MANAGEMENT
1st E D I T I O N
Gulati | Mayo | Nohria
Chapter 6
CORPORATE-LEVEL
STRATEGY
STRATEGIC
PERSPECTIVE
©South-Western, a part of Cengage Learning
PowerPoint Presentation by Charlie Cook
Learning Objectives
• Understand that corporate-level strategies include
decisions regarding diversification, international
expansion, and vertical integration
• Describe the difference between related and unrelated
diversification and outline the advantages and
disadvantages of each approach
• Explain the reasons why firms decide to diversify through
international expansion
• Describe the process of vertical integration and the
reasons why a firm would choose to pursue this path
© South-Western, a part of Cengage Learning
6–2
Developing a Corporate-Level Strategy
Corporatelevel strategy
The way a company seeks to create value through the
configuration and coordination of multimarket
activities
Corporate
advantage
Occurs when a firm maximizes its resources to build a
competitive advantage across its business units
© South-Western, a part of Cengage Learning
6–3
Corporate-Level Strategy Decisions
Motivation to pursue
diversification strategies
“Big Bets”
Diversification into international
markets
Whether the firm should vertically
integrate
© South-Western, a part of Cengage Learning
6–4
History of Diversification
Single-Core Business Focus
Related (Horizontal) Diversification
Acquisition of competitors
Vertical Diversification
Acquisition of suppliers
1900s
Reversal of Diversification
Corporate raiders
Institutional investor activism
1950
CellerKefauver
Act of 1950
© South-Western, a part of Cengage Learning
Unrelated Diversification
Opportunistic expansion
1960-1970 1980s
2000s
Reagan Era
Deregulation
6–5
Diversification Strategy
A strategy in which a firm engages in several different businesses that may
or may not be related in an attempt to create more value than if the
businesses existed as stand-alone entities
Single-product
strategy
A firm focuses on one specific product, typically in one market
Horizontal
(related)
diversification
A firm pursues businesses that share a similar set of tangible
and intangible resources
© South-Western, a part of Cengage Learning
6–6
Diversification Strategy
Unrelated
diversification
A firm that manages several businesses with no connection
Economies of
scope
Exists when the costs of operating two or more businesses or
producing two or more products with the same corporate
structure is less than the costs of operating the businesses
independently or producing each product separately
© South-Western, a part of Cengage Learning
6–7
General Reasons for
Diversification Strategies
The opportunity to leverage core assets
or skills between different businesses
The opportunity
for growth
Why
diversify?
The potential for
personal gain
The potential to manage
or minimize risk
© South-Western, a part of Cengage Learning
6–8
General Reasons for
Diversification Strategies
Synergy: Created when a firm generates
sustainable cost savings by combining
duplicate activities or deploying underutilized
assets across multiple businesses
© South-Western, a part of Cengage Learning
6–9
Related Diversification
Creating value through sharing and
transferring of resources and skills
Sharing sales forces, advertising expenses,
distribution channels for similar products
Exploiting closely related technologies or
research and development activities
Transferring operational knowledge or
processes
Leveraging a firm’s strong brand name and
reputation across multiple product lines
© South-Western, a part of Cengage Learning
6–10
Reasons for Pursuing
Related Diversification
The activities involved in the
business are similar enough that
sharing expertise is meaningful
Transferring
skills leads to
competitive
advantage
when:
The transfer of skills involves
activities important to competitive
advantage
The skills transferred represent a
significant source of competitive
advantage for the receiving unit
© South-Western, a part of Cengage Learning
6–11
Reasons for Pursuing
Related Diversification
Sharing of resources allows the
firm to spread fixed costs across
its business units
Sharing of
resources leads
to competitive
advantage
when:
Sharing of internal functions among
units creates economies of scope
Sharing of intangible resources
results in the transfer of internal
value for business units
© South-Western, a part of Cengage Learning
6–12
Unrelated Diversification
A firm that manages several businesses with no reasonable connection
Financial economies
Cost savings that a firm
achieves through the
distribution of capital
among business units
© South-Western, a part of Cengage Learning
By efficiently allocating capital
among units
By purchasing a business and
restructuring its assets with the
goal of selling it back into the
marketplace at a higher price
6–13
Reasons for Pursuing
Unrelated Diversification
• To reduce the overall risk of the business through
the efficient distribution of capital between
business units
• To allow for the use of capital from a profitable
division to sustain a failing firm for a period of
time
• To acquire undervalued assets and attempt to
raise their value through specific restructuring
activities
© South-Western, a part of Cengage Learning
6–14
International Diversification
• International strategy
– A strategy a firm uses to conduct operations outside
its home market by selling products and services or
conducting activities through the use of international
resources to create a value chain
• Motives for international diversification
– Finding new markets
– Achieving economies of scale
– Taking advantage of certain local factors
© South-Western, a part of Cengage Learning
6–15
International Scope Test
• The test a manager can use to determine the
viability of international diversification
– Similar to the tests used to determine the viability of
diversification
• Components
– Better-off test
– Ownership test
• Factor cost differences: Cost savings achieved
by access to raw materials or other factors such
as low cost labor
© South-Western, a part of Cengage Learning
6–16
Vertical Integration
Occurs when one corporation owns business units that make inputs for
other business units in the same corporation
Forward
integration
Occurs when a firm owns or controls the customers or
distribution channels for its main products
Backward
integration
Occurs when a firm owns or controls the inputs it uses
© South-Western, a part of Cengage Learning
6–17
Costs Associated with Vertical Integration
Administrative
costs
Transaction
costs
© South-Western, a part of Cengage Learning
The costs of coordinating activities between business
units
Costs to obtain products or services from a contractor or
supplier as well as the costs associated with writing and
administering the contracts for these products and
services
6–18
Alternatives to Vertical Integration
Spot contracts
Outsourcing
© South-Western, a part of Cengage Learning
Allow a buyer to purchase a commodity
at a specific price
Contracting with a firm outside the corporation to perform
certain tasks or functions that the corporation used to do
on its own
6–19
Outsourcing
• Advantages
– Reduces the costs of the firm’s noncore value chain
activities
– Allows a firm to focus more on core functions in its
value chain
• Disadvantages
– Outsourcing of too many activities may damage the
firm’s internal core competencies and capabilities
– Outsourcing may isolate a firm from its external market
© South-Western, a part of Cengage Learning
6–20
KEY TERMS
Administrative costs
Backward integration
Corporate advantage
Diversification
Economies of scope
Factor cost differences
Financial economies
Forward integration
Horizontal diversification
© South-Western, a part of Cengage Learning
Market power
Outsourcing
Related diversification
Single-product strategy
Spot contracts
Synergy
Transaction costs
Unrelated diversification
Vertical integration
6–21