CHAPTER 9

CORPORATE-LEVEL
STRATEGY:
RELATED AND
UNRELATED
DIVERSIFICATION
 GROUP 6: MUỐI

Pham Thi Sao Mai Pham Thao Nguyen Tran Dieu Thuong

Kieu Huyen Trang Nguyen Phuong Nga Truong Thi Hong Tham
 Table of chapter contents
01
Increasing profitability
02 03
Limits and disadvantages
Two types of
through diversification of diversification
diversification

04 05 06
Choosing a strategy Entering new industries: Entering new
Internal new ventures industries:
Acquisitions
 OVERVIE
- W
The challenges and opportunities created by corporate-level strategies of related
and unrelated diversification.
- The different kinds of multibusiness models upon which related and unrelated
diversification are based
- 3 different ways companies can implement a diversification strategy: internal new
ventures, acquisitions and joint ventures
- The advantages and disadvantages associated with strategic manager’s decisions
to diversify and enter new markets and industries
 01
INCREASING PROFITABILITY
THROUGH DIVERSIFICATION
Definition: Diversification is the process of entering new industries, distinct from a company’s core
or original industry, to make new kinds of products that can be sold profitably to customers in these
new industries.
A diversification strategy should enable a company or its individual business units to perform one
or more value-chain functions: (1) at a lower cost, (2) in a way that allows for greater
differentiation and gives the company better pricing options, or (3) in a way that helps the
company manage industry rivalry better – in order to increase profitability.
Most companies consider diversification when they are generating free cash flow; that is, cash in
excess of that required to fund new investments in the company’s current business and meet
existing debt commitments. In other words, free cash flow is cash beyond that needed to make
profitable new investments in the existing business.

Diversification can increase profitability when strategic managers:

● Transfer competencies between business units in different industries

● Leverage competencies to create business units in new industries
● Share resources between business units to realize synergies or economies of scope
● Utilize general organizational competencies that increase the performance of all a company’s
business units
 a, Transfer competencies between business units
in different industries
Transferring competencies is the process of taking a distinctive competency developed by a
business until in one industry and implanting it in a business until operating in another
industry.
Companies that base their diversification strategy on transferring competencies tend to
acquire new businesses related to their existing business activities because of commonalities
between one or more of their value-chain functions. A commonality is a skill or attribute
that, when shared or used by two or more business units, allows both businesses to operate
more effectively and efficiently and create more value for customers.
Example: Miller Brewing was related to Philip Morris’s
tobacco business because it was possible to create
important marketing commonalities; both beer and tobacco
are mass-market consumer goods in which brand
positioning, advertising, and product development skills
are crucial to create successful new products. In general,
such competency transfers increase profitability when
they either
(1) lower the cost structure of one or more of
a diversified company’s business units or
(2) enable one or more of its business units to
better differentiate their products, both of
which give business-unit pricing options to
lower a product’s price to increase market
share, or to charge a premium price.
To increase profitability, transferred
competencies must involve value-chain
activities that become an important source of a
specific business unit’s competitive advantage
in the future.
 Example: Coca-Cola acquired Minute Maid, the fruit
juice maker, to take advantage of commonalities in
global distribution and marketing, and this acquisition
has proved to be highly successful. On the other hand,
Coca-Cola once acquired the movie studio Columbia
This acquisition was a disaster that cost Coca-
Pictures because it believed it could use its marketing
Cola billions in losses, and Columbia was
prowess to produce blockbuster movies.
eventually sold to Sony, which was then able
to base many of its successful PlayStation
games on the hit movies the studio produced.
b, Leveraging Competencies to Create a New
Business
Leveraging Competencies is the process of taking
a distinctive competency developed by a business
until in one industry and using it to create a new
business until in a different industry.

By leveraging competencies, a company can

develop new business in a different industry.
 The multibusiness model is based on the premise
Example: Apple leveraging that the set of distinctive competencies that are
its competencies in the source of a company’s competitive advantage
personal computer (PC) in one industry might be applied to create a
hardware and software to differentiation or cost-based competitive
enter the smartphone advantage for a new business unit or division in
industry. a different industry.
 c, Sharing Resources and Capabilities
Economies of scope are the synergies that arise when one or more of a diversified
company’s business units are able to lower costs or increase differentiation because they can
more effectively pool, share, and utilize expensive resources or capabilities.

