PART III
CREATING COMPETITIVE ADVANTAGE
Chapter 8
Corporate-Level Strategy
1
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Key Terms

Corporate-level strategy
Specifies actions a firm takes to gain a
competitive advantage by selecting and
managing a portfolio of businesses that
compete in different product markets or
industries
Primary form of corporate-level strategy

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Concerns scope of industries and
markets
Defines approach to buying, creating,
and selling businesses
Intends to reduce variability in
profitability
Comes with development and
monitoring costs

Key Terms

Single business strategy
Corporate-level strategy in which the firm generates
95% or more of its sales revenue from its core business
area

Dominant business diversification strategy
Corporate-level strategy in which the firm generates
between 70% and 95% of its total sales revenue within
a single business area

Key Terms

Related diversification strategy
Corporate-level strategy in which the firm generates
more than 30% of its sales revenue outside a dominant
business and whose businesses are related to each other
in some manner

Related constrained diversification strategy
Related diversification strategy characterized by direct
links between the firm's business units

Related linked diversification strategy
Related diversification strategy characterized by only a
few links between the firm’s business units

Key Terms

Unrelated diversification strategy
Corporate-level strategy for highly
diversified firms in which there are no welldefined relationships between business units

Key Terms

Multidivisional structure (M-form)
Organizational structure which ties
together several operating divisions, each
representing a separate business or profit
center to which responsibility for daily
operations and business-unit strategy is
delegated
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It enabled corporate officers to more
accurately monitor the performance of each
business, which simplified the problem of
control.
It facilitated comparisons between divisions,
which improved the resource allocation
process.
It stimulated managers of poorly
performing divisions to look for ways of
improving performance.

Key Terms

Organizational controls
Management tool which indicates how to compare actual
results with expected results and suggests corrective actions to
take when the difference between actual and expected results is
unacceptable

Strategic controls
Subjective criteria intended to verify that the firm is using
appropriate strategies for the conditions in the external
environment and given the company's competitive advantages

Financial controls
Objective criteria used to measure firm performance against
previously established quantitative standards
 Cooperative
 Strategic
business-unit (SBU)
 Competitive

Key Terms

Economies of scope
Cost savings that the firm creates by
successfully transferring some of its
capabilities and competencies that were
developed in one of its businesses to
another of its businesses

Synergy
Conditions that exist when the value
created by business units working together
exceeds the value those same units create
working independently
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Positive Outcomes:

Increased Value Creation

Improved Financial Returns

Reduced Risk
Challenges:

Linked Outcomes

Conflict Between Divisions

Coordination Costs

Key Terms

Cooperative form
Organizational structure using
horizontal integration to bring
about interdivisional cooperation
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Centralization
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Standardization
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Formalization
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Information processing among
divisions
Strategic controls
Reward systems
Managerial commitment levels

Key Terms

Corporate-level core competencies
Complex sets of resources and capabilities
that link different businesses, primarily
through managerial and technological
knowledge, experience, and expertise
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Elimination of duplicate
efforts
Resource intangibility

Key Terms

Strategic business-unit form
Form of multidivisional organization
structure with three levels used to
support the implementation of a
diversification strategy

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Corporate headquarters
Strategic business units
Divisions within each SBU
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Multimarket Competition

Vertical Integration

Key Terms

Market power
Exists when a firm is able to price and sell its
products above the existing competitive level or to
reduce costs of value chain activities and support
functions below the competitive level, or both

Multimarket (or multipoint) competition
Exists when two or more diversified firms
simultaneously compete in the same product or
geographic markets

Key Terms

Vertical integration
Exists when a company produces its own inputs
or owns its own source(s) of output distribution

Taper integration
Exists when a firm sources inputs externally from
independent suppliers as well as internally within
the boundaries of the firm, or disposes of its
outputs through independent outlets in addition
to company-owned distribution channels

Reduced operational costs

Reduced market costs

Improved product quality

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Protected technology (from
imitation)
Invaluable ties between assets
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Outside supplier may produce inputs at
a lower cost.
Bureaucratic costs may occur.
Substantial investments may be
required, which lessen flexibility.
Changes in demand can create a capacity
imbalance and coordination problems.
“Diseconomies” of Scope
or
Competitive Advantage

Frequent and direct contact
between division managers
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Liaisons
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Temporary teams or task forces
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Formal integration departments

Key Terms

Matrix organization
Organizational structure in which a dual
structure combines both functional
specialization and business product or
project specialization.

