Corporate-Level Strategies
 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. WHERE ARE
WE GOING TO COMPETE?
Snack Foods
Frito-Lay North America
Frito-Lay International
Beverages
Foods
Quaker North America
Pepsi-Cola North America
Gatorade/Tropicana North America
PepsiCo Beverages International
Snack Foods
Frito-Lay North America
Lay’s
Ruffles
Doritos
Santitas
Fritos
Cheetos
Rold Gold
Funyuns
Sunchips
Cracker Jack
Chester’s popcorn
Grandma’s cookies
Munchos
Smartfood
Baken-ets fried pork skins
Oberto meat snacks
Snack Foods
Frito-Lay International
Bocabits wheat snacks
Crujitos corn snacks
Fandangos corn snacks
Hamkas snacks
Niknaks cheese sticks
Quavers potato snacks
Sabritas potato chips
Twisties cheese snacks
Walkers potato crisps
Walkers Square potato snacks
Walkers Monster Munch Corn snacks
Miss Vickie’s potato chips
Gamesa cookies
Dippas
Sonric’s sweet snacks
Snack Foods
Frito-Lay International
Bocabits wheat snacks
Crujitos corn snacks
Fandangos corn snacks
Hamkas snacks
Niknaks cheese sticks
Quavers potato snacks
Sabritas potato chips
Twisties cheese snacks
Walkers potato crisps
Walkers Square potato snacks
Walkers Monster Munch Corn snacks
Miss Vickie’s potato chips
Gamesa cookies
Dippas
Sonric’s sweet snacks
Beverages
Pepsi-Cola North America
Pepsi-Cola
Mountain Dew
Slice
Mug
Sierra Mist
FruitWorks
Lipton
Dole
Aquafina
Frappuccino
SoBe
AMP
Beverages
Gatorade/Tropicana North America
Gatorade
Propel
Tropicana
Dole juices
Beverages
PepsiCo Beverages International
Loóza juices and nectars
Copella juices
Frui’Vita juices
Tropicana 100 juices
Foods
Quaker North America
Quaker Oats
Cap’n Crunch cereal
Life cereal
Quisp cereal
King Vitaman cereal
Mother’s cereal
Quaker rice cakes and granola bars
Rice-A-Roni side dishes
Near East couscous/pilafs
Aunt Jemima mixes & syrups
Quaker grits
Foods
Business Level
Strategies
How are we going
to compete and
gain a competitive
advantage in
each of our
businesses?
Quaker North America
Quaker Oats
Cap’n Crunch cereal
Life cereal
Quisp cereal
King Vitaman cereal
Mother’s cereal
Quaker rice cakes and granola bars
Rice-A-Roni side dishes
Near East couscous/pilafs
Aunt Jemima mixes & syrups
Quaker grits
Snack Foods
Beverages
Foods
Corporate Level Strategy
1) What businesses do we want to compete in?
2) How do manage effectively across businesses
Where did they go?
Corporate-level strategy
 Specifies actions a firm takes to gain a competitive
advantage by selecting and managing a group of
different businesses competing in different product
markets


Expected to help firm earn above-average returns
Value ultimately determined by degree to which “the
businesses in the portfolio are worth more under the
management of the company then they would be under
any other ownership - Synergy

Product diversification (PD): primary form of corporate-level
strategy
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Goals of Corporate Strategy
Moves to enter new businesses
Boosting combined performance of the
businesses
Capturing synergies and turning them into
competitive advantages
Establishing investment priorities and steering
resources into business units
4 Conditions of Successful
Diversification
• 1) Growing industries with complementary
products and technologies
•
Apple IPhone
• 2) Leverage existing capabilities which match
the KSFs in other arenas
•
Disney Cruise Lines
• 3) Closely related moves which reduce costs
• Kroger & Fred Meyer
• 4) Powerful brand and reputation
• Marguerittaville, NASCAR Café, or Emril’s
Product Diversification





Primary form of corporate-level strategy
Entails the scope of the industries and markets in
which the firm competes
Defines how managers buy, create, and sell
different businesses to match skills and strengths
with opportunities
Is expected to reduce variability in the firm's
profitability, generating earnings from several
different business units
Its development and monitoring carry a cost which
must be balanced with benefits to establish an ideal
portfolio of businesses
Levels and Types of Diversification
Curvilinear Relationship between
Diversification and Performance
Procter & Gamble’s Diversification Strategy
 Purpose of diversification: Use expertise and
knowledge gained in one business by diversifying
into a business where it can be used in a related way

Builds synergy: value added by corporate office adds up
to more than the value if different businesses in the
portfolio were separate and independent
 Procter & Gamble (P&G)
 Product mix: beauty products targeting women and baby
care products
 2005: Acquired Gillette (consumer health care products)
focused on masculine market
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Related Diversification at Disney
Entertainment/Production
Theme Parks
Resorts
Entertainment/Broadcasting
Retailing
Cruise Lines
Levels of Diversification (N=3)
(Cont’d)
 2. Moderate to High Levels