First, when companies can share resources or capabilities across business units, it lowers
their cost structure compared to a company that operates in only one industry and bears the
full costs of developing resources capabilities.
Example: P&G makes disposable diapers, toilet paper, and paper towels, which are all paper-
based products that customers value for their ability to absorb fluids without disintegrating.

Because these products need the same attribute - absorbency - P&G can share the R&D costs
associated with developing and making even more advanced absorbent, paper-based products
across the three distinct businesses.
Similarly, because all these products are sold to retailers, P&G can use the same sales force to sell its
whole array of products. In contrast, P&G competitors that make only one or two of these products
cannot share these costs across industries, so their cost structures are higher.
As a result, P&G has lower costs; it can use its marketing function to better differentiate its
products, and it achieves a higher ROIC than companies that operate only in one or a few industries
- which are unable to obtain economies of scope from the ability to share resources and obtain
synergies across business units

In addition, managers must be aware that the costs of coordination necessary to achieve synergies
or economies of scope within a company may sometimes be higher than the value that can be
created by such a strategy.
Example: From 1990 to 2010, Citibank transitioned from
being wholly focused on retail consumer banking to a
“financial supermarket” by diversifying into insurance,
mortgage banking, stock brokering, and more, believing
that it would achieve major cost savings from
consolidating operations across its acquisitions, and
revenue-increasing opportunities from cross-selling.
The Citi case also illustrates that one of the
sources of economies of scope that firms seek
through diversification is through product
bundling.

Example Consumers may prefer to buy their

internet, cable television, and phone service
from a single provider that will give them a
single point of contact for customer service
and a discount for buying a bundled package.
Industrial customers similarly prefer to deal with fewer
suppliers.

It is important to note, however, that product bundling

often does not require joint ownership. In many
instances, bundling can be achieved through market
contracts.
 d. Utilizing General Organizational Competencies
General Organizational Competencies are competencies that result from the skills of a company’s
top managers and that help every business unit within a company perform at a higher level than it
could if it operated as a separate or independent company.

General organizational competencies transcend individual functions or business units and are
found at the top or corporate level of a multibusiness company.
Three general organizational competencies help a company increase its performance and
profitability:

1. entrepreneurial capabilities
2. organizational design capabilities
3. strategic capabilities
Entrepreneurial Capabilities
1. Encourage managers to take risks
2. Give managers the time and resources to pursue novel
ideas
3. Not punish managers when a new idea fails
4. Make sure that the company’s free cash flow is not
wasted in pursuing too many risky ventures that have a
low profitability of generating a profitable return on
investment
Example: 3M’s goal of generating 40% of its revenues from products introduced within
the past 4 years focuses managers’ attention on the need to develop new products and enter
new businesses.
Capabilities in Organizational Design
Organizational design skills is the ability of a company’s
managers to create a structure, culture, and control
systems that motivate and coordinate employees to
perform at a high level.

organizational design is a major factor that influences a

company’s entrepreneurial capabilities; it is also an
important determinant of a company’s ability to create
the functional competencies that give it a competitive
advantage.
Superior strategic management capabilities
An especially important governance skill in a diversified company is the ability to diagnose
the underlying source of the problems of a poorly performing business unit, and then to
understand how to proceed to solve those problems.

Identify inefficient, poorly managed companies in other industries and then acquire
and restructure them to improve their performance—and thus the profitability of the
total corporation. This is known as a turnaround strategy.
Turnaround strategy is when managers of a
diversified company identify inefficient,
poorly managed companies in other industries
and then acquire and restructure them to
improve their performance—and thus the
profitability of the total corporation.
There are several ways to improve the performance of an acquired company

● First, the top managers of the acquired company are replaced with a more aggressive
top-management team.
● Second, the new top-management team sells off expensive assets such as underperforming
divisions, executive jets, and elaborate corporate headquarters; it also terminates staff to
reduce the cost structure.
● Third, the new management team devises new strategies to improve the performance of the
operations of the acquired business and improve its efficiency, quality, innovativeness, and
customer responsiveness.
● Fourth, to motivate the new top-management team and the other employees of the
acquired company to work toward such goals, a companywide, pay-for-performance
bonus system linked to profitability is introduced to reward employees at all levels for
their hard work.
● Fifth, the acquiring company often establishes “stretch” goals for employees at all
levels
 SUMMARY OF PART 1

Question 1: The managers of the most companies often consider when they
generating free cash flow.

A. Taper integration
B. Full integration
C. Diversification
D. Long-term contracts
E. Strategic alliances
 SUMMARY OF PART 1

Question 1: The managers of the most companies often consider when they
generating free cash flow.

