CHAPTER6

KEYTERMS

•Corporat
e-l
evel
Str
ategy–speci
fi
esacti
onaf i
rmtakestogai
nacompet
it
iveadvant
agea
select
ingandmanagingagroupofdi
ff
erentbusi
nessescompeti
ngi
ndi
ff
erentpr
oductmarket
s.

•EconomiesofScope–ar ecostsav
ingsaf i
rm creat
esbysuccessf
ull
yshar
ingresour
cesand
capabil
i
tiesortr
ansfer
ri
ngoneormor ecorporate-
lev
elcor
ecompetenciest
hatweredevel
oped
i
noneofbusi nessestoanot
herofit
sbusiness.

•Corporat
e-levelCoreCompetenci
es–arecomplexset
sofresour
cesandcapabi
li
ti
est
hatlink
dif
ferentbusinesses,pr
imar
il
ythroughmanager
ial
andtechnol
ogi
calknowl
edge,
exper
ience,
andexper t
ise.

•Mar
ketPower–existwhenaf
irmi
sablet
osell
itsproductsabovetheexist
ingcompeti
ti
ve
l
evelort
oreducet
hecostsofi
tspr
imar
yandsupportacti
vi
tiesbel
owt hecompetit
ivel
evel
,or
bot
h.

•
Mult
ipoi
ntCompeti
ti
on–exist
swhent woormoredi
ver
sif
iedf
ir
mssi
mul
taneousl
ycompl
etei
n
t
hesameproductar
easorgeographi
calmar
ket
s.

•
Verti
calI
ntegr
ati
on–exi
stswhenacompanyproduceswhenit
sowninput
s(backwar
d
i
ntegr
ati
on)orownsi
tsownsourceofout
putdi
str
ibut
ion(
for
wardi
ntegr
ati
on)
.

•
Financi
alEconomi
es–arecost
ssav i
ngsreal
izedt
hroughi
mpr
oveal
l
ocat
ionsoff
inanci
al
r
esourcesbasedoninv
est
mentsinsi
deoroutsidet
hefir
m.

•
Synergy–exist
swhent
heval
uecreat
edbybusinessuni
tswor
kingt
oget
herexceedst
hev
alue
t
hatthosesameuni
tscr
eat
eworki
ngindependent
ly.

REVI
EW QUESTI
ONS

1.Cor
porat
e-l
evel
str
ategyspeci
fi
esacti
onsafir
mt aket
ogainacompet
iti
veadvant
ageby
sel
ect
ingandmanagingagroupofdi
ffer
entbusi
nessescompet
ingi
ndif
ferentpr
oductmar
ket
.

Thei
mpor
tanceofcor
por
atel
evel
str
ategyi
sasf
oll
ows:

•Theset
ypesofst
rat
egi
eswill
helpcompani
esdeci
dewhatst
rat
egi
cposi
ti
onst
ouse
dependi
ngoneachmarketi
sdoingduri
ngaspeci
fi
edt
imeperi
od.

•
Theypl
ayav
ital
rol
eindeci
dingt
hecompet
it
iveposi
ti
onoft
hef
ir
mint
hemar
ket
.

•
Theyhel
pinr
etai
ningt
hecust
omerbase.
•
Ifpr
oper
lyt
aken,
reducet
hel
evel
ofr
iskt
obef
acedbyt
hef
ir
m.

Theyar
ever
yhel
pful
int
heor
gani
zat
ionssust
ainabi
l
ity
.

2.Therear
et hr
eediff
erentlev
elsofdi
ver
sif
icat
iont
hatf
ir
msmaypur
suebyusi
ngdi
ff
erent
corpor
ate-
lev
elstr
ategies.

