Michael_A._Hitt,_R._Duane_Ireland,_Robert_E._Hosk

Chapter 6: Corporate-Level Strategy 179

Operational relatedness and corporate relatedness are two ways diversification strat-
egies that can create value (see Figure 6.2). Studies of these independent relatedness
dimensions show the importance of resources and key competencies.^28 The figure’s ver-
tical dimension depicts opportunities to share operational activities between businesses
(operational relatedness) while the horizontal dimension suggests opportunities for
transferring corporate-level core competencies (corporate relatedness). The firm with a
strong capability in managing operational synergy, especially in sharing assets between its
businesses, falls in the upper left quadrant, which also represents vertical sharing of assets
through vertical integration. The lower right quadrant represents a highly developed
corporate capability for transferring one or more core competencies across businesses.
This capability is located primarily in the corporate headquarters office. Unrelated
diversification is also illustrated in Figure 6.2 in the lower left quadrant. Financial econ-
omies (discussed later), rather than either operational or corporate relatedness, are the
source of value creation for firms using the unrelated diversification strategy.

6-3 Value-Creating Diversification: Related

Constrained and Related Linked

Diversification

With the related diversification corporate-level strategy, the firm builds upon or extends its
resources and capabilities to build a competitive advantage by creating value for custom-
ers.^29 The company using the related diversification strategy wants to develop and exploit
economies of scope between its businesses.^30 In fact, even nonprofit organizations have
found that carefully planned and implemented related diversification can create value.^31

Table 6.1 Reasons for Diversification

Value-Creating Diversification

• Economies of scope (related diversification)
  
  
  • Sharing activities
  
  
  • Transferring core competencies
  
  
  
  


• Market power (related diversification)
  
  
  • Blocking competitors through multipoint competition
  
  
  • Vertical integration
  
  
  
  


• Financial economies (unrelated diversification)
  
  
  • Efficient internal capital allocation
  
  
  • Business restructuring
  
  
  
  

Value-Neutral Diversification

• Antitrust regulation


• Tax laws


• Low performance


• Uncertain future cash flows


• Risk reduction for firm


• Tangible resources


• Intangible resources

Value-Reducing Diversification

• Diversifying managerial employment risk


• Increasing managerial compensation