A. Taper integration
B. Full integration
C. Diversification
D. Long-term contracts
E. Strategic alliances
 SUMMARY OF PART 1
Question 2: Diversification is the process of a company entering new
industries distinct from its core industry,using a multibusiness model. True
or False?

True
 02
TWO TYPES OF
DIVERSIFICATION
Amazon’s initial operation was just an online
bookseller, it became successful after its launch in
1995. Books were easy to source and distribute, but
company founder Jeff Bezos always planned to
diversify.

The website began selling video games and other

multimedia in 1998 and, before long, the company
sold consumer electronics, software, homeware, toys
and more.
The long-term goal of Amazon was always to diversify from an ecommerce website to a
fully loaded technology company. In 2006, Amazon launched AWS (Amazon Web
Services), which delivers on-demand cloud computing platforms and APIs; suddenly they
were a long way away from just selling books.

From web services and ecommerce to consumer electronics, Amazon diversified further as
they launched the Kindle e-reader and later the Amazon Echo smart speaker system. They
also entered the digital music industry with Amazon Music.

Skip ahead to the present day, Amazon has its own airline (Amazon Air), cloud storage
platform, movie studio, and much more.
➢ Question: What is the main key to Amazon’s
success?

D IV E R S I FI CAT I O
N
There are two types of diversification:

- Related diversification

- Unrelated diversification
a, Related Diversification

Definition: Related diversification is a

corporate-level strategy based on the goal of
establishing a business unit in a new industry
that is related to a company’s existing
business units by some form of commonality
or linkage between their value-chain
functions
There are 3 types of related diversification:
Vertical diversification occurs when a company moves up or down the supply chain by
combining two or more stages of production normally operated by separate companies.

This typically means the company decides to start taking over some or all of the functions
related to the production and distribution of their core product, such as the purchase of raw
material, manufacturing processes, assembly, distribution and sale.
Vertical diversification
There are 2 forms of vertical diversification, which are identified by the direction you
move in the supply chain.

+ Forward diversification: If you’re at the beginning of a supply chain in terms of your

business positioning, you might decide you want to control operations further along
the chain as well.
+ Backward diversification: If you’re closer to the end of a supply chain, you can
think about how to diversify into the markets that funnel into your product.
There are 3 types of related diversification:
Horizontal diversification: The process of acquiring or merging with industry
competitors to achieve the competitive advantages that arise from a large size and scope of
operations.

An acquisition occurs when one company uses capital resources such as stock, debt, or
cash, to purchase another company. A merger is an agreement between equals to pool their
operations and create a new entity.
There are 3 types of related diversification:
Horizontal diversification: The process of acquiring or merging with industry
competitors to achieve the competitive advantages that arise from a large size and scope of
operations.

Pfizer Company Warner Lambert Products

There are 3 types of related diversification:
Concentric diversification: occurs when a company enters a new market with a new
product that is technologically similar to their current products and therefore are able to
gain some advantage by leveraging things like industry experience, technical know-how,
and sometimes even manufacturing processes already in place.

Concentric diversification can be beneficial if sales are declining for one product, as loss in
revenue can be offset by a rise in sales from other products.
There are 3 types of related diversification:
b, Unrelated Diversification

Definition: Unrelated Diversification is a

corporate-level strategy based on a
multibusiness model that uses general
organizational competencies to increase the
performance of all the company’s business
units.
To put it simply, if you’re looking to diversify
into completely new markets with unrelated
products to reach brand new customer bases,
this is known as unrelated diversification. The
parent company that owns all of the individual
entities is known as a “conglomerate”, and it
became one by successfully implementing an
unrelated diversification strategy.
Example: Coca-Cola purchased Columbia Pictures for
$750 million. It’s hard to imagine the logic behind such a
move as why would a soft-drink company buy a movie
studio? This is a good example of unrelated
diversification, which occurs when a firm enters an
industry that lacks any important similarities with the
firm’s existing industries. Luckily for Coca-Cola, its
investment paid off. Columbia was sold to Sony for $3.4
billion just seven years later.
 SUMMARY OF PART 2
Two types of diversification

Related Unrelated

Horizontal Vertical Concentric

Backward Forward
 SUMMARY OF PART 2
Question 1: Name 2 types of diversification?

Related diversification and Unrelated diversification

Question 2: How many types are there in the related

diversification?

