Chapter 6
Corporate-Level Strategy
Dr. Mubarak Ali
Ch6-1
Strategic
Inputs
Chapter 2
External
Environment
Strategic Intent
Strategic Mission
Chapter 3
Internal
Environment
Strategy Implementation
Chapter 4
Business-Level
Strategy
Chapter 5
Competitive
Dynamics
Chapter 6
Corporate-Level
Strategy
Chapter 10
Corporate
Governance
Chapter 11
Structure
& Control
Chapter 7
Acquisitions &
Restructuring
Chapter 8
International
Strategy
Chapter 9
Cooperative
Strategies
Chapter 12
Strategic
Leadership
Chapter 13
Outcomes
Strategic
Strategic
Actions
Strategy Formulation
The Strategic
Management
Process
Feedback
Entrepreneurship
& Innovation
Strategic
Competitiveness
Above Average
Returns
Ch6-2
A Diversified Company
Has Two Levels of Strategy
1. Business-Level Strategy
(Competitive Strategy)
How to create competitive advantage in each
business in which the company competes
- low cost
- focused low cost
- differentiation
- focused differentiation
- integrated low cost/differentiation
2. Corporate-Level Strategy
(Companywide Strategy)
How to create value for the corporation as a whole
Ch6-3
Key Questions of Corporate Strategy
1. What businesses should the corporation
be in?
2. How should the corporate office manage
the array of business units?
Corporate Strategy is what makes the corporate whole
add up to more than the sum of its business unit parts
Ch6-4
Levels and Types of Diversification
Low Levels of Diversification
Single business
> 95% of revenues from a single
business unit
Dominant business
Between 70% and 95% of revenues
from a single business unit
A
A
B
Moderate to High Levels of Diversification
Related constrained
Related linked (mixed)
< 70% of revenues from dominant
business, and only limited links exist
Very High Levels of Diversification
Unrelated-Diversified
A
< 70% of revenues from dominant
business; all businesses share product,
technological and distribution linkages
Business units not closely related
B
A
B
C
A
B
C
C
Motives, Incentives, and Resources
for Diversification
Motives to Enhance
Strategic Competitiveness
Resources
Economies of Scope
Market Power
Financial Economies
Incentives
Managerial
Motives
Ch6-6
Motives, Incentives, and Resources
for Diversification
Resources
Incentives
Managerial
Motives
Incentives and Resources
with Neutral Effects of
Strategic Competitiveness
Anti-Trust Regulation
Tax Laws
Low Performance
Uncertain Future Cash Flows
Firm Risk Reduction
Tangible Resources
Intangible Resources
Ch6-7
Motives, Incentives, and Resources
for Diversification
Resources
Incentives
Managerial
Motives
Managerial Motives
Causing Value Reduction
Diversifying Managerial
Employment Risk
Increasing Managerial
Compensation
Ch6-8
Summary Model of the
Relationship Between Firm
Performance and Diversification
Resources
Incentives
Diversification
Strategy
Managerial
Motives
Ch6-9
Adding Value by Diversification
Diversification most effectively adds value
by either of two mechanisms:
By developing economies of scope between
business units in the firms which leads to
synergistic benefits
By developing market power which leads to
greater returns
Ch6-10
Alternative Diversification Strategies
Related Diversification Strategies
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
Efficient Internal Capital Market Allocation
Restructuring
Ch6-11
Alternative Diversification Strategies
Sharing Activities
Key Characteristics:
Sharing Activities often lowers costs or
raises differentiation
Example: Using a common physical distribution system
and sales force such as Procter & Gamble’s disposable
diaper and paper towel divisions
Sharing Activities can lower costs if it:
Achieves economies of scale
Boosts efficiency of utilization
Helps move more rapidly down Learning Curve
Example: General Electric’s costs to advertise, sell and
service major appliances are spread over many different
products
Ch6-12
Alternative Diversification Strategies
Sharing Activities
Key Characteristics:
Sharing Activities can enhance potential for or
reduce the cost of differentiation
Example: Shared order processing system may allow new
features customers value or make more advanced remote
sensing technology available
Must involve activities that are crucial to
competitive advantage
Example: Procter & Gamble’s sharing of sales and
physical distribution for disposable diapers and paper
towels is effective because these items are so bulky and
costly to ship
Ch6-13
Alternative Diversification Strategies
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
Ch6-14
Alternative Diversification Strategies
Related Diversification Strategies
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
Efficient Internal Capital Market Allocation
Restructuring
Ch6-15
Alternative Diversification Strategies
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 transfer activities
Ch6-16
Alternative Diversification Strategies
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
Ch6-17
Alternative Diversification Strategies
Related Diversification Strategies
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
Efficient Internal Capital Market Allocation
Restructuring
Ch6-18
Alternative Diversification Strategies
Efficient Internal Capital Market Allocation
Key Characteristics:
Firms pursuing this strategy frequently 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
Ch6-19
Alternative Diversification Strategies
Efficient Internal Capital Market Allocation
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
Ch6-20
Alternative Diversification Strategies
Related Diversification Strategies
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
Efficient Internal Capital Market Allocation
Restructuring
Ch6-21
Alternative Diversification Strategies
Restructuring
Key Characteristics:
Seek out undeveloped, sick or threatened organizations
or industries
Parent company (acquirer) intervenes and 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
Frequently sell unit after making one-time changes since
parent no longer adds value to ongoing operations
Ch6-22
Alternative Diversification Strategies
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
Ch6-23
Incentives to Diversify
External Incentives:
Relaxation of Anti-Trust regulation allows more
related acquisitions than in the past
Before 1986, higher taxes on dividends favored
spending retained earnings on acquisitions
After 1986, firms made fewer acquisitions with
retained earnings, shifting to the use of debt to take
advantage of tax deductible interest payments
Internal Incentives:
Poor performance may lead some firms to
diversify to attempt to achieve better returns
Ch6-24
Value-creating Strategies of Diversification
Operational and Corporate Relatedness
High
Sharing:
Operational
Relatedness
Between
Business
Low
Related Constrained
Diversification
Vertical Integration
(Market Power)
Both Operational and
Corporate Relatedness
(Rare Capability and
Can Create Diseconomies
of Scope)
Unrelated
Diversification
(Financial Economies)
Related Linked
Diversification
(Economies of Scope)
Low
High
Corporate Relatedness: Transferring Skills Into
Business Through Corporate Headquarters
Ch6-25
Performance
Diversification and Firm Performance
Dominant
Business
Related
Constrained
Level of Diversification
Unrelated
Business
Ch6-26
Incentives to Diversify
Internal Incentives:
Poor performance may lead some firms to diversify to
attempt to achieve better returns
Firms may diversify to balance uncertain future cash
flows
Firm may diversify into different businesses in order
to reduce risk
Managers often have incentives to diversify in order to
increase their compensation and reduce employment
risk, although effective governance mechanisms may
restrict such abuses
Ch6-27
Summary Model of the Relationship Between Firm
Performance and Diversification
Resources
Capital Market
Intervention and
Market for
Managerial Talent
Incentives
Diversification
Strategy
Firm
Performance
Managerial
Motives
Internal
Governance
Strategy
Implementation
Ch6-28