•Lowlev
eldiv
ersi
fi
cat
ion:
incl
udessingl
eanddominantl
evelbusi
nessstrat
egy.I
nsuch
busi
nessstr
ategi
escompaniesgenerat
ethei
rmaxi
mum revenuefrom t
heircor
ebusi
nessar
eas.
Fore.
g.Fri
toLay

•Moder atetohighlevel
diversi
fi
cat
ion:isthestr
ategywherecompaniesuserel
ated
diver
sificat
ionstr
ategyforthei
rbusiness.All
thebusinessesi
nthesecasesarel
inkedt
oeach
other.Fore.g.GE

•Ver
yhighleveldi
ver
sif
icat
ion:
iswher
ecompaniesuseunrel
ateddiv
ersi
fi
cati
onst
rat
egyf
or
thei
rbusi
nesspurposes.Companiest
hatgener
all
yusesuchstrat
egyareknownas
conglomer
ates.Fore.
g.Samsung

3.Toincreaseacompany'svalue:Thi
sisoneofthemajorreasonswhyacompanymaychoose
todiv
er si
fyi
tsoper
ati
ons.Di
v ersi
fyi
ngit
sbusi
nesswilll
eadtothecompanycr
eati
nganedge
overrestofit
scompeti
torswhichleadtosust
ainabi
l
ityoft
hebusiness.

Todecreaseacompany'
sv al
ue:Heret
hemainmot i
vebehi
nduseofsuchstrat
egyisnott
he
or
ganizati
onal
growt
h,i
nsteadincr
easedcompensati
onandreducedmanageri
alr
isk.

Toneutrali
zeanothercompany
'sstrengt
hs:Ver
yimpor
tantasneut r
ali
zi
ngcompeti
tor'
s
str
engthswillpr
ovetobeamaj orachiev
ementfort
hebusiness.Thiswil
lhi
ghl
ycontr
ibut
eto
theprofi
tabi
li
tyandgrowthoft
heor gani
zat
ion.

4.Acompanycancr eateval
uebyusi ngwhati scall
edar elateddiversifi
cati
onstrat
egy.Thi
swi
l
l
i
ncl udeoper ati
onalrel
atednessandal socor poraterel
atedness.Thr oughoper ati
onal
relatednesst hecompanyshar esit
sact ivit
ies.Throughcor poraterel
at ednessthecompany
transfersitscorecompet encies.Thisandt hatcreatesvaluef ori
tscust omers.Many
organi zat
ionsusebot htheabov ement ionedt y
pesofr el
at eddiversi
ficati
onstrat
egies
simul t
aneousl ytoachievehigherprofitabil
ity.

Bydoingthisi
twil
lbedev elopingitseconomyofscope, whichisawayofsharingresour
cesin
ordersavecost
s.Thestrategyal sohelpsincreati
ngav eryhighlev
elofmarketpowerforthe
organi
zati
on.Suchstr
ategiesi fproperl
yimplement edpr
ov etobev er
ycostef
fecti
veandv i
tal
n
thesuccessofanorganization'sbusinessacti
vit
ies.

5.Thefi
rstmethodistomakeef f
iciental
l
ocati
onsoftheinternalcapi
tal
,whichwill
help
miti
gat
er i
sk.Capi
talcanbeal
locatedinvari
ouswayslikethroughdebtandshar es,et
c.t
he
hol
dersofsuchdebtorshareswillputeff
ort
stoenhancethev al
ueofthei
rinvestmentsby
t
aki
ngi
nter
est
sinot
herbusi
nesseswi
thhi
ghgr
owt
handpr
ofi
tabi
l
itypr
ospect
s.

Thesecondmethodisrest
ruct
uri
ngthealr
eadyacquir
edassets.Therestr
uctur
ingent
ail
s
purchasi
nganot
hercompany,r
estr
uctur
ingitf
oreff
ici
encyandprofi
tabil
i
ty,andthenr
esell
i
ng
foraprofi
t.

6.Di
ver
sif
icat
ioni
ncent
ivescomebot
hint
hei
nter
nal
andext
ernal
busi
nessenv
ironment
.

Someext ernalincenti
vesarepossi bleanti
trustortaxlaws.Suchlawspr ov
ideincentiv
esto
vari
ousfi
rmst odiversi
fythei
rbusi nesses.Theselawscr eat
eincreasedmar ketpowers.These
i
ncludecongl omeratedi v
ersi
fi
cation.Thesei ncent
ivesenhancemer gersandacquisiti
ons.
Theseactivit
iesulti
mat el
yaretreatedasani ncent
ivebecausetheyexpandt hemar ketbasefor
theconcernedor ganizati
on.