3 types: Vertical, Horizontal and Concentric

 SUMMARY OF PART 2

Question 3: Fill in the blank: _______ diversification is the process

of acquiring or merging with industry competitors to achieve the
competitive advantages that arise from a large size and scope of
operations.
Horizontal
 03
Limits and
disadvantages of
diversification
 - Changes in the industry or inside a company
Limits and that occur over time

disadvantages of - Diversification pursued for the wrong

reasons
diversification - Excessive diversification that results in
increasing bureaucratic costs
 a, Changes in the industry or inside a company that
occur over time
- The environment often changes rapidly and unpredictably: For a company to profit from it over
time, managers must be as willing to divest business units as they are to acquire them.

- Over time, a company’s top-management team often changes: When the managers who possess
the hard-to-define skills leave, they often take their vision with them. A company’s new leaders may
lack the competence or commitment necessary to pursue diversification successfully over time;
thus, the cost structure of the diversified company increases and eliminates any gains the strategy
may have produced.
 b, Diversification pursued for the wrong reasons
- Many CEOs argue that diversifying into industries that have different business cycles
would allow the sales and revenues of some of their divisions to rise, while sales and
revenues in other divisions would fall.

- Research suggests that corporate diversification is not an effective way to pool risks
because the business cycles of different industries are inherently difficult to predict, so it is
likely that a diversified company will find that an economic downturn affects all its
industries simultaneously. If this happens, the company’s profitability plunges.
Example: Kodak made this mistake. In the 1980s, increased competition from low-cost,
Japanese competitors such as Fuji, combined with the beginnings of the digital revolution,
soon led Kodak’s revenues and profits to plateau and then fall. Its managers took its huge
free cash flow and spent tens of billions of dollars to enter new industries such as health
care, biotechnology, and computer hardware in a desperate and mistaken attempt to find
ways to increase profitability
This was a disaster because every industry
Kodak entered was populated by strong
companies such as 3M, Canon, and Xerox.
In reality, Kodak’s diversification was
solely for growth, but growth does not
create value for stockholders; growth is
the by-product, not the objective of a
diversification strategy.
c, Excessive diversification that results in increasing
bureaucratic costs
A major reason why diversification often fails to boost profitability is that the bureaucratic
costs of diversification exceed the benefits created by the strategy.

Bureaucratic costs are the costs associated with solving the transaction difficulties that
arise between a company’s business units and between business units and corporate
headquarters, as the company attempts to obtain the benefits from transferring, sharing, and
leveraging competencies.
They also include the costs associated with using general organizational competencies to
solve managerial and functional inefficiencies.

The level of bureaucratic costs in a diversified organization is a function of two factors:

the number of business units in a company’s portfolio, and the degree to which
coordination is required between these different business units to realize the advantages of
diversification.

Number of Businesses: The greater the number of business units in a company’s portfolio,
the more difficult it is for corporate managers to remain informed about the complexities of
each business.
Example: Business-unit managers might blame poor performance on difficult competitive
conditions, even when it is the result of their inability to craft a successful business model.
As such organizational problems increase, top managers must spend an enormous amount
of time and effort to solve them. This increases bureaucratic costs and cancels out the
profit-enhancing advantages of pursuing diversification, such as those obtained from
sharing or leveraging competencies
Coordination Among Businesses: The amount of coordination required to realize value
from a diversification strategy based on transferring, sharing, or leveraging competencies is
a major source of bureaucratic costs. The bureaucratic mechanisms needed to oversee and
manage the coordination and handoffs between units, such as cross-business-unit teams and
management committees, are a major source of these costs. A second source of bureaucratic
costs arises because of the enormous amount of managerial time and effort required to
accurately measure the performance and unique profit contribution of a business unit that is
transferring or sharing resources with another.
Example: Consider a company that has two
business units, one making household products
and another making packaged food products.
The products of both units are sold through
supermarkets. To lower the cost structure, the
parent company pools the marketing and sales
functions of each business unit, using an
organizational structure similar to that illustrated
in the picture
 SUMMARY OF PART 3

Question 1: How many disadvantages of diversification?

3 disadvantages

Question 2: Research suggests that corporate diversification is not an

effective way to pool risks, why?

