VIII. Reflecting on Career Implications
Below, we provide some suggestions on how you can lead the discussion on the career
implications for the material in Chapter 6.
Corporate-Level Strategy: Is your current employer a single business firm or a
diversified firm? If it is diversified, does it pursue related or unrelated diversification?
Does its diversification provide you with career opportunities, especially lateral moves?
What organizational policies are in place to either encourage or discourage you from
moving from one business unit to another?
Very often students are far removed from the corporate level of their organizations; many of
them will have only very vague notions about their firm’s corporate strategy. This would be a
Core Competencies: What do you see as your core competencies? How can you leverage
them both within your business unit as well as across other business units?
It would be a good idea for the instructor to make connection to the personal SWOT that the
students performed earlier. The challenge is to make each individual think in terms of their core
competency. Once they have identified their core competency, the discussion can move on to
Sharing Infrastructures: Identify what infrastructure activities and resources (e.g.,
information systems, legal, training) are available in the corporate office that is shared by
various business units in the firm. How often do you take advantage of these shared
resources? Identify ways in which you can enhance your performance, taking advantage
of these shared infrastructures resources.
Students will rarely have a good handle on this issue. The key point to make is that employees
can enhance and demonstrate their value to their firms by leveraging the value enhancing
Diversification: From your career perspective, what actions can you take to diversify
your employment risk (e.g., coursework at a local university, obtain professional
While students can often easily talk of risk in terms of a financial portfolio, they have difficulty
identifying and evaluating risk in the context of their own employment. The key is to make them
see the parallels between investment decisions and employment choices. That is, they are
IX. Summary
A key challenge of today’s managers is to create “synergy” when engaging in
diversification activities. As we discussed in this chapter, corporate managers do not, in general,
have a very good track record in creating value in such endeavors when it comes to mergers and
We addressed two major types of corporate-level strategy: related and unrelated
diversification. With related diversification the corporation strives to enter into areas in which
key resources and capabilities of the corporation can be shared and leveraged. Synergies come
When firms undergo unrelated diversification they enter product markets that are
dissimilar to their present businesses. Thus, there is generally little opportunity to either leverage
core competencies or share activities across business units. Here, synergies are created from
Corporations have three primary means of diversifying their product markets. These are
mergers and acquisitions, joint ventures/strategic alliances, and internal development. There are
key trade-offs associated with each of these. For example, mergers and acquisitions are typically
the quickest means to enter new markets and provide the corporation with a high level of control
Finally, some managerial behaviors may serve to erode shareholder returns. Among these
are “growth for growth’s sake,” egotism, and anti-takeover tactics. As we discussed, some of
Chapter 6: Corporate-Level Strategy: Creating Value Through Diversification
For a company with which you are familiar, select a potential area of diversification.
Provide supporting arguments for this diversification move (e.g., if it is related diversification
it might involve leveraging core competences or sharing activities). Would you recommend
internal development, strategic alliances/joint ventures, or acquisition as the means to achieve
this diversification? Clarify your rationale.
Teaching Suggestions:
Key points to be highlighted in this exercise are:
*What businesses should a corporation compete in? How can a corporation create “synergy”
among the various business units?
You can discuss the merits and demerits of related vs. unrelated diversification.
— Related diversification:
— Synergies are realized from the horizontal relationships among businesses.
You might want to explain the concepts of “core competencies” and “economies of
scope” here.
— Synergies are also realized from market power through pooled negotiating power and
Here you can raise questions related to the merits and demerits of vertical integration and
You must also mention that creating market power would draw the attention of regulatory
—Unrelated diversification:
—Creates value by exploiting vertical relationships.
the businesses.
—Corporate office can add value by viewing the corporation as a family or
“portfolio” of businesses and allocating resources to optimize corporate goals and
*Should a corporation necessarily diversify? Which method of diversification should a
firm employ?
