the example of Under Armour—a firm whose
diversification strategy is moving them from being an apparel company to a sports technology
firm.
Extra Example: Under Armour’s Diversification Path
When you say Under Armour, most people think of athletic clothing. While this has been historically true, the firm is
evolving into a fitness technology company. Technology has always been at the core of Under Armour. The firm
largely pioneered the market for high technology, performance wear for athletes. Over the years, the firm has
extended itself from clothing into athletic shoes, protective gear (such as chest protectors), mouth guards,
sunglasses, and many other products for athletes and active individuals.
The firm is now evolving further from its initial core business into social network technology. Under Armour has
purchased three different fitness related social network firms. With the apps the Under Armour owns, including
MyFitnessPal and MapMyFitness, users can track their calorie intake, activity, and nutrition, providing them with an
overall view of their fitness activity and trends. In early 2015, Under Armour launched its own fitness app, UA
Record, that can combine data from different fitness tracking devices and hosts an online community where users
can encourage and challenge each other. Across the three platforms, Under Armour has over 120 million users,
making it the largest fitness and health social community.
At first blush, there appears to be little in common between fitness wear and social networks, but Under Armour sees
significant potential value in the shared ownership. First, there is significant value in the Under Armour brand name.
Thus, customers are more likely to use apps and join communities that carry the Under Armour name. Second, and
more long term, Under Armour sees the opportunity to use data from the fitness apps to sell additional products.
Data on the types of activities users do and their bodies’ responses during activities can give Under Armour
information it can use to recommend different types of fitness wear for users. It can also keep a record regarding the
level of activity and when replacement products would be needed. For example, Under Armour could remind
runners when it was time to replace their shoes to minimize the chances of leg injuries. The challenges and
encouragement users get in these fitness communities also stoke up demand for more fitness wear and related
products. As Under Armour founder and CEO Kevin Plank stated, “The more someone exercises … the more
apparel and footwear they are ultimately buy. This will help us sell more shoes and shirts and reach more athletes.”
Source: Mirabella, L. 2015. Under Armour may be evolving into a fitness technology company. baltimoresun.com.
February 7: np; underarmour.com.
A. Leveraging Core Competencies
We begin with the imagery of a tree to illustrate the concept of core competencies. Core
competencies represent the root system (not the leaves) and competitors can make a big mistake
Core competencies—to create synergy for a corporation—must satisfy three conditions:
The core competence must enhance competitive advantage(s) by creating superior
Different businesses in the corporation must be similar in at least one important
The core competencies must be difficult for competitors to imitate or find
STRATEGY SPOTLIGHT 6.1 discusses how IBM is leveraging its core competencies in
Teaching Tip: Although many companies have core competencies, not all seem to be able
to leverage them. You may ask students to speculate why so many firms fail to leverage
their core competencies. Possible reasons may include failure to recognize opportunities
The SUPPLEMENT below points out how luxury car manufacturers are leveraging their
Extra Example: For Luxury Automakers, Selling Toys is no Game
The three big German automakers, BMW, Mercedes, and Volkswagen’s Audi have been locked in a tight fight for
the domination of the luxury car market. Besides competing in automobiles, they have extended their product lines
to include playground offerings, with sleds and push cars that target the next generation of drivers. The top offering
came from Audi with a scale model of its 1930’s racer, the Auto Union Type C, which retailed for $13,300, and
quickly sold 400 out of the total of 500 that were produced. The toy car is suitable for children up to 4 feet 5 inches
and features an aluminum frame, oak dashboard, leather-clad steering wheel and seven speeds. As an alternative,
Audi also offers a plastic pedal-powered version of the Type C for $410.
While BMW offered snow sleds with either a Mini or a BMW brand for approximately $110, Mercedes countered
with a toddler version of its gull-wing SLS supercar for $123. To ensure that their toys represent the technological
prowess and quality that their automobiles represent, luxury carmakers go to great lengths to make sure their toys
stand out. Mercedes’ foot-powered SLS Bobby-Benz is designed to closely resemble its $183,000 counterpart, and
features quiet running tires, tight steering, and an impact-absorbing steering wheel. BMW’s snow sled features
replaceable metal runners, a horn, as well as a suspension-system in the steering ski.