Because the business cycles of different industries are inherently

difficult to predict
 04
CHOOSING A
STRATEGY
Related diversification involves more
ways of creating value, so this strategy a, Related Versus
is often preferred. Furthermore, with Unrelated
related diversification, companies are Diversification
moving into fields where their
managers have knowledge, so this
strategy is less risky.
 Related diversification can Unrelated diversification can
create value by sharing create value by pursuing an
resources and transferring acquisition and restructuring
capabilities between business strategy.
units.
Related diversification typically has higher bureaucratic costs
than unrelated diversification.
● Unrelated diversification companies only have to pay
administrative costs arising from the number of business
units in the portfolio.
● Related diversification companies incurs costs both
from the number of units in the portfolio and the
combination of units.
=> The higher costs can outweigh the benefits, making the
strategy no more profitable than unrelated diversification.
How does a company choose between these strategies?
The choice depends upon a comparison of the benefits of each strategy
against the bureaucratic costs of pursuing it.
● A company pursues related diversification when the company's
competencies can be applied across a greater number of industries and
the company has superior strategic capabilities that allow it to keep
bureaucratic costs under close control.
● A company pursues unrelated diversification when each
business unit's functional competencies have few useful
applications across industries, but the company's top
managers are skilled at raising the profitability of poorly
run businesses and the company's managers use their
superior strategic management competencies to improve the
competitive advantage of their business units and keep
bureaucratic costs under control.
b, The Web of
Corporate-Level
Strategy
Although some companies may choose to
pursue a strategy of related or unrelated
diversification, there is nothing that stops
them from pursuing both strategies at the
same time.
For example, Harley Davidson
developed a web of corporate strategies
to compete in many industries - a
program that proved a mistake, reduced
its differentiation advantage, and
increased its cost structure.

Harley Davidson is famous for their large

displacement motorcycles.
 Perfume

● The company tried to take advantage by opening

a chain of stores under the Harley Davidson
Clothes
brand name.
● The main customers think the company has over-
commercialized the brand.
Toy
● Harley Davidson has upset their main customers,
depriving the brand of its distinctiveness and
speciality. Harley Davidson’s profitability fell
Wine cooler
dramatically.
 SUMMARY OF PART 4

Question 1: A company can pursue both strategies at the same

time. (True/False)
True
Question 2: Related or Unrelated Diversification is often
preferred?
Related diversification
 O5
ENTERING NEW
INDUSTRIES:
INTERNAL NEW
VENTURES
a, The attractions of internal new venturing

Internal new venturing is typically used to implement corporate-level

strategies when a company possesses one or more distinctive competencies in
its core business model that can be leveraged or recombined to enter a new
industry.
For example, DuPont, which has created new markets with products such as cellphone, nylon,
Freon, and Teflon - are most likely to use the internal new venturing. 3M has a near-legendary
knack for a new or improved products from internal generated ideas, and then establishing new
business unit to create the business model that enables it to dominate a new market. Similarly, HP
entered into the computer and printer industry by using internal new venturing.
A company may also use internal venturing to
enter a newly emerging or embryonic
industry-one in which no company has yet
developed the competencies or business
model to give a dominant position in that
industry.
This was Monsanto’s situation in 1979
 b, Pitfall of new ventures
Despite the popularity of internal new venturing, there is a high risk of failure.
Research suggest that somewhere between 33 and 60% of all new products that
reach the marketplace do not generate an adequate economic return, and that most of
these products were the result od internal ventures. Three reason a often put forward
to explain the relatively high failure rate of internal new ventures:

● Market entry on too small a scale

● Poor commercialization of the new-venture product
● Poor corporate management of the new-venture devision.
 For example, consider the desktop PC
marketed by NeXT.
Scale of entry Research suggests that
large-scale entry into a new industry
is often a critical precondition for the
success of a new venture. In the short
run, this means that.
Poor implementation Managing the new-venture process, and controlling the new-
venture division, creates many difficult managerial and organizational problems.

For example, one common mistake companies make to try to increase their chances of
introducing successful products is to establish too many internal new-venture divisions
at the same time.
The failure to anticipate the time and costs involved in the new-venture process
constitutes a further mistake. Many companies have unrealistic expectations regarding
the time frame and expect profits to flow in quickly. Research suggests that some
companies operate with a philosophy of killing new businesses if they do not turn a profit
by the end of the third year, which is unrealistic given that it can take 5 years or more
before a new venture generates substantial profits.
 c, Guidelines for Successful
Internal new Venturing