Profit maximization as a goal propels a firm to grow, and diversification becomes a
means of achieving such growth. However, diversification, whether related or unrelated,
You can then discuss whether internal development, i.e., through corporate entrepreneurship and
new venture development, is better than external growth through mergers and acquisitions or
*Does diversification create value at all?
A very important question to raise. Research shows that diversification destroys rather
than creates value. Then, why do firms pursue a diversification strategy? The issue of
You might also want to mention that egotism and anti-takeover tactics take CEOs to any lengths
You can raise these questions regardless of the method of diversification the students come up
End of Chapter Teaching Notes
Chapter 6: Corporate-Level Strategy: Creating Value through Diversification
Summary Review Questions
1. Discuss how managers can create value for their firm through diversification efforts.
Response:
Diversification is often more costly for firms to do than for investors, so firms are not doing their
shareholders a favor if they diversify without creating new value. Managers can create new value
by combining their operations with the new business in a way that increases the diversified
2. What are some of the reasons that many diversification efforts fail to achieve desired
outcomes?
Response:
Managers of diversification efforts often fail to do the very difficult job of effectively combining
operations in different businesses. According to the text diversifiers:
“failed to effectively integrate their acquisitions“
“paid too high a premium for the target’s common stock”
“were unable to understand how the acquired firm’s assets would fit with their own lines
of business”
had top executives who “may not have acted in the best interests of shareholders. That is,
3. How can companies benefit from related diversification? Unrelated diversification?
What are some of the key concepts that can explain such success?
Response:
Related diversification is a firm entering a different business in which it can benefit from
leveraging core competencies, sharing activities, or building market power. Companies can
benefit from related diversification through economies of scope (leveraging core competencies
Unrelated diversification is a firm entering a business that uses different core competencies and
operates in different markets. Companies can benefit from unrelated diversification by improving
the target businesses. Two ways to improve these businesses are parenting, where the company
4. What are some of the important ways in which a firm can restructure a business?
Response:
Three types of restructuring are asset restructuring, capital restructuring, and management
restructuring. Asset restructuring involves selling off unproductive assets and product lines and
acquiring complementary assets needed to improve the business. Capital restructuring involves
5. Discuss some of the various means that firms can use to diversify. What are the pros and
cons associated with each of these?
Response:
Firms can diversify using mergers and acquisitions, strategic alliances and joint ventures, or
internal development. Mergers and acquisitions involve joining two separate firms into one.
Mergers and acquisitions enable firms to fully integrate operations; acquire valuable resources
and exploit them through leveraging core competencies, sharing activities, and building market
Strategic alliances and joint ventures are a method of diversification that involves collaboration
with partner firms. They are a method of gaining the advantages of mergers and acquisitions
without the financial costs. The benefits of strategic alliances and joint ventures are that they
Internal development is another way for firms to diversify, through corporate entrepreneurship.
Internal development enables firms to achieve the benefits of mergers and acquisitions without
6. Discuss some of the actions that managers may engage in to erode shareholder value.
Response:
Managers have engaged in diversification efforts that do not increase shareholder value. They
place their own self-interest ahead of shareholders’. The actions that managers may take can be
in the form of growth for growth’s sake, egotism, and antitakeover tactics. Growth for growth’s
sake results from managers’ desires to work in larger, more powerful organizations, which offer
Application Questions and Exercises
1. What were some of the largest mergers and acquisitions over the past two years? What
was the rationale for these actions? Do you think they will be successful? Explain.
Response:
(Note to instructor) The Wall Street Journal announces mergers and acquisitions on a regular
basis. A quick Internet search yields a bunch of mergers as announced by UPI, Reuters, and the
like. There has been an ongoing wave of mergers in the banking industry. So getting information
from that source should be a straightforward exercise. As for the rationale, ask students to
identify a shared core competence, shared activity, enhanced negotiating power, or vertical
the potential for imitation and the other 3 sources of sustainable competitive advantage (rare,
valuable, costly to imitate, and costly to substitute). Are these advantages of diversification
sustainable?
