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Chapter 6 Corporate-Level Strategy: Creating Value Through Diversification McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 6-3 Learning After studying this chapter, you should have Objective a good understanding of: s • How managers can create value through diversification • The reasons why many diversification efforts fail • 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 • Managerial behaviors that can erode the creation of value STRATEGIC MANAGEMENT CHAPTER 6 Gregory G. Dess and G. T. Lumpkin 6-4 Diversification and Corporate Exhibit 6.1 (adapted) Performance: A Disappointing History • A study conducted by Business Week and Mercer Management Consulting, Inc., analyzed 150 acquisitions that took place between July 1990 and July 1995. Based on total stock returns from three months before, and up to three years after, the announcement: 30 percent substantially eroded shareholder returns. 20 percent eroded some returns. 33 percent created only marginal returns. 17 percent created substantial returns. • A study by Salomon Smith Barney of U.S. companies acquired since 1997 in deals for $15 billion or more, the stocks of the acquiring firms have, on Sources: Lipin, S. & Deogun, average, under-performed the S&P stock index by 14 percentage points N. 2000. Big merges of the 90’s prove disappointing to and under-performed their peer group by four percentage points after the shareholders. Wall Street Journal, October 30: C1; A deals were announced. study by Dr. G. William Schwert, University of Rochester, cited in Pare, T. P. 1994. The new merger boom. Fortune, November 28:96; and Porter, M.E. 1987. From competitive advantage to corporate strategy. Harvard Business Review, 65(3):43. STRATEGIC MANAGEMENT CHAPTER 6 Gregory G. Dess and G. T. Lumpkin 6-5 Creating Value through Related Exhibit 6.2 (adapted) Diversification Economies of Scope (Efficiencies of operating two or more businesses within the same firm) 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 STRATEGIC MANAGEMENT CHAPTER 6 Gregory G. Dess and G. T. Lumpkin 6-6 Exhibit 6.2 Creating Value through Related (adapted) 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 in several huge markets Vertical Integration • Shaw Industries, a carpet manufacturer, increases its control over raw materials by producing much of its own polypropylene fiber, one of its key inputs STRATEGIC MANAGEMENT CHAPTER 6 Gregory G. Dess and G. T. Lumpkin
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