To avoid these pitfalls, a company should adopt a well-thought-out, structured

approach to manage internal new venturing. New venturing is based on R&D.
It begins with the exploratory research necessary to advance basic science and
technology (the “R” in R&D) and development research to identify, develop,
and perfect the commercial applications of a new technology (the “D” in
R&D).
● First, many companies must place the funding for research into the hands of
business-unit managers who have the skill or know how to narrow down and then
select the optimal set of research projects that have the best chance of a significant
commercial payoff.
● Second, to make effective use of its R&D competency, top managers must work
with R&D scientists to continually develop and improve the business model and
strategies that guide their efforts, and make sure that all its scientists and engineers
understand what they have to do to make it succeed.
Third, a company must foster close links between R&D and
marketing to increase the probability that a new product will be a
commercial success in the future. When marketing works to
identify the most important customer requirements for a new
product and then communicates thèse requirements to scientists
it ensures that research projets meet the needs of their intended
customers.
Fourth, a company should also foster close links between
R&D and manufacturing to ensure that it has the abilîty
to make a proposed new product in a cost-effective way.
Many companies successfully integrate the activities of
the different functions by creating cross-functional
project teams to oversee the development of new
products from their inœption to market introduction. This
approach can significantly reduce the time it takes to
bring a new product to market.
Finally, because large-scale entry often leads to greater long-term profits, a company can
promote the success of internal new venturing by “thinking big.” A company should
construct efficient-scale manufacturing facilities and allocate marketing a large budget to
develop a future product campaign that will build market presence and brand loyalty
quickly and well in advance of that pmduct’s introduction. Also, corporate managers
should not panic when customers are slow to adopt the new product; they need to accept
the fact there will be initial losses and recognize that as long as market share is
expanding, the product will eventually succeed.
 SUMMARY OF PART 5

Question 1: How many rules for Successful Internal New

Venturing?
A. 1
B. 3
C. 5
D. 7
 SUMMARY OF PART 5

Question 1: How many rules for Successful Internal New

Venturing?
A. 1
B. 3
C. 5
D. 7
Question 2: How many reasons are often put forward to
explain the relatively high failure rate of internal new
ventures?
A. 1
B. 2
C. 3
D. 4
Question 2: How many reasons are often put forward to
explain the relatively high failure rate of internal new
ventures?
A. 1
B. 2
C. 3
D. 4
 06
ENTERING NEW
INDUSTRIES:
ACQUISITIONS
a, The attraction of acquisitions

● In general, acquisitions are the principle strategy used to implement

horizontal integration, used to pursue vertical integration or
diversification when a company lacks the distinctive competencies
necessary to compete in a new industry, and so uses its financial
resources to purchase an established company that has those
competencies.
- Use acquisitions when it needs to move rapidly to establish a presence in
an industry. Entering a new industry through internal venturing is a relatively slow
process; acquisition is a much quicker way for a company to establish a significant
market presence.
- A company can purchase a leading company with a strong competitive
position in months, rather than waiting years to build a market leadership position
by engaging in internal venturing.

=> When speed is particularly important, acquisition is the favored entry

mode.
Example
● Acquisitions are often perceived as being less risky than internal new ventures because
they involve less commercial uncertainty.
● Acquisitions are an attractive way to enter an industry that is protected by high barriers to
entry.
+ When entry barriers are high, it may be very difficult for a company to enter an industry
through internal new venturing because it will have to construct large-scale
manufacturing facilities and invest in a massive advertising campaign to establish
brand loyalty.
+ In contrast, if a company acquires another company already established in the
industry, possibly the market leader, it can circumvent most entry barriers because that
company has already achieved economies of scale and obtained brand loyalty.
 b, Acquisition pitfalls