Related Constrained Diversification Strategy

Less than 70% of revenue comes from the dominant business

Direct links (I.e., share products, technology and distribution
linkages) between the firm's businesses
Related Linked Diversification Strategy (Mixed related
and unrelated)

Less than 70% of revenue comes from the dominant business

Mixed: Linked firms sharing fewer resources and assets among
their businesses (compared with related constrained, above),
concentrating on the transfer of knowledge and competencies
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among the businesses
Tyco Electronics
Tyco Telecommunications
Tyco Fire and Security
Tyco Safety Products
Tyco Healthcare
Tyco Plastics
Tyco Adhesives
Tyco Flow Control
Tyco Electrical and Metal Products
Tyco Fire and Building Products
Tyco Infrastructure Services
GE
Advanced materials
Commercial loans
Appliances
Insurance
Jet engines
Electric power generation
Medical imaging
NBU Universal
Chemical Treatment
Equipment services and rentals
Levels of Diversification (N=3 )
(Cont’d)
 3. Very High Levels: Unrelated

Less than 70% of revenue comes from dominant business

No relationships between businesses
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Unrelated Diversification
 Key Terms

Financial Economies – cost savings
realized through improved allocations
of financial resources based on
investments inside or outside the firm
Drawbacks for Unrelated
 Demanding requirements
 Limited to no opportunities to share
advantages
Creating Value with Diversification Strategies
 Operational relatedness -
sharing activities
 Corporate relatedness -
transferring knowledge
Value-Creating Strategies of Diversification
Diversification and the
Multidivisional Structure
 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
Original Benefits of the M-form
 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
Diversification and the
Multidivisional Structure
 Key Terms

Organizational Controls – guide the use of strategy, indicate
how to compare actual results with expected results, and
suggest 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 the company's competitive
advantages (used for "sharing" strategies)

Finance Controls – objective criteria used to measure firm
performance against previously established quantitative
standards (used for unrelated diversification)
Operational Relatedness – Sharing
Activities
 Activity sharing requires sharing strategic control
over business units
 Pursuing appropriate coordination mechanisms can
lead to successful creation of economies of scope
 Activity sharing can be risky because business-unit
ties create links between outcomes and can cause
organizational difficulties that interfere with success
 More attractive results are obtained through activity
sharing when facilitated by a strong corporate office
Variations of the M-form
 Cooperative
 Strategic
business-unit (SBU)
 Competitive
Cooperative Form of the
Multidivisional Structure
 Key Terms

Cooperative Form – organizational
structure using horizontal integration
to bring about interdivisional
cooperation
Cooperative Form of the
Multidivisional Structure
Cooperative Form of the
Multidivisional Structure
 All of the divisions share one or more corporate strengths
 Interdivisional sharing depends on cooperation
 Links resulting from effective integration mechanisms
support sharing of both tangible and intangible resources
 Centralization is one integrating mechanism that can be
used to link activities among divisions, allowing firms to
exploit common strengths and share competencies
 Success is influenced by how well information is
processed among divisions
 Success can be influenced by managerial commitment
levels and the response to some lost managerial
autonomy
The Strategic Business-Unit Form of
the Multidivisional Structure
 Key Terms

Strategic Business-Unit (SBU) Form
– multidivisional organization
structure with three levels used to
support the implementation of a
diversification strategy
SBU Form of the Multidivisional
Structure
SBU Form of the
Multidivisional Structure
 Divisions within each SBU are related in terms of
shared products and/or markets
 Divisions of one SBU have little in common with
division of other SBUs
 Divisions within each SBU share product or market
competencies to develop economies of scope
 Integrations used in cooperative form are equally
effective for the SBU form
 Each SBU is a profit center
 Financial controls are more vital for evaluating
performance
The Competitive Form of the
Multidivisional Structure
 Key Terms

Competitive Form – organizational
structure in which the firm's divisions
are completely independent
Competitive Form of the
Multidivisional Structure
Competitive Form of the
Multidivisional Structure
 Divisions do not share common corporate
strengths
 Integration devices are not developed to
coordinate activities across divisions
 Efficient capital markets in unrelated strategies
require organizational arrangements that
emphasize divisional competition rather than
cooperation
 Specific performance expectations and
accountability for independent divisions stimulate
internal competition for future resources
Competitive Form of the
Multidivisional Structure
 Headquarters maintains a distant
relationship to avoid intervention in
divisional affairs
 Strategic controls are used to monitor
performance relative to targeted returns
 Headquarters remains responsible for
cash flow allocation, performance
appraisal, resource allocation, and the
legal aspects related to acquisitions
Benefits of Internal Competition
 Internal competition creates flexibility
 Internal competition challenges the
status quo and inertia
 Internal competition motivates effort
Competing For Advantage
Part III – Creating Competitive Advantage
Chapter 9 – Acquisition and Restructuring Strategy
Mergers, Acquisitions, and Takeovers:
What Are the Differences?
 Key Terms

Merger - strategy through which two
firms agree to integrate their operations
on a relatively co-equal basis.

Acquisition - strategy through which
one