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A. Portfolio Management
Here, the key concept is the idea of a balanced portfolio of businesses. This consists of
1. Description and Potential Benefits
The Boston Consulting Group’s growth/share matrix is among the best known of these
approaches. Each of the firm’s strategic business units (SBUs) is plotted on a two-dimensional
In using a portfolio strategy approach, a corporation tries to create synergies and
shareholder value in a number of ways. Since the businesses are unrelated, synergies that
Discussion Question 8: What are the main advantages of portfolio approaches? (e.g.,
provides good snapshot to help allocate resources, helps determine attractiveness of
The SUPPLEMENT below provides an example of how General Electric used portfolio
logic when it decided to exit the banking business.
Extra Example: GE Sheds Its Banking Unit
General Electric (GE) signaled one of the largest shifts in the firm’s corporate strategy when it decided to get out of
the banking business and focus more on the firm’s industrial operations. For years, GE benefitted from its widely
diversified business portfolio by producing very predictable and stable earnings. This allowed the firm to borrow
money at very low rates and then used those funds to offer financing to customers buying GE’s products. By
bundling financing with its products, GE was able to generate strong sales and earnings.
However, in looking at the banking business, GE saw a changing landscape that was not as attractive or as
strategically important for the firm as it was in the past. The firm believes that exiting the finance business will lead
to better stock returns since industrial businesses typically trade at higher valuations than finance businesses.
Additionally, margins in financing businesses have trended down due to increased regulations after the 2008
financial meltdown. Thus, while the financing business had been a strong cash cow business for GE for a number of
years, it is unlikely to produce similar strong cash flow in the future. Finally, GE may not have been able to hold all
of its finance businesses in the future. In the wake of the 2008 financial crisis, where most large financial institutions
needed bailouts from the U.S. government to stay in business, large banking organizations, like GE Capital, have
faced increasing pressure to breakup into smaller pieces to reduce the risk that the failure of any single banking firm
would imperil the entire U.S. economy.
Source: Mann, T. & McGrane, V. 2015. GE to Cash Out of Banking Business. Wall Street Journal. April 11–12: A1
& A6.
Discussion Question 9: What do you think are some of the benefits (drawbacks) of this
approach?
2. Limitations
We then provide some of the limitations and disadvantages of portfolio approaches such
as the BCG matrix.
Discussion Question 10: What are the primary limitations of portfolio approaches? (too
simplistic—only two dimensions, ignores potential synergies across businesses, process
can become too mechanical, may rely on overly strict rules to allocate resources, and, the
imagery may lead to overly simplistic prescriptions)
We close out the section with the example of how one company, Cabot Corporation,
B. Caveat: Is Risk Reduction a Viable Goal of Diversification?
In this section we briefly address the issue as to whether or not diversification should be
undertaken in order to reduce risk that is inherent in a firm’s variability in revenues and profits
However, such a diversification rationale can, at times, be justified. We discuss how
The SUPPLEMENT below addresses two of the more difficult issues in studying
diversification: what really is the difference between related and unrelated diversification? Is it
possible to reduce risk even with a related diversification strategy or is conglomerate
diversification the only path to risk reduction?
Extra Example: Johnson & Johnson’s Diversification Strategy
Is Johnson & Johnson pursuing a strategy of related diversification or conglomerate (unrelated) diversification? Let
us see what businesses they are in. J&J is organized into three major product groups: consumer products, medical
devices and diagnostics, and pharmaceuticals. The consumer products group sells such well-known brands as baby
shampoo and oil, Listerine mouth wash, Nicorette anti-smoking gum, and Neutrogena skin care products. The
medical diagnostics and devices group includes a wide variety of products such as such as sutures, blood tests,
endosurgery tools, and artificial joints. The products of the pharmaceutical group include Concerta for attention
deficit disorder, Remicade for arthritis, and Prezista for HIV/AIDS. On the one hand, one can say that all these
products are in the health care industry. On the other hand, there is not much in common between shampoo, artificial
joints, and arthritis drugs in terms of technology, marketing, or distribution. That is, while J&J is not clearly a
conglomerate, the furthest corners of its product empire bear little relatedness.