● For these reasons, acquisitions have long been the most common method that
companies use to pursue diversification. Numerous research studies have
been conducted to assess whether, on average, acquisitions create or destroy
shareholder value.
● The research falls well short of a consensus on the effect of
acquisitions, however a very large number of studies conclude that many
acquisitions fail to increase the profitability of the acquiring company and may
result in losses.
For example, one study of 700 large acquisitions found that although 30% of these
resulted in higher profits, 31% led to losses, and the remainder had little impact.
Another study of the post acquisition performance of acquired companies found
that their profitability and market share often decline, suggesting that many
acquisitions destroy rather than create value.
Acquisitions may fail to raise the performance of the acquiring companies for five reasons:
(1) Companies frequently experience management problems when they attempt to integrate
a different company’s organizational structure and culture into their own;
(2) Companies often overestimate the potential economic benefits from an acquisition;
(3) Acquisitions tend to be so expensive that they do not increase future
profitability;
(4) Companies are often negligent in screening their acquisition targets and fail to
recognize important problems with their business models;
(5) Managers may have incentives to make acquisitions even when they do not
increase shareholder value
 ● Integrating the Acquired Company
Once an acquisition has been made, the acquiring
company must integrate the acquired company
and combine it with its own organizational
structure and culture. Experience has shown that
many problems can occur as companies attempt
to integrate their activities.
For example, when Daimler Benz acquired
Chrysler, the two companies discovered that the
more formal and hierarchical culture at Daimler
chafed Chrysler employees, who were used to a
looser more entrepreneurial culture.
 ● Overestimating Economic Benefits
Even when companies find it easy to integrate their
activities, they often overestimate the combined
businesses’ future profitability. Managers often
overestimate the competitive advantages that will derive
from the acquisition and so pay more for the acquired
company than it is worth.
Example: Coca-Cola’s acquisition of several
midsized winemakers illustrates this.
 ● The Expense of Acquisitions
Perhaps the most important reason for the failure of acquisitions is that acquiring a company
with stock that is publicly traded tends to be very expensive—and the expense of the
acquisition can more than wipe out the value of the stream of future profits that are expected
from the acquisition.
Example : Nortel and Alcatel-Lucent engaged in a race to purchase smaller,
innovative companies that were developing new telecommunications
equipment.
 ● Inadequate Pre-acquisition Screening
As the problems of these companies suggest, top
managers often do a poor job of pre-acquisition
screening—that is, evaluating how much a potential
acquisition may increase future profitability.
 Example : In 2009, IBM
was in negotiations to
purchase chip-maker Sun
Microsystems.

Sun Microsystems was eventually sold to

Oracle in 2010.
 ● Agency Problems
It is important to note that managers may make acquisitions for reasons that
have nothing to do with shareholder value. This is called an “agency problem”.
 c, Guidelines for successful
acquisition
To avoid these pitfalls and make successful acquisitions, companies need to follow
an approach to targeting and evaluating potential acquisitions that is based on four
main steps:
(1) target identification and pre-acquisition screening,
(2) bidding strategy,
(3) integration,
(4) learning from experience.
 ● Identification and Screening
Thorough pre-acquisition screening increases a company’s knowledge about a potential
takeover target and lessens the risk of purchasing a problem company—one with a weak
business model. The screening process should begin with a detailed assessment of the strategic
rationale for making the acquisition, an identification of the kind of company that would make
an ideal acquisition candidate, and an extensive analysis of the strengths and weaknesses of the
prospective company’s business model compared to other possible acquisition targets.
Acquiring company should select a set of top potential acquisition targets focus on
revealing
(1) its financial position,
(2) its distinctive competencies and competitive advantage,
(3) changing industry boundaries,
(4) its management capabilities,
(5) its corporate culture.
Such an evaluation helps the acquiring company perform a detailed strength, weakness,
opportunities, and threats (SWOT) analysis that identifies the best target.
 ● Bidding Strategy
- The objective of the bidding strategy is to reduce the price that a company must
pay for the target company. By contrast, in a hostile bidding environment, such as
existed between Oracle and PeopleSoft, and between Microsoft and Yahoo!, the price
of the target company often gets bid up by speculators who expect that the offer price
will be raised by the acquirer, or by another company with a higher counteroffer.
- Another essential element of a good bidding strategy is timing.
For example, Hanson PLC, one of the most successful companies to pursue
unrelated diversification.
 ● Integration
- Integration should center upon the source of the potential
strategic advantages of the acquisition; for instance,
opportunities to share marketing, manufacturing, R&D,
financial, or management resources.
- Integration should also involve steps to eliminate any
duplication of facilities or functions. In addition, any
unwanted business units of the acquired company should be
divested.
 ● Learning from Experience
Research suggests that organizations that acquire
many companies over time become expert in this
process and can generate significant value from their
experience of the acquisition process.
Tyco International, never made hostile acquisitions; it audited the accounts of the
target companies in detail, acquired companies to help it achieve a critical mass in an
industry, moved quickly to realize cost savings after an acquisition, promoted
managers one or two layers down to lead the newly acquired entity, and introduced
profit-based, incentive-pay systems in the acquired unit.
 SUMMARY OF PART 6

Question 1: Which of the following is (are) the probable consequence(s) of an inability

to integrate two divergent corporate cultures after an acquisition?
A. High management turnover
B. Damaging political tensions between the management of the acquired and acquiring
companies
C. An inability to realize potential gains from synergies
D. All of these choices
E. None of these choices
 SUMMARY OF PART 6