Key Terms

Financial economies
Cost savings realized through
improved allocations of financial
resources based on investments
inside or outside the firm

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Efficient internal capital allocation
Asset restructuring of purchased
corporations

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Corporate office distributes capital to
business divisions
Requires detailed and accurate information
External sources of capital have imperfect
information about the organization
Minor corrections to capital allocations are
possible
Capital allocations can be based on specific
criteria
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Stock markets value diversified
manufacturing conglomerates at 20% less
than the value of the sum of their parts.
The discount applies despite economic
influences.
Only extraordinary manufacturers can defy
it (for a while).
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Attention and resources are
focused on acquisitions rather than
innovations.
Conglomerates in developed
countries have short life cycles.
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Success usually calls for a focus on mature,
low-technology businesses with more
certain demand and less reliance on
valuable human resources.
Service businesses oriented toward clients
are difficult to buy/sell because of their
sales orientation and the mobility of sales
people.

Key Terms

Competitive form
Organizational structure in which
the firm's divisions are completely
independent

Creates flexibility
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Challenges inertia
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Motivates employees
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Maintains a distant relationship
from divisions
Primarily uses financial controls to
monitor performance
Focuses on cash flow, resource
allocation, performance appraisal,
and the legal aspects of acquisitions
Structural
Characteristics
Cooperative
M-Form
SBU
M-Form
Competitive
M-Form
Type of
Strategy
RelatedConstrained
RelatedLinked
Unrelated
Diversification
Degree of
Centralization
Centralized at
Corporate Office
Partially Centralized
in SBUs
Decentralized
to Divisions
Extensive
Moderate
Nonexistent
Use of
Integrating
Mechanisms
Structural
Characteristics
Cooperative
M-Form
SBU
M-Form
Competitive
M-Form
Divisional
Performance
Appraisal
Subjective
Strategic
Criteria
Strategic &
Financial
Criteria
Objective Financial
Criteria
Divisional
Incentive
Compensation
Linked to
Corporate
Performance
Linked to
Corporate
SBU & Division
Performance
Linked to
Division
Performance
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External

Antitrust regulation

Tax laws
Internal

Low performance

Cash flow uncertainty

Synergy

Risk management
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Financial Resources

Tangible Resources
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Intangible Resources
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Increased compensation
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Reduced employment risk
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Empire building
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Internal corporate governance
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External market for corporate control
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External market for managerial talent
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Manager reputation
Assume that you overheard the following
statement: “Those managing an unrelated
diversified firm face far more difficult ethical
challenges than do those managing a
dominant business firm.” Based on your
reading of this chapter, do you believe this
statement true or false? Why?
Is it ethical for managers to diversify a
firm rather than return excess earnings to
shareholders? Provide reasoning to
support your answer.
Are ethical issues associated with the use of
strategic controls? With the use of financial
controls? If so, what are they?
Are ethical issues involved in
implementing the cooperative and
competitive M-forms? If so, what are
they? As a top-level manager, how
would you deal with them?
What unethical practices might occur
when a firm restructures the assets it
has acquired through its diversification
efforts? Explain.
Do you believe that ethical managers are
unaffected by the managerial motives to
diversify discussed in this chapter? If so, why?
In addition, do you believe that ethical managers
should help their peers learn how to avoid
making diversification decisions on the basis of
the managerial motives to diversify (e.g.,
increased compensation)? Why or why not?