If there is no identified shared core competence, shared activity, enhanced negotiating power, or
vertical integration, then the merger or acquisition is unrelated. Ask students to identify the likely
2. Discuss some examples from business practice in which an executive’s actions appear to
be in his or her self-interest rather than the corporation’s well-being.
Response:
(Note to instructor) The business sections of most major newspapers are full of examples of
executives who are greedy and in legal trouble. In addition, some students are likely to be aware
of business practices in their own experience. For each identified instance, we suggest that you
To extend the exercise, ask students if there are any modifications to corporate governance and
3. Discuss some of the challenges that managers must overcome in making strategic
alliances successful. What are some strategic alliances with which you are familiar? Were
they successful or not? Explain.
Response:
Strategic alliances involve a number of processes, including agreement on goals of the alliance,
agreement on the investment or contribution that each partner gives, agreement on the
The success of a strategic alliance is also not obvious. Strategic alliances are not all supposed to
(Note to instructors) Students will usually be aware of the agreements for goals, investments, and
distribution of earnings. But they will tend to be less aware of the need for monitoring. To
In the cases where an alliance is successful for one partner but not the other, ask students how a
4. Use the Internet and select a company that has recently undertaken diversification into
new product markets. What do you feel were some of the reasons for this diversification
(e.g., leveraging core competencies, sharing infrastructures)?
Response:
(Note to instructors) Students should be able to identify the core competency or shared
infrastructure. Ask students to identify the likely costs and benefits of the diversification in order
Experiential Exercise
Time Warner is a firm that follows a strategy of related diversification. Evaluate its success
(or lack thereof) with regard to how well it has (1) built on core competencies, (2) shared
infrastructures, and (3) increased market power. (Fill answers in table below.)
Response:
Time Warner is a well-diversified firm in the entertainment and publishing businesses. Its
divisions include Time Inc., Home Box Office, Turner Broadcasting System, the CW network,
For the table below, we provide some quick notes on these diversifications.
Rationale for Related
Diversication
Successful/
Unsuccessfu
l?
Why?
1. Build on core
Successful Competence in television and movie
2. Share infrastructures Successful Possible sharing of program production
infrastructure across all channels. Sharing of
3. Increase market power Successful Bargaining with advertisers regarding airing
commercials on multiple channels in multiple
(Note to instructor) Students should be able to come up with a number of examples of Time
Warner’s diversifications into new businesses. We suggest you take one at a time and ask
students to demonstrate how it has contributed to shareholder value. For the first method—build
on core competencies—ask students to first identify the core competence. This question will
In addition to diversification, the case of Time-Warner offers the opportunity to examine the
Ethics Questions
1. In recent years there has been a rash of corporate downsizing and layoffs. Do you feel
that such actions raise ethical considerations? Why or why not?
Response:
Relevant ethical considerations might include whether the individuals laid off were treated fairly,
and whether management acted to maximize firm value. At the individual level, the question
At the corporate level, the question revolves around the restructuring effort. Effective strategies
of unrelated diversification and then restructuring will result in a new business unit that is worth
2. What are some of the ethical issues that arise when managers act in a manner that is
counter to their firm’s best interests? What are the long-term implications for both the
firms and the managers themselves?
Response:
Managers have an obligation to their shareholders or, more broadly, their stakeholders. To the
extent that managers neglect stakeholders and make business decisions that serve their self-
The long-term implications for the firm are that firm value is reduced. The ability of the firm to
compete effectively and to otherwise fulfill its corporate mission are likely to be eroded. And if a
As for the managers themselves, there are two possibilities. One is that the managers will stay
with their firms. In this case, the managers may continue to make diversification decisions that
Of course there are exceptions. Managers who diversify in self-interest once may not repeat the
act. They may also be held accountable either by their board, the shareholders, the press, or