Chapter 6
Corporate-Level Strategy
Diane M. Sullivan, Ph.D. 2011
Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage
Sections modified from Gentner (2009)
The Strategic Management Process

Previously, we have
examined firms
competing in a single
industry or product
market. After
solidifying a position
in a single industry or
product market, firms
will often want to
diversify into multiple
businesses.
Insert figure 1.1 graphic
Corporate-level Strategy: Definitions

Business-level strategy (Chapter 4)


Deals with how the business should compete (e.g., cost leadership,
differentiation, focus, integrated strategies)
Corporate-level strategy (Chapter 6)

Definition: Specific actions a firm takes to gain an advantage
by selecting and managing a group of different businesses

Primary form of corporate-level strategy is product diversification
 Diversification involves using expertise and knowledge gained in one business to
diversify into a business where it can be used in a related way

2 main concerns with corporate-level strategy:
1) What businesses the firm should be in
2) How the firm should manage the different business units
Corporate-level Strategy: Examples

Ex. 1: Proctor & Gamble’s Diversification Strategy

Pre-2005: Product mix focused on women and baby care

2005: Acquired Gillette, which focused on consumer health care
products geared toward men

Synergy created by combining Gillette’s toothbrush (Oral-B) and P&G’s
toothpaste (Crest) businesses to create Pro-Health oral care product line

Good for retailers (shelf space)

Strategy had potential but was more difficult to create operational
relatedness between the products
 Comingle employees requiring actual physical re-location/talent exit
 Different ways to make business decisions
 Conflicting organizational cultures


In 2007, Pro-Health overtook Colgate in market share
Ex. 2: Disney
3 Levels of Diversification
1.
2.
3.
Low level of diversification

Single-business strategy

Dominant-business strategy
Moderate-to-high levels of diversification

Related constrained diversification strategy

Related linked diversification strategy
Very high levels of diversification

Unrelated diversification
Performance
Diversification and Firm Performance
Dominant
Business
Related
Constrained
Level of Diversification
Unrelated
Business
Low-level Diversification

Single-business strategy

Firm generates 95% or more of its sales revenue from its core
business area

Example (pre-2008): Wm. Wrigley Jr. Company—the world’s
largest producer of chewing and bubble gums


A
Post-2008  Acquired by Mars Inc.
Dominant-business strategy
A
B

Firm generates 70-95% of total sales revenue within a single
business area

Example: UPS generated 74% of revenue from U.S. package
delivery business; 17% from international package business; 9%
from non-package business
Moderate-to-High Diversification

A
Related constrained diversification strategy
B

< 70% of revenue comes from the dominant business

There are direct links between the firm's businesses (e.g., share
products, technology; marketing; and distribution linkages)

Example: Campbell’s
C
Moderate-to-High Diversification

Related linked diversification strategy

< 70% of revenue comes from the dominant business

Mix between related and unrelated diversification
A
B
D
C

Linked firms share fewer resources and assets among their businesses

Interested in constantly adjusting the mix in their portfolio of
businesses and how to manage the businesses

Example: Rachel Ray
Moderate-to-High Diversification

Related linked diversification strategy example 2
A
B
Mars, Inc.
2%
42%
49%
7%
Petcare
Food
Snack Food
Drinks
D
C
Very High Diversification

A
Unrelated diversification strategy

Less than 70% of revenue comes from dominant
business

No relationships between businesses

Often called conglomerates

Example: Jarden Corporation
B
C
Performance
Diversification and Firm Performance
Dominant
Business
Related
Constrained
Level of Diversification
Unrelated
Business
3 Reasons Firms Diversify
1.
Value-creating reasons


Economies of scope
Market power


2.
Vertical Integration
Financial economies
Value-neutral reasons







Antitrust regulation
Tax laws
Low performance
Uncertain future cash flows
Risk reduction for firm
Tangible resources
Intangible resources
3.
Value-reducing reasons


Diversifying managerial
employment risk
Increasing managerial
compensation
Value-Creating Reasons to Diversify

Based a desire to develop resources that will enhance
strategic competitiveness
Ok, but how?

Two main ways diversification strategies can create value
1.
Operational relatedness: sharing activities between businesses

2.
Ex: P&G’s paper towel business and baby diaper business both use
paper products as inputs; the firm’s paper production plant produces
inputs for both businesses
Corporate relatedness: transferring core competencies into business

Ex: Honda’s competence in engine design and manufacturing to
motorcycles, lawnmowers, cars and trucks

Often achieved via transferring or hiring personnel with competencies
Operational & Corporate Relatedness Value

The value these create are referred to as

Economies of Scope (for related constrained and related-linked
strategies)



Cost savings created by sharing its resources/capabilities or transferring core
competencies of one businesses to another of its businesses
Market Power (for related constrained and related-linked strategies)

Exists when a firm sells its products above competitive levels and/or reduces
the cost of its Value Chain activities below competitive levels

Influenced by a firm’s level of vertical integration
Financial Economies (for unrelated diversification)

Cost savings realized via improved allocations of financial resources based
on investments inside or outside the firm—2 main types
1. Efficient internal capital allocations can reduce risk of the firm’s portfolio
2. Restructuring of acquired assets
Value-creating Strategies of Diversification
Operational and Corporate Relatedness
High
Sharing
Activities:
Operational
Relatedness
Between
Business
Low
Related Constrained
Diversification
(Economies of Scope &
Market Power)
Both Operational and
Corporate Relatedness
(Rare Capability;
Can sometimes Create
Diseconomies of Scope)
Unrelated
Diversification
(Financial Economies)
Related Linked
Diversification
(Economies of Scope &
Market Power)
Low
High
Corporate Relatedness: Transferring Skills Into
Business Through Corporate Headquarters
Value-Neutral Reasons to Diversify

External value-neutral reasons


Antitrust Regulation and Tax Laws

Deregulation

Changing tax laws
Internal value-neutral reasons

Low Performance

Uncertain Future Cash Flows

Firm Risk Reduction

Resources and Diversification

Excess tangible resources like plant and equipment, sales force, etc.
Value-Reducing Reasons to Diversify

Managerial Motives

Diversifying managerial employment risk


If one business fails, the whole firm will stay intact
Increasing managerial compensation

Larger firms are more complex

Generally mean larger compensation packages