Chapter 6: Corporate-Level Strategy 187or encouraging strategic changes in one of the firm’s businesses.^71 Thus, capital can be
allocated according to more specific criteria than is possible with external market allo-
cations. Because it has less accurate information, the external capital market may fail to
allocate resources adequately to high-potential investments. The corporate headquarters
office of a diversified company can more effectively perform such tasks as disciplining
underperforming management teams through resource allocations.^72
In spite of the challenges associated with it, a number of corporations continue to
use the unrelated diversification strategy, especially in Europe and in emerging markets.
As an example, Siemens is a large diversified German conglomerate that engages in sub-
stantial diversification in order to balance its economic risk. In economic downturns,
diversification can help some companies improve future performance.^73
The Achilles’ heel for firms using the unrelated diversification strategy in a devel-
oped economy is that competitors can imitate financial economies more easily than they
can replicate the value gained from the economies of scope developed through opera-
tional relatedness and corporate relatedness. This issue is less of a problem in emerging
economies, in which the absence of a “soft infrastructure” (including effective financial
intermediaries, sound regulations, and contract laws) supports and encourages use of the
unrelated diversification strategy.^74 In fact, in emerging economies such as those in Korea,
India, and Chile, research has shown that diversification increases the performance of
firms affiliated with large diversified business groups.^75
6-4b Restructuring of Assets
Financial economies can also be created when firms learn how to create value by buy-
ing, restructuring, and then selling the restructured companies’ assets in the external
market.^76 As in the real estate business, buying assets at low prices, restructuring them,
and selling them at a price that exceeds their cost generates a positive return on the firm’s
invested capital. This is a strategy that has been taken up by private equity firms, who buy,
restructure and then sell, often within a four or five year period.^77
Unrelated diversified companies that pursue this strategy try to create financial econ-
omies by acquiring and restructuring other companies’ assets, but it involves significant
trade-offs. For example, United Technologies as illustrated in the Strategic Focus has
used this strategy. Likewise, Danaher Corp.’s success requires a focus on mature manu-
facturing businesses because of the uncertainty of demand for high-technology products.
It has acquired 400 businesses since 1984 and applied the Danaher Business System to
reduce costs and create a lean organization.^78 In high-technology businesses, resource
allocation decisions are highly complex, often creating information-processing overload
on the small corporate headquarters offices that are common in unrelated diversified
firms. High-technology and service businesses are often human-resource dependent;
these people can leave or demand higher pay and thus appropriate or deplete the value
of an acquired firm.^79
Buying and then restructuring service-based assets so they can be profitably sold
in the external market is also difficult. Thus, for both high-technology firms and
service-based companies, relatively few tangible assets can be restructured to create value
and sell profitably. It is difficult to restructure intangible assets such as human capital
and effective relationships that have evolved over time between buyers (customers) and
sellers (firm personnel). Ideally, executives will follow a strategy of buying businesses
when prices are lower, such as in the midst of a recession, and selling them at late stages
in an expansion.^80 Because of the increases in global economic activity, including more
cross-border acquisitions, there is also a growing number of foreign divestitures and
restructuring in internal markets (e.g., partial or full privatization of state-owned enter-
prises). Foreign divestitures are even more complex than domestic ones and must be
managed carefully.^81