•Lowerper
formancei
sanotherincent
ivef
ortheorgani
zat
ion.Theorgani
zat
ionsthatar
e
broadl
ydiv
ersi
fi
edhavearelat
ivel
ylowerper
formancelev
el t
hanit
scompetitor
s.

•Unpredict
ablecashflowisanotherki
ndofi ncent
ivet
hatshoul
dbediver
sif
iedbyan
organizati
on.Di
versif
icat
ioni
ntootherproductli
neswill
leadt
obet
tercashflowsoft
he
organizati
on.I
twillal
soreducethelevel
ofriskinvol
ved.

•Mit
igat
ionofri
skforthebusinessisanotherar
eat hatcouldbedi
versi
fi
ed.Whent wo
busi
nessestendtowor kt
ogetheritisver
yimportantforthem t
ogeneratesy
nergy.Syner
gy
occurswhenbothfir
msar eabletoaddupt othev alueofthebusi
nessasexpected.Such
si
tuati
onreducest
her i
skinvolvedi
nt hei
ndivi
dualbusinesses.

7.Increasedcompensati
on:Thr
oughoverdi versi
fi
cati
onthecompanymaygener atemoreand
mor erevenuewhichwil
lenabl
ethem t
oi ncreasethecompensat i
onlevelofthei
remployees
result
inginbett
eremployeesat
isf
act
ionandi ncr
easedlevel
ofmot iv
ation.Al
lsuchfact
orswill
enhancet heperf
ormanceoftheover
allorganizati
onandincreasethecompet i
ti
venessofthe
fi
rm.

Reducti
onofmanager i
alr
isks:Ifthef
ir
m getsoverdiv
ersi
fi
ed,i
tevent
uall
yreducesthe
managerial
risksinvol
ved.Thishappensbecausether i
skget
sdivi
dedamongal lthebusinesses
thatf
orm agr oupfordi
versi
ficati
on.I
thasanotheraddedbenef
itt
hatwithoverdiver
sif
icati
on
theygettoexploremoreandmor emar ket
s.Thi
sleadstomoreandmor eideasfr
obusinesses
comingin.
CASEDI
SCUSSI
ONQUESTI
ONS

1.ThestrategyIvi
ewSanyt obepur si
ngi smoder ateleveldiv
ersifi
cat
ionandspeci f
ical
lyr
elat
ed
constr
ainedbusinessdiversi
fi
cati
onst rategy.Sanyhas“ f
ourcor ebusi
ness:cranes,r
oad
constr
uctionmachinery,portmachinery,andpumpov ermachi nery(Hi
tt,
Ir
eland&Hoski sson,
2017).Al
lofthesebusinessesarerelatedt oonet ypeofindustryconst
ructi
onheav yequipment
whichcouldmeant hatSanyi sasinglebusi nesslowlevelofdiversi
fi
cati
on.Howev er,what
mov esSanyawayf rom thatstr
ategyiseachof thebusinessesar euni
queandcanst andalone
i
ndependentoft heothers.

Sanyisabl etoengagei nmanyoft hebenef

itsofdiv
ersif
icat
ionandcreatevaluebyusing
economi esofscale.Technologyadvancementsincranesmayal sobev er
yappli
cabletoroad
constructi
onmachi nery.I
nadditi
on,market
ingcampaignscanbesharedt ohelpallofthe
businesses.Themi ni-
casetalksabouthowSanyt ar
getsNASCARaudi encestosellall
ofthei
r
products.

2.ThreeofSany ’sbusi
nessesar einvol
vedinconst ructi
on:cranes, r
oadconstr
uctionmachinery
andpumpov ermachinery,usedmai nl
yforconcr ete.Grossdomest icproduct(GDP)i stheval
ue
ofthegoodsandser vi
cest hatacount r
yprovides.IftheGDPi sfall
ing,i
tmeanst hatthecountr
y
i
spr oduci
nglessgoodsandser vi
ces.Thishasar ippleeffectthatthecountrywoul dhavel
ess
moneyt oinvestinnewi t
emsornewconst r
uction.Acount r
ythatisbecomingconst rai
nedfor
cashwi l
ll
ikelynotstar
tnewl argeconstruct
ionpr ojects.Thisi
swhySany ’
srevenuewas
decreasi
ngi nstepwithChina’ sGDP.