Has this extensive product portfolio helped or hurt J&J? Their experience is that it certainly reduces risk, a benefit
that is normally associated with conglomerate diversification. For example, in 2009, two of their key drug patents
expired but the loss in revenue was substantially offset by the strong growth by medical diagnostics and devices
group.
Finally, has J&J been able to derive any synergies across their seemingly unrelated products? The answer is an
emphatic yes. Collaboration between engineers from the devices group and scientists from the pharma group led to a
path-breaking discovery: tiny metal stents used to open blocked arteries that are coated with a drug to prevent the
artery from narrowing again. Launched in 2002, the drug-eluting Cypher stent has already generated over $10
billion in sales!
Source: Colvin, G. & Shambora, J. 2009. J&J: Secrets of success. Fortune. May 4: 118.
Discussion Question 11: Can you contrast J&J’s strategy with that of other companies in
the health care industry? What differences stand out?
V. The Means to Achieve Diversification
In the first three sections of the chapter we addressed the types of diversification (i.e.,
related and unrelated). Now we address the means to attain diversification. These include:
mergers and acquisitions;
A. Mergers and Acquisitions
Discussion Question 12: What are the major advantages and disadvantages of mergers
and acquisitions?
Growth through mergers and acquisitions (M&A) has played a critical role in the success
of many corporations in a wide variety of high technology and knowledge-intensive industries.
EXHIBIT 6.5 illustrates the enormous volume in global mergers and acquisitions since
The track record of acquisitions is less than stellar as described in the text. There are a
number of reasons why acquisitions fail most of the time. However, companies like Cisco have
Extra Example: Parker’s Successful M&A Strategy
Parker, the Cleveland-based industrial products manufacturer makes an average of ten acquisitions every year. What
is truly impressive is not just the number but the remarkable success they have had with these acquisitions. What do
they do right?
Parker works very hard to retain the employees of the acquired organization by communicating frequently
with employees and implementing an orderly integration process.
The company assigns an “integration manager” to each acquired firm to get to know its employees at all
levels and to make sure that they understand Parker’s goals.
They acquire only firms that they understand very well. Acquisition targets are often their former competitors.
This way they already know the customers, the markets, and even the margins.
They send a team of supply-chain and sales managers to each acquired firm so that they can share the best
practices to get the lowest prices from their suppliers and the highest prices from their customers.
They send an innovation team to acquired companies to help them launch new products.
They make sure that they don’t ram their practices down the throats of acquired firms. Instead, the emphasis
is on making the managers of these firms even more successful than before.
If the managers can’t get the results they want, they don’t hesitate to replace them.
Source: Hymovitz, C. 2008. In deal-making, keep people in mind. Wall Street Journal. May 12: np.
Discussion Question 13: Do you think the above strategies will work if the acquisitions
are in unrelated industries?
1. Motives and Benefits
In this section, we address the potential advantages of mergers and acquisitions. These
include:
Obtaining valuable resources that can help an organization to expand its product
Provide the opportunity for firms to attain the three bases of synergy—leveraging
Lead to consolidation within an industry and can force other players to merge
Enter new segments (example: Fiat’s acquisition of Chrysler).
The SUPPLEMENT below outlines how Dollar Tree may benefit by acquiring one of its
key competitors Family Dollar.
Extra Example: Consolidation in the Dollar Store Market
The dollar store industry is dominated by three major players: Dollar General, Dollar Tree, and Family Dollar. In
early 2015, Dollar Tree, the second largest player in this market, acquired Family Dollar, the industry’s third largest
firm, to create the largest dollar store firm. In completing this consolidation merger, Dollar Tree can extract value in
multiple ways. First, the market in the future may be less competitive since there will be fewer competitors in the
market space. Second, the combined firm will have stronger market power with its suppliers. Finally, the firm can
share warehouse and distribution facilities to improve firm efficiency.
