178 Part 2: Strategic Actions: Strategy Formulation
The diversified company with a portfolio of businesses that have only a few links
between them is called a mixed related and unrelated firm and is using the related linked
diversification strategy (see Figure 6.1). GE uses a related-linked corporate-level diversi-
fication strategy. Compared with related constrained firms, related linked firms share
fewer resources and assets between their businesses, concentrating instead on transfer-
ring knowledge and core competencies between the businesses. GE has four strategic
business units (see Chapter 11 for a definition of SBUs) it calls “divisions,” each composed
of related businesses. There are few relationships across the strategic business units, but
many among the subsidiaries or divisions within them. As with firms using each type of
diversification strategy, companies implementing the related linked strategy constantly
adjust the mix in their portfolio of businesses as well as make decisions about how to
manage these businesses.^23 Managing a diversified firm such as GE is highly challenging,
but GE appears to have been well managed over the years given its success.
A highly diversified firm that has no relationships between its businesses follows an
unrelated diversification strategy. United Technologies Corporation, Textron, Samsung,
and Hutchison Whampoa Limited (HWL) are examples of firms using this type of cor-
porate-level strategy. Commonly, firms using this strategy are called conglomerates. HWL
is a leading international corporation with five core businesses: ports and related services;
property and hotels; retail; energy, infrastructure, investments and others; and telecom-
munications. These businesses are not related to each other, and the firm makes no efforts
to share activities or to transfer core competencies between or among them. Each of these
five businesses is quite large as exemplified by the retailing arm of the retail and manu-
facturing business which has more than 9,300 stores in 33 countries. Groceries, cosmetics,
electronics, wine, and airline tickets are some of the product categories featured in these
stores. This firm’s size and diversity suggest the challenge of successfully managing the
unrelated diversification strategy. However, Hutchison’s past CEO and Board Chair, Li
Ka-shing, has been successful at not only making smart acquisitions, but also at divesting
businesses with good timing.^24 Another form of unrelated diversification strategy is pur-
sued by private equity firms such Carlyle Group, Blackstone, and KKR.^25 They often have
an unrelated set of portfolio firms.6-2 Reasons for Diversification
A firm uses a corporate-level diversification strategy for a variety of reasons (see Table 6.1).
Typically, a diversification strategy is used to increase the firm’s value by improving its
overall performance. Value is created either through related diversification or through
unrelated diversification when the strategy allows a company’s businesses to increase
revenues or reduce costs while implementing their business-level strategies.^26
Other reasons for using a diversification strategy may have nothing to do with increas-
ing the firm’s value; in fact, diversification can have neutral effects or even reduce a firm’s
value. Value-neutral reasons for diversification include a desire to match and thereby
neutralize a competitor’s market power (e.g., to neutralize another firm’s advantage by
acquiring a similar distribution outlet). Decisions to expand a firm’s portfolio of busi-
nesses to reduce managerial risk or increase top managers pay can have a negative effect
on the firm’s value. Greater amounts of diversification reduce managerial risk in that if
one of the businesses in a diversified firm fails, the top executive of that business does not
risk total failure by the corporation. As such, this reduces the top executives’ employment
risk. In addition, because diversification can increase a firm’s size and thus managerial
compensation, managers have motives to diversify a firm to a level that reduces its value.^27
Diversification rationales that may have a neutral or negative effect on the firm’s value are
discussed later in the chapter.