Corporate-Level Strategy
Chapter Seven
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Strategic
Inputs
Chapter 4
Internal
Environment
Strat. Intent
The Strategic
Strat. Mission
Strategy Formulation
Chapter 5
Bus. - Level
Strategy
Chapter 6
Chapter 7
Competitive Corp. - Level
Dynamics
Strategy
Chapter 9
Chapter 8
Acquisitions & International
Strategy
Restructuring
Strategic
Outcomes
Strategic Actions
Chapter 3
External
Environment
Chapter 2
Above Average
Returns
Chapter 10
Cooperative
Strategies
Chapter 1
Strategic
Competitiveness
.
Management
Process
.
Strategy Implementation
Chapter 11
Chapter 12
Corporate
Structure
Governance
& Control
Chapter 13 Chapter 14
Strategic Entrepreneurship
Leadership & Innovation
Feedback
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Corporate–Level Strategy
Knowledge Objectives:
1.
Define corporate-level strategy and discuss its
importance to the diversified firm.
2.
Describe the advantages and disadvantages of
single-business strategies and dominant-business
strategies.
3.
Explain three primary reasons why firms move from
single-business strategies and dominant-business
strategies to more diversified strategies.
4.
Describe how related-diversified firms create value
by sharing or transferring core competencies.
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Corporate – Level Strategy
Knowledge Objectives – continued…
5. Explain the two ways value can be treated with an
unrelated-diversification strategy.
6. Discuss the incentives and resources that encourage
diversification.
7. Describe motives that can encourage managers to
overdiversify a firm.
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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
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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
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C
A
Related linked (mixed) < 70% of revenues from dominant
business, only limited links exist
B
B
C
A
B
C
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Reasons for Diversification
Motives to Enhance
Strategic Competitiveness
Resources
Incentives
•Economies of Scope
•Market Power
•Financial Economies
Managerial
Motives
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*
Reasons for Diversification
Resources
Incentives
Managerial
Motives
Incentives & Resources
with Neutral Effects of
Strategic Competitiveness
•Anti-Competition Regulation
•Tax Laws
•Low Performance
•Firm Risk Reduction
•Uncertain Future Cash
Flows
•Tangible Resources
•Intangible Resources
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7-8
Reasons for Diversification
Resources
Incentives
Managerial
Motives
•Managerial Motives
Causing Value Reduction
•Diversifying Managerial
Employment Risk
•Increasing Managerial
Compensation
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*
Summary Model of the
Relationship between Firm
Performance & Diversification
Resources
Diversification
Strategy
Incentives
Managerial
Motives
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Value-creating Strategies of Diversification
Operational and Corporate Relatedness
•Related Constrained
Diversification
•Vertical Integration
•Both Operational and
Corporate Relatedness
(Market Power)
(Rare & can create
diseconomies of scope)
•Unrelated
Diversification
•Related Linked
Diversification
(Financial Economies)
(Economies of Scope)
Low
High
Sharing:
Operational
Relatedness
Between
Business
Low
High
Corporate Relatedness: Transferring Skills Into
Business Through Corporate Headquarters
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Alternative Diversification Strategies
Related Diversification Strategies
1
2
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
3
Efficient Internal Capital Market Allocation
4
Restructuring
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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.
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1
Sharing Activities
Assumptions
* Strong sense of corporate identity
* Clear corporate mission that
emphasizes the importance of
integrating business units
* Incentive system that rewards
more than just business unit
performance
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*
Alternative Diversification Strategies
Related Diversification Strategies
1
2
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
3
Efficient Internal Capital Market Allocation
4
Restructuring
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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
Two firms can share the same sales force,
logistics network or distribution channels.
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2
Transferring Core Competencies
Assumptions
Transferring Core Competencies leads to competitive
advantage only if the similarities among business units
meet the following conditions:
* Activities involved in the businesses are similar
enough that sharing expertise is meaningful.
* Transfer of skills involves activities which are
*
important to competitive advantage.
The skills transferred represent significant
sources of competitive advantage for the
receiving unit.
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Related Diversification Strategies
Alternative Diversification Strategies
1
2
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
3
Efficient Internal Capital Market Allocation
4
Restructuring
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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.
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3
EfficientInternal
InternalCapital
CapitalMarket
MarketAllocation
Allocation
Efficient
Assumptions
Managers have more detailed knowledge of firm
relative to outside investors.
Firm need not risk competitive edge by disclosing
sensitive competitive information to investors.
Firm can reduce risk by allocating resources
among diversified businesses, although
shareholders can generally diversify more
economically on their own.
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Alternative Diversification Strategies
Related Diversification Strategies
1
2
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
3
Efficient Internal Capital Market Allocation
4
Restructuring
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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.
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4
Restructuring
Assumptions
Requires keen management insight in
selecting firms with depressed values or
unforeseen potential.
Must do more than restructure
companies.
Need to initiate restructuring of
industries to create a more
attractive environment.
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*
Performance
Diversification & Firm Performance
Dominant
Business
Related
Constrained
Unrelated
Business
Level of Diversification
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Incentives to Diversify
External Incentives
•Relaxation of Anti-Competition regulation allows
more related acquisitions than in the past.
Internal Incentives
•Poor performance may lead some firms to diversify to
attempt to achieve better returns in new industries.
•Firms may diversify to balance uncertain future cash
flows.
•Firms may diversify into different businesses in order to
reduce risk.
•Managers often have incentives to diversify to raise
their compensation & reduce employment risk.
(Effective governance mechanisms may restrict such abuses)
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Summary Model of the Relationship
between Firm Performance &
Diversification
Resources
Capital Market
Intervention and
Market for
Managerial Talent
Incentives
Diversification
Strategy
Managerial
Motives
Internal
Governance
Firm
Performance
Strategy
Implementation
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