What is not clear at this point in time is if Dollar Tree can extract enough value from the deal to justify the 35
percent premium it paid to acquire Family Dollar.
Source: Tully, S. 2015. How the dollar store war was won. fortune.com. May 1: np.
One of the problems with acquisitions is that acquirers tend to overpay. Acquisition
Extra Example: Parker Continues to Acquire in Down Times
In recent years, economic conditions have been very weak across the globe. While the United States moved out of
its recession fairly quickly, other countries, especially in Europe, remained mired in recession. For Parker, this
spelled opportunity. Parker, a global firm in motion and control technologies, is a serial acquirer, a firm that
undertakes acquisitions regularly as a part of its normal business operations. It found the economic turbulence of
recent years to provide an opportunity. The economic troubles in a number of countries resulted in significant
declines in the market value of potential acquisition targets, increasing their attractiveness as acquisition targets.
These troubles have also reduced the number of potential acquiring firms competing with Parker as many firms have
shifted their attention to shoring up their own core operations rather than undertaking acquisitions.
Parker used this period to acquire a number of companies in geographic regions in which Parker wanted to grow.
For example, in 2012, Parker acquired a number of firms in India, including PIX Transmissions and John Fowler
PLC. Parker also acquired Olaer Group, a British-based firm that manufacturers hydraulic system parts. While this
firm is U.K.-based, it sells its products in fourteen countries. These acquisitions allow parker to diversify its product
portfolio and geographic reach. By undertaking these acquisitions during a down economic time, Parker was able to
achieve its strategic goal to become a broad-based, global player at attractive prices.
Source: Anonymous. 2012. Parker completes acquisition of the Olaer Group in the United Kingdom. Prnewswire.
July 2: np. Anonymous. 2012. Proactive acquisitions by Parker. Finance.yahoo.com. July 13: np.
Discussion Question 14: The PC industry is going through a massive downturn
currently. Do you think this is a good time for leading firms to acquire weaker players?
EXHIBIT 6.6 summarizes the potential benefits of M&As.
The SUPPLEMENT below presents an interview with eBay’s CEO, John Donahue, who
shares insights into how the firm integrates new acquisitions into its organizational culture.
Extra Example: eBay’s Integrating of New Acquisitions in its Organizational Culture
With your other acquisitions, what have you learned about how to make them work, how to integrate them
into the culture?
We think about acquisitions in three categories: acquisitions to strengthen our core, adjacent acquisitions, and
capability acquisitions. The easiest are the first kind, like the acquisition two years ago of (the Korean auction site)
Gmarket. We’re letting adjacent acquisitions, such as StubHub and Bill Me Later, run relatively independently. With
Bill Me Later we’ve integrated core capabilities into PayPal and eBay. Positronic, a small search company, is in the
third category. In many cases we’re buying the people—Christopher Payne, who’s running eBay North America
now, was a founder of Positronic—which helps us integrate faster and acquire great talent.
Source: Ignatius, A. 2011. How eBay developed a culture of experimentation. Harvard Business Review. 89(3): 96.
Discussion Question 15: What benefits would eBay have from allowing an acquired firm,
such as Bill Me Later to function relatively independently?
Discussion Question 16: Is it a good idea to impose the acquiring firm’s culture onto the
acquired firms? Why? Why not?
2. Potential Limitations
Here, we discuss some of the possible drawbacks of mergers and acquisitions. These
include:
The takeover premium can be very high (examples: Household International’s
Competing firms can often imitate any advantages realized or copy synergies that
Managers’ credibility and ego can sometimes get in the way of sound business
Cultural issues can doom the intended benefits from M&A endeavors (example:
The SUPPLEMENT below addresses the danger associated with being too quick to get
rid of key employees, such as the founding entrepreneur, during an M&A transition.
