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