3.Sany“ i
sthefif
thlargestproduceroft histypeofequipmentgl oball
y ”(
Hitt
,I
reland&Hoski sson,
2017).Sanyistryi
ngtoov ertakeCat erpi
ll
arast hemarketleader.Caterpi
ll
arisawel l-
establ
i
shed
i
nternati
onalfi
rm.Oneoft heway sthatSanycanwor kongr owingitsmar ketshar eisbymaki ng
productst
hataremor eef f
ici
ent,achievebet t
erquali
ty,havingnewt echnologyinnov ati
onsor
creat
ingnewpr oducts.All
oft hoseitemsi nvolv
eSanyl earningandcr eat
ingsomet hingthat
doesn’texi
sttodayandt hatrequiresresearchanddev elopment( R&D)withinnov ation.

4.Sanyisnotawel l
-knowncompanygl oball
y,cer
tai
nlynotcomparedtoCat
erpi
ll
ar.I
nordert
o
convincepeoplei
not hercountr
iest
ousey ourproductsatl
eastoneoftwoi
temsmustbewel l-
known: yourpr
oductisclearl
ysuper
ior
toitscompet i
torsand/
oryourcompany’
sreputat
ioni
s
well
-known.
CHAPTER7

KEYTERMS

•Acquisit
ion–isastr
ategythroughwhi
chonefi
rm buysacontr
olli
ngor100percenti
nter
esti
n
anotherfirm wi
tht
heintentofmakingt
heacqui
redfi
rm asubsi
diar
ybusinesswit
hini
ts
portf
olio.

•Merger–isastr
ategyi
nwhi
cht
wof
ir
msagr
eet
oint
egr
atet
hei
roper
ati
onsi
nrel
ati
vel
y
coequalbasi
s.

•Rest
ricti
ng–i
sast
rat
egyt
hroughwhi
chaf
ir
m changesi
tssetofbusi
nessori
tsf
inanci
al
str
ucture.

•
Takeover–i
saspecialt
ypeofacqui
sit
ionofat
argetf
ir
m doesnotsol
i
citf
ir
m’sbi
d;t
hus,
t
akeover
sunf
riendl
yacqui
sit
ions.

REVI
EW QUESTI
ONS

1.Thereasonswhymerger
sandacqui
sit
ionsar
epopul
ari
nthef
ir
mscompet
ingi
ngl
obal
marketareasfol
l
ows:

-
Iti
ncr
easesmar
ketpower
.

-
Itov
ercomesent
rybar
ri
ers.

-
Costofnewpr
oductdev
elopmentandi
tsl
aunchget
sreduced.

-
Riski
ncompar
isont
onewpr
oductr
educes.

-
Higherl
evel
ofdi
ver
sif
icat
ion.

-
Itgi
vesanewshapet
oaf
ir
m'scompet
it
ivescope.

-
Hel
pst
hef
ir
mtodev
elopnewcapabi
l
iti
es.

2.I
ncr
easedmarketpower.Onceapar
ti
cul
aracqui
sit
ionofthi
stypei
smade,acompanywoul
d
hav
eincr
easedmarketshareaswel
lashopef
ull
yprofi
tabi
l
itybycombi
ngr
esources.

Anotherreasonacompanymayacqui reanot
herist
oov er
comeanymarketentr
ybarri
erst
hati
t
mayhav eprevi
ouslyhadprobl
emsov ercomi
ng.Thr
oughanacqui
sit
ion,
issuessuchas
cust
omerl oyal
tyandeconomiesofscalecanbeovercome.

I
tresul
tsi
ntot
hef
ir
m ear
ningabov
eav
erager
etur
nsf
rom t
heacqui
sit
ion.Thi
smaynotal
way
s
bepossi
blef
oraf
ir
m buti
ncaseofacqui
sit
iont
hef
ir
m def
ini
tel
year
nsanabov
eav
erager
etur
n.

Anot
heri
mportantr
easonbehindanacqui
sit
iondeci
sionbyaf
ir
mist
hatact
ivi
tycr
eat
esmor
e
andmoreval
ueforthei
rst
akeholder
s.