Extra Example: Retaining Key Employees Helps Retain Shareholder Value
Mergers & acquisitions have a terrible reputation for destroying shareholder value. David Harding, who runs the
M&A practice at management consultant Bain & Co, thinks he knows why. It occurs because, too often, acquiring
firms regard the entrepreneurs who started the firm being acquired to be liabilities rather than assets. According to
Harding, the opposite is often true and acquirers need to pay more attention to “human due diligence” in the
transition between owners. Although such a perspective may seem obvious, a Bain survey of 40 recent deals
revealed that only about half of the acquirers paid attention to this factor.
Harding recommends identifying key employees early and moving quickly to retain them. One place where this
worked was with General Mills acquisition of Small Planet Foods, a Washington State-based organic food company.
General Mills allowed the founding entrepreneur, Gene Kahn, to keep running the business as if it was still an
independent company. “They gave me a lot of leeway to explore the synergies on my own, rather than be rushed into
them,” says Kahn. Kahn stayed on as president of the division for three years after the acquisition and later moved
into the vice president of sustainable development for General Mills. The strategy seems to have worked. The Small
Planet division has grown from a $60 million to a $250 million dollar business since it was acquired by General
Mills.
Source: Birger, J. 2007. Entrepreneurs inside the machine. Fortune, May 14: 22;
http://www.generalmills.com/Company/Businesses/US_Retail.aspx.
EXHIBIT 6.7 summarizes the potential limitations of M&As.
STRATEGY SPOTLIGHT 6.3 notes that most acquisitions destroy shareholder value and
The INSIGHTS FROM EXECUTIVES section in this chapter draws on the experiences
3. Divestment: The Other Side of the “M&A Coin”
Corporate managers often find it necessary to divest businesses from their portfolios.
Divesting can enhance a firm’s competitive position by reducing costs, freeing up resources,
STRATEGY SPOTLIGHT 6.4 addresses why Bristol-Myers Squibb has used divestitures
B. Strategic Alliances and Joint Ventures
Discussion Question 17: What are the major advantages and limitations of strategic
alliances and joint ventures?
Strategic alliances and joint ventures are assuming an increasingly prominent role in the
strategy of leading firms, both large and small. Such cooperative relationships have many
potential advantages. Among these are (our text examples are included):
1. Entry into new markets (the partnership of Zara’s alliance with Tata to enter the
Indian market);
3. Reducing manufacturing (or other) costs in the value chain (the combination of
3. Developing and diffusing new technologies (Verizon Wireless and ILS
Technology).
STRATEGY SPOTLIGHT 6.5 discusses how Lionsgate used an alliance with Alibaba to
better enter the Chinese market.
There are also many potential limitations associated with strategic alliances and joint
ventures. Problems often arise when there is low trust among the partners and minimal attention
The SUPPLEMENT below addresses some useful tips for making partnerships work.
Extra Example: Tips for Making Partnerships Work
Here is what some experts advise for successful partnerships:
1. Demonstrate the value of your partnership to gain your partner’s confidence. Your partner will then be
much more open to your ideas.
2. Establish rules of engagement with your partner, including boundaries and responsibilities, early.
3. Focus on your partner’s best interests. Avoid becoming too revenue-focused when partnering.
4. Find partners with skills that complement—not rival—your own.
5. Respect your partners.
6. Watch out for hidden agendas, such as a partner looking to tap into your expertise so it can get an
upper hand going forward.
7. If the cultural shoe fits, wear it. Find partners with perspective and methodologies that mirror your
own.
Source: Cirillo, R. 2000. Joining forces. VARBusiness. October 2: 52–53.
Discussion Question 18: What would be some of the negative consequences if these
“tips” were not followed?
A. Internal Development
Firms can also diversify via corporate entrepreneurship and new venture development. In
today’s economy, internal development (or intrapreneurship) is such an important topic by which
Among the advantages of internal development is the ability to capture all of the value of
innovative endeavors (as opposed to sharing with partners). Generally firms may be able to
Discussion Question 19: How can internal development endeavors be made more
effective?
