Reference Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2016).

Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2016). Strategic Management: Concepts and Cases: Competitiveness and Globalization (12th Edition). Cengage Limited.
Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2016). Strategic Management: Concepts and Cases: Competitiveness and Globalization (12th Edition). Cengage Limited.
The primary reason a firm uses a corporate-level strategy to become more diversified is to create additional value. Using a single- or dominant-business corporate-level strategy may be preferable to seeking a more diversified strategy, unless a corporation can develop economies of scope or financial economies between businesses, or unless it can obtain market power through additional levels of diversification. Economies of scope and market power are the main sources of value creation when the firm uses a corporate-level strategy to achieve moderate to high levels of diversification.
The related diversification corporate-level strategy helps the firm create value by sharing activities or transferring competencies between different businesses in the company’s portfolio.
Sharing activities usually involves sharing tangible resources between businesses. Transferring core competencies involves transferring core competencies developed in one business to another business. It also may involve transferring competencies between the corporate headquarters office and a business unit.
Sharing activities is usually associated with the related constrained diversification corporate-level strategy. Activity sharing is costly to implement and coordinate, may create unequal benefits for the divisions involved in the sharing, and can lead to fewer managerial risk-taking behaviors.
Transferring core competencies is often associated with related linked (or mixed related and unrelated) diversification, although firms pursuing both sharing activities and transferring core competencies can also use the related linked strategy.
Efficiently allocating resources or restructuring a target firm’s assets and placing them under rigorous financial controls are two ways to accomplish successful unrelated diversification. Firms using the unrelated diversification strategy focus on creating financial economies to generate value.
Diversification is sometimes pursued for value-neutral reasons. Incentives from tax and antitrust government policies, low performance, or uncertainties about future cash flow are examples of value-neutral reasons that firms choose to become more diversified.
Managerial motives to diversify (including to increase compensation) can lead to over diversification and a subsequent reduction in a firm’s ability to create value. Evidence suggests, however, that many top-level executives seek to be good stewards of the firm’s assets and avoid diversifying the firm in ways that destroy value.
Managers need to consider their firm’s internal organization and its external environment when making decisions about the optimum level of diversification for their company. Of course, internal resources are important determinants of the direction that diversification should take. However, conditions in the firm’s external environment may facilitate additional levels of diversification, as might unexpected threats from competitors.
Mergers and acquisitions as a strategy are popular for companies based in countries throughout the world. Through this strategy, firms seek to create value and outperform rivals. Globalization and deregulation of multiple industries in many of the world’s economies are two of the reasons for this popularity among both large and small firms.
Firms use acquisition strategies to
increase market power
overcome entry barriers to new markets or regions
avoid the costs of developing new products and increase the speed of new market entries
reduce the risk of entering a new business
become more diversified
reshape their competitive scope by developing a different portfolio of businesses
enhance their learning as the foundation for developing new capabilities
Among the problems associated with using an acquisition strategy are
the difficulty of effectively integrating the firms involved
incorrectly evaluating the target firm’s value
creating debt loads that preclude adequate long-term investments (e.g., R&D)
overestimating the potential for synergy
creating a firm that is too diversified
creating an internal environment in which managers devote increasing amounts of their time and energy to analyzing and completing the acquisition
developing a combined firm that is too large, necessitating extensive use of bureaucratic, rather than strategic, controls
Effective acquisitions have the following characteristics:
the acquiring and target firms have complementary resources that are the foundation for developing new capabilities
the acquisition is friendly, thereby facilitating integration of the firms’ resources
the target firm is selected and purchased on the basis of completing a thorough due-diligence process
the acquiring and target firms have considerable slack in the form of cash or debt capacity
the newly formed firm maintains a low or moderate level of debt by selling off portions of the acquired firm or some of the acquiring firm’s poorly performing units
the acquiring and acquired firms have experience in terms of adapting to change
R&D and innovation are emphasized in the new firm
Restructuring is used to improve a firm’s performance by correcting for problems created by ineffective management. Restructuring by downsizing involves reducing the number of employees and hierarchical levels in the firm. Although it can lead to short-term cost reductions, the reductions may be realized at the expense of long-term success because of the loss of valuable human resources (and knowledge) and overall corporate reputation.
The goal of restructuring through downscoping is to reduce the firm’s level of diversification. Often, the firm divests unrelated businesses to achieve this goal. Eliminating unrelated businesses makes it easier for the firm and its top-level managers to refocus on the core businesses.
Through a leveraged buyout (an LBO), a firm is purchased so that it can become a private entity. LBOs usually are financed largely through debt, although limited partners (institutional investors) are becoming more prominent. General partners have a variety of strategies, and some emphasize equity versus debt when limited partners have a longer time horizon. Management buyouts (MBOs), employee buyouts (EBOs), and whole-firm LBOs are the three types of LBOs. Because they provide clear managerial incentives, MBOs have been the most successful of the three. Often, the intent of a buyout is to improve efficiency and performance to the point where the firm can be sold successfully within five to eight years.
Commonly, restructuring’s primary goal is gaining or reestablishing effective strategic control of the firm. Of the three restructuring strategies, downscoping is aligned most closely with establishing and using strategic controls and usually improves performance more on a comparative basis.

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