The technology the firms use in its toy offerings is partially derived from its automotive products, and helps them
leverage their core competences, thus obtaining more than just some additional sales, through product positioning in
the mind of the next generation of drivers. Skills and retail space used to sell luxury automobiles are also used to tap
into a new market segment—premium toys—and also to further reinforce their value proposition, by reinforcing
their brand image.
Source: Reiter, C. 2010. For luxury automakers, selling toys is no game. Bloomberg Businessweek. November 29:
26.
Discussion Question 6: Given the high cost of producing quality toys that would sustain
the rigors of child play, is this a good strategy (if the toys break, it would reflect
negatively on the company)?
Discussion Question 7: Should the firms focus only on doing what they do best, namely
produce cars? Why/why not (benefits/costs)?
B. Sharing Activities
Synergy can also be achieved by sharing tangible activities across business units. These
Sharing activities provide two potential benefits: cost savings and revenue enhancements.
1. Deriving Cost Savings through Sharing Activities
Cost savings come from many sources such as eliminating jobs, facilities, and related
2. Enhancing Revenue and Differentiation through Sharing Activities
At times, an acquiring firm and its target may attain a higher level of sales growth
Firms can also increase the effectiveness of their differentiation strategies via sharing
The SUPPLEMENT below discusses how Target was able to enhance its revenues by
Extra Example: Target Enters the Grocery Retailing Industry
Target is a go-to location for many consumers to purchase stylish yet affordable clothes, picture frames, lamps, and
kitchen appliances as well as basic toiletries and paper products. Now, Target wants to be your favorite stopping
point for chicken, fresh fruit, and other grocery products. Target has invested over a billion dollars in recent years to
redesign its stores to carry a full line of food products. It now has a grocery section in over half of its stores.
Why have they made this push? The grocery business is a notoriously low margin business with a number of strong,
entrenched competitors. Target sees it as an opportunity to drive traffic into its stores. Customers typically shop for
groceries two to three times a week but only visit discount stores about once a month. If Target can get customers in
to pick up some bananas or a loaf of bread, they may also choose to pick up a DVD and a new pair of shorts while
they are in the store. So far, it appears to be working. Sales and traffic in stores with the grocery sections has been
six percent higher than in similar stores without them.
Source: Clifford, S. 2011. Big retailers fill more aisles with groceries. Nytimes.com. January 16: np.
III. Related Diversification: Market Power
Here, we address two principal means by which firms attain synergy through market
power: pooled negotiating power and vertical integration. Note that managers have limits on
A. Pooled Negotiating Power
Similar businesses working together or the affiliation of a business with a strong parent
can strengthen an organization’s bargaining power in relation to suppliers and customers as well
We also note that managers must evaluate how the combined business may affect
relationships with actual or potential competitors, suppliers, and customers. We give the example
B. Vertical Integration
Vertical integration represents an expansion or extension of the firm by integrating
preceding or successive productive processes. That is, the firm incorporates more processes
We address the benefits and risks of vertical integration. They are summarized in
EXHIBIT 6.3.
In making decisions associated with vertical integration, five issues need to be
considered:
1. Is the company satisfied with the quality of the value that its present suppliers and
distributors are providing?
2. Are there activities in the industry value chain that are presently being outsourced
or performed by others independently that are viable sources of future profits?
3. Is there a high level of stability in the demand for the organization’s products?
4. Does the company have the necessary competencies to execute the vertical
integration strategies?
5. Will the vertical integration initiative have potential negative impacts on the
firm’s stakeholders?
We discuss how vertical integration can be analyzed from the transaction cost
perspective.
We note that every transaction involves transaction costs: search costs, negotiating,
Vertical integration, on the other hand involves a different set of costs—administrative.
IV. Unrelated Diversification: Financial Synergies and Parenting
We now address unrelated diversification. Here, unlike related diversification, there are
In unrelated diversification, the benefits are to be gained from vertical (or hierarchical)
the corporate office can contribute to “parenting” and restructuring of (often
the corporate office can add value by viewing the entire corporation as a family or
A. Corporate Parenting and Restructuring
The positive contribution of the corporate office has been referred to as the “parenting
advantage.” Many parent companies such as Berkshire Hathaway and Virgin Group create value
Restructuring is another means by which the corporate office can add substantial value to
a business. Here, the corporate office tries to find either poorly performing firms with unrealized
For restructuring strategies to work, corporate management must have both the insight to
detect undervalued companies (otherwise the cost of acquisition would be too high), or