VI. How Managerial Motives Can Erode Value Creation
In this section, we address some of the managerial motives that can erode, rather than
A. Growth for Growth’s Sake
There are huge incentives for executives to grow the size of the firm. These include extra
We provide the examples of Priceline.com’s entry into offering groceries and gasoline
online, and how Joseph Bernardino’s overemphasis on growth at Andersen Worldwide played a
B. Egotism
As we all know, a healthy ego makes a leader more confident and able to cope with
We provide several examples of rather hostile interactions among executives after their
merger. Such clashes can certainly lead to the erosion of some of the intended benefits of
We also discuss how egotism (as well as very poor judgment!) led to the demise of Tyco
International’s Dennis Kozlowski and Merrill Lynch’s John Thain.
The SUPPLEMENT below discusses how egotism caused Mattel to fail miserably with
an acquisition.
Extra Example: Mattel Falls Prey to Egotism with the Learning Company
In 1999, Mattel found itself in a difficult situation. Its growth was slowing, its flagship product, Barbie, was losing
market share, and it did not have a strong position in computer-based games. Mattel CEO, Jill Barad, thought that
the solution was for Mattel to shift its attention to the faster growing computer-based interactive games market. To
move aggressively in this market, she decided to acquire the Learning Company, a maker of interactive and
educational games. The price was steep—$3.5 billion which was 4.5 times the Learning Company’s annual revenue.
It turned out to be a very expensive move. Mattel found that the Learning Company was generating little free cash
flow and had a stable of aging brands. To make matters worse, Mattel didn’t have the skills to renew the product
portfolio of the Learning Company. Mattel lost two-thirds of its market value after the acquisition. Jill Barad lost her
job. And the Learning Company was sold off for a paltry $27 million.
One of the key mistakes with this acquisition was that Mattel was overconfident in its ability to run the Learning
Company. They thought that their managerial talent and knowledge could be easily transferred to run the Learning
Company. What they found, instead, was that the skills needed to run a computer software company were very
different from those needed to run a toy company. Also, they had little appreciation for the differences in the market
dynamics of the software business. Mattel would have been much better served by focusing its attention on being the
strongest competitor possible in their core market, a market where they should have had the competencies needed to
build a competitive advantage.
Source: Hirsch, E. & Rangan, K. 2013. The grass isn’t greener. Harvard Business Review. 91(1): 21–23.
Discussion Question 20: How can such egotistic behavior be minimized? (e.g., reward
and control systems, executive selection, culture, etc.)
C. Antitakeover Tactics
Anti-takeover tactics are rather common. These are efforts by management to prevent
We discuss three types of anti-takeover tactics: greenmail, golden parachutes, and
poison pill.
Teaching Tip: Ask the students how the managerial behaviors that erode shareholder
value can be minimized. This provides you with an opportunity to reintroduce the
underlying concepts of corporate governance that we introduced in Chapter 1 and will
STRATEGY SPOTLIGHT 6.6 addresses how antitakeover measures can benefit multiple
Discussion Question 21: Can you provide other examples (either real or hypothetical) of
how antitakeover measures may benefit multiple stakeholders?
I VII. Issue for Debate
The case examines Starbucks’ expanding range of businesses.
Discussion Question 22: What are Starbucks’ core competencies? Do the new businesses
allow Starbucks to leverage those competencies?
The mini-case doesn’t specifically identify Starbucks’ competencies, but most students,
either due to their own personal experience with Starbucks or reading about the firm in other
As to the second part of the question, the simple answer is yes. Diving deeper, students
should identify that there are multiple ways the firm could leverage value, such as economies of
Discussion Question 23: Does its diversification efforts appear to be primarily about
increasing growth or increasing shareholder value by sharing activities, building market
power, and/or leveraging core competencies?
On some level, the students should talk about it as being a balance. Students should
explore this issue, likely leading to the understanding that growth concerns likely triggered the
Discussion Question 24: Where do you think Starbucks should draw boundaries on what
businesses to compete in? Should it keep the new products in the corporate family?
Should it continue to move into the grocery retailing space?
There is no clear right answer for this question. I look for students discuss both the
opportunities with diversification and also the risks the firm faces with different levels of