Question 1: Which of the following is (are) the probable consequence(s) of an inability

to integrate two divergent corporate cultures after an acquisition?
A. High management turnover
B. Damaging political tensions between the management of the acquired and acquiring
companies
C. An inability to realize potential gains from synergies
D. All of these choices
E. None of these choices
Question 2: Which of the following is not a reason for the failure of an
acquisition to generate the gains originally expected of it?
A. Poor postacquisition integration
B. Overestimation of the potential gains to be derived from synergy
C. The high cost of making acquisitions
D. Lack of preacquisition screening
E. Overestimation of the potential costs of realizing synergies
Question 2: Which of the following is not a reason for the failure of an
acquisition to generate the gains originally expected of it?
A. Poor postacquisition integration
B. Overestimation of the potential gains to be derived from synergy
C. The high cost of making acquisitions
D. Lack of preacquisition screening
E. Overestimation of the potential costs of realizing synergies
Question 3: Acquisitions often fail because of
A. poor commercialization.
B. too much preaccquisition screening, which increases the time it
takes to enter a market.
C. large-scale entry.
D. differences in corporate culture.
E. slowness in establishing significant market presence.
Question 3: Acquisitions often fail because of
A. poor commercialization.
B. too much preacquisition screening, which increases the time it takes
to enter a market.
C. large-scale entry.
D. differences in corporate culture.
E. slowness in establishing significant market presence.
 MINIGAME
1. Leveraging competencies involves taking a distinctive
competency developed by a business unit in one industry to
create
A. a new business unit in the same industry.

B. a new business unit in a different industry.

C. a new industry.

D. a new market segment.

 MINIGAME
1. Leveraging competencies involves taking a distinctive
competency developed by a business unit in one industry to
create
A. a new business unit in the same industry.

B. a new business unit in a different industry.

C. a new industry.

D. a new market segment.

 MINIGAME
2. Product bundling refers to
A. preparation of products for shipment.

B. a complete package of related products.

C. a method of stocking products efficiently.

D. an inventory procedure for ensuring effective

counting of products.

E. a package of unrelated products.

 MINIGAME
2. Product bundling refers to
A. preparation of products for shipment.

B. a complete package of related products.

C. a method of stocking products efficiently.

D. an inventory procedure for ensuring effective

counting of products.

E. a package of unrelated products.

 MINIGAME
3. _____ involves taking a distinctive competency developed by a business
unit in one industry and implanting it in a business unit operating in
another industry.

A. Sharing resources and capabilities

B. Transferring competencies
C. Product bundling
D. Leveraging competencie
E. Strategic management capabilities
 MINIGAME
3. _____ involves taking a distinctive competency developed by a business
unit in one industry and implanting it in a business unit operating in
another industry.

A. Sharing resources and capabilities

B. Transferring competencies
C. Product bundling
D. Leveraging competencie
E. Strategic management capabilities
 MINIGAME
4. Companies that base their diversification strategy on transferring
competencies tend to acquire new businesses that are ____ to their
existing business activities.
A. Unrelated

B. Not comparable

C. Opposed

D. Related

E. Identical
 MINIGAME
4. Companies that base their diversification strategy on transferring
competencies tend to acquire new businesses that are ____ to their
existing business activities.
A. Unrelated

B. Not comparable

C. Opposed

D. Related

E. Identical
 MINIGAME
5. The three main types of diversification strategies are___

A. Acquisitions, joint ventures, and divestments.

B. Acquisitions, mergers, and buy outs.

C. Acquisitions, internal new ventures, and joint ventures.

D. Related acquisitions, unrelated acquisitions, and mergers

E. Joint ventures, strategic alliances, and long-term contracts.

 MINIGAME
5. The three main types of diversification strategies are___

A. Acquisitions, joint ventures, and divestments.

B. Acquisitions, mergers, and buy outs.

C. Acquisitions, internal new ventures, and joint ventures.

D. Related acquisitions, unrelated acquisitions, and mergers

E. Joint ventures, strategic alliances, and long-term contracts.

 MINIGAME
6. What is the process of transferring resources to and creating a new
business unit in a new industry called?

A. External new venturing

B. Exportation of resources

C. Intrapreneuring

D. Risk avoidance

E. Internal new venturing

 MINIGAME
6. What is the process of transferring resources to and creating a new
business unit in a new industry called?

A. External new venturing

B. Exportation of resources

C. Intrapreneuring

D. Risk avoidance

E. Internal new venturing

Thanks!