Corporate-Level Strategy
Chapter Seven
© 2006 by Nelson, a division of Thomson Canada Limited.
7-1
Corporate Strategy
concerns 2 key questions:
1. What businesses should the firm in?
2. How should the corporate office manage
the array of business units?
Corporate-level strategy specifies actions to be
taken by the firm to gain a competitive advantage
by selecting & managing a group of different
businesses competing in several industries &
product markets
© 2006 by Nelson, a division of Thomson Canada Limited.
7-2
Firms Vary by Degree of Diversification
Low Levels of Diversification
> 95% of revenues from a
Single-business
Dominant-business
single business unit
Between 70% & 95% of revenues
from a single business unit
A
A
Moderate to High Levels of Diversification
Related constrained < 70% of revenues from dominant
business; bus.s share product,
technological & distribution links
A
B
High Levels of Diversification
Unrelated-Diversified Business units not closely related
© 2006 by Nelson, a division of Thomson Canada Limited.
C
A
Related linked (mixed) < 70% of revenues from dominant
business, only limited links exist
B
B
C
A
B
C
7-3
Summary Model of the
Relationship between Firm
Performance & Diversification
Resources
Diversification
Strategy
Incentives
Managerial
Motives
© 2006 by Nelson, a division of Thomson Canada Limited.
7-4
Alternative Diversification Strategies
Related Diversification Strategies
1
2
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
3
Efficient Internal Capital Market Allocation
4
Restructuring
© 2006 by Nelson, a division of Thomson Canada Limited.
7-5
1
Sharing Activities
Key Characteristics
Sharing Activities can lower costs if it:
* Achieves economies of scale
* Boosts efficiency of utilization
* Helps move more rapidly down Learning Curve.
Example: Laboratory costs forcing drug companies to
merge in order to continue R&D efforts.
Sharing Activities can enhance differentiation if it:
* Involves activities crucial to competitive advantage.
Example: Shared order processing system may allow the firm
to discover new features customers value from a
group of products.
© 2006 by Nelson, a division of Thomson Canada Limited.
7-6
2
Transferring Core Competencies
Key Characteristics
*
*
Exploits Interrelationships among divisions
Start with Value Chain analysis
Identify ability to transfer skills or
expertise among similar value chains
Exploit ability to share activities
© 2006 by Nelson, a division of Thomson Canada Limited.
7-7
3
Efficient Internal Capital Market Allocation
Key Characteristics
Firms using this strategy
often diversify by acquisition:
•Acquire sound, attractive companies
•Acquired units are autonomous
•Acquiring corporation supplies needed capital
Portfolio managers transfer resources from units
that generate cash to those with high growth
potential and substantial cash needs.
•Add professional management/control to sub-units
•Sub-unit managers’ compensation based on unit
results.
© 2006 by Nelson, a division of Thomson Canada Limited.
7-8
4
Restructuring
Key Characteristics
•Seek out undeveloped, sick or threatened
organizations or industries
•Parent firm (acquirer) intervenes & frequently:
- Changes sub-unit management team
- Shifts strategy
- Infuses firm with new technology
- Enhances discipline by changing control systems
- Divests part of firm
- Makes additional acquisitions to achieve critical mass
Often sells unit after making one-time changes since
parent no longer adds value to ongoing operations.
© 2006 by Nelson, a division of Thomson Canada Limited.
7-9
Performance
Diversification & Firm Performance
Dominant
Business
Related
Constrained
Unrelated
Business
Level of Diversification
© 2006 by Nelson, a division of Thomson Canada Limited.
7-10