Thr
oughacquisit
ionafi
rm canent
ert
hemar
ketofv
ari
etyofpr
oduct
swhi
chot
her
wisewoul
d
bedi
ff
icul
tforthefir
mtodo.

3.Thesevenpr
imar
ypr
obl
emst
hataf
fectaf
ir
m'sef
for
tst
osuccessf
ull
yuseanacqui
sit
ion
str
ategy
;

1.Diffi
cult
yinrel
ati
ontointegr
ati
on:i
tisdi
ff
icul
tforthetwoparti
cipat
ingcompani
espost
acqui
siti
ontodealwithint
egrat
ingint
oeachother.Ther
ear edi
ff
erentareaswhenaproper
i
ntegrati
onisrequi
redfort
hesuccessofacquisi
ti
ondecisionwhichaddsupt ot
hedif
ficul
ty
l
evel.

2.I
mpropertargetev
aluat
ion:I
mproperori
nadequat
eeval
uati
onoftar
getwi
lll
eadtowrong
acqui
sit
iondecisi
onbyaf i
rm.Thi
smayhamperi t
smarketval
ueandmakeitdi
ffi
cul
tfort
he
fi
rmtosurvi
veorsustain.

3.Excessi
veDebt:Tof
undt
heacqui
sit
ionproj
ectt
heconcer
nedfir
m mayl
andupi
tsel
fint
oa
hi
ghdebtsituat
ionwhi
chmaynotal
way sr
esul
tint
oprof
it
abi
li
ty.

4.I
nabi
li
tytoworkt
ogetheref
fi
cient
ly:
Theworkscenar
iomaynotal
waysbepleasi
ngi
ncaseof
anacqui
sit
ionbyafi
rm.Itmaybediffi
cul
ttoachi
evesy
nergybet
weenbot
hthefir
ms.

5.Overdi
ver
sif
icat
ion:mayal
sobeamajorpr
oblem i
ncaseofacqui
sit
ionsbyfi
rms.Thismay
l
eadthecompanyt ogetdi
str
act
edf
rom i
tsmajorbusi
nessar
easanddecreaseit
smar ket
posi
ti
on.

6.ManagementbecomesHyperfocusedonacquisit
ions:
Inthecaseofacqui
sit
ionsthefi
rm
maygetover
lyfocusedonj
ustthi
sparticul
aract
ivi
tyasaresul
tdecreasi
ngit
sov eral
lbusi
ness
andcompeti
ti
vepositi
oni
nthemar ket
.

7.Endresul
tsi
stol
arge/
expensi
vetomanage:
resul
tantf
ir
m wi
l
lmakei
tver
ydi
ff
icul
tfort
he
managementtomanageandsucceed.

4.-
Bot
hcompani
eswi
l
lhav
ecompl
ement
aryr
esour
ceswhi
chwi
l
lmeant
hati
tismor
eli
kel
yto
gai
nsyner
gy.

-
Theacqui
sit
ionhasaposi
ti
vet
onet
hroughoutandt
hei
ntegr
ati
onmov
esf
ast
er.

-Theacqui
ri
ngfir
m eval
uatesanappropr
iatecompanyt
oacqui
reonal
ll
evel
sandt
hemost
complementar
yandleastexpensi
veacquisi
ti
onismade.

-
Theacqui
ri
ngcompanyhasaposi
ti
vebal
ancesheetal
l
owi
ngf
inanci
ngt
obeaneasi
erpr
ocess.
-Bot
hmer gedcompani
esshoul
dhav
elowormoder
atedebtpr
ofi
l
esmaki
ngf
inanci
alsuccessa
bett
erpossibi
l
ity
.

-Theacqui
ri
ngcompanyshouldhav
eaconst
antR&Dpr
ocesswi
thi
nnov
ati
oncy
clet
hatwi
l
l
ensurecompet
it
iveadv
antages.

-Acqui
ri
ngcompanyshoul
ddealwel
lwi
thchangemanagementandbyhi
ghl
yfl
exi
ble;
thi
swi
l
l
all
owintegr
ati
ont
omov efast
er.

5.Therest
ruct
uri
ngstr
ategyi
sast r
ategyt
hati
sappl
i
edwhenacompanywant
stochangei
ts
busi
nesssetorfi
nanci
alorar
rangement.

-Downsi
zi
ng:avolunt
arymet hodofr educi
ngthenumberofemployeesoroper
ati
nguni
tsbythe
managementofanor ganization.Butthechangei
nthebusinesscomposi
ti
onofthefi
rm wi
l
l
dependuponthesit
uation,itmayormaynotchange.

-
Downscoping:
incl
udesdi
ffer
entmethodsusedt
oelimi
nateorabol
ishunr
elat
edbusi
nessest
o
f
ir
m'sbasi
corcorebusi
nesses.I
tisaposi
ti
veact
ivi
tywhencomparedtodownsizi
ng.

-
Lev
eragedbuyout
s:isapopul
arrest
ruct
uri
ngstr
ategy
.Inthi
sst
rat
egyaf
ir
m wi
l
lpur
chaseal
l
t
heassetsofanot
hercompanyleadi
ngthel
att
erbecomingapri
vat
efi
rm.

6.Downsi
zi
ng:

-
shor
tter
m wi
l
lyi
eldar
educt
ioni
nlaborcost
.

-
longt
erm out
comei
slossofpeopl
eandper
for
mance.

Downscopi
ng:

-
shor
tter
m wi
l
lyi
eldar
educt
ioni
ndebtaswel
lashav
inganemphasi
sinst
rat
egi
ccont
rol
s.

-
longt
erm ef
fecti
shi
gherper
for
mance.

Lev
eragedbuy
outst
rat
egy
:

-shor
tter
m out
comeal
sohasast
rongemphasi
sinst
rat
egi
ccont
rol
buti
twi
l
lal
sohav
ehi
gh
costofdebt
.

-
longt
erm out
comef
ort
hel
ever
agedbuy
outwi
l
lbeahi
gherl
evel
ofr
isk.
CASEDI
SCUSSI
ONQUESTI
ONS

1.Inmostacqui sit
ions,t
hebuyertendstogetmi r
edint heendlessl
aboreddetai
lsofintegr
ati
ng
thenewcompanyi ntotheexi
stingcult
ure,result
inginslowedgr owthanddownsizedwor k
for
ces.Ther easonswhymer gersandacqui sit
ionsarepopul arint
hefir
mscompet inginglobal
mar ketareasfoll
ows: -
Iti
ncr
easesmar ketpower ...
.Increasedmarketpower.Onceapar ti
cul
ar
acquisit
ionofthistypeismade,acompanywoul dhav ei ncr
easedmarketshareaswel l
as
hopef ul
l
yprofi
tabil
itybycombingresources.

2.NDSgr oupandCiscowerehor i
zontalacquisi
ti
ons,meaningtheyarecompani es
that
compet edi
nthesamei ndustr
y.Inthiscase,hor
izont
alacquisi
ti
oni st
hatthefirmshavevery
simi
larcharact
eri
sti
cswhichresult
sinhigherperfor
mance.Verticalacqui
sit
ionsacqui
rea
suppli
erordist
ri
butorofoneormor eofitsgoodsorser v
icessointhiscaseitwouldbeMer aki
.

3.WhenJohnChamber sr anCiscoSystems,acqui
sit
ionswereoneofhisfav
orit
ewaystogrow
thecompany ...
.Acqui
sit
ionsarea“ por
tfol
i
opl ayl
i
kev ent
urecapi
tal
,
”hesaid.Tobesuccessf
ul,
hesaid,acquisi
ti
vecompani eshavetoknowhowt ot aker
iskandacceptout
sider
sint
othei
r
ranks.

4.Ciscohasdev elopedthedi
sti
nctabi
li
tytointegrateacquisiti
ons.Withfi
nancial
duedil
igence,
ensuri
ngt hattheyar epayi
ngtheri
ghtpri
ce,theydev elopadet ail
edplanforpossi
blepost-
mergerintegration.Theybegi
ncommuni cati
ngear ly,al
lowingthem toplanahead.Theywantt o
hi
tthegr oundr unningwhenthedealcl
oses.Ifintegrati
onisdonepoor ly,
theycanlosemoney .
Somet i
mesi ntegrationcanbetoodeep,andv al
uei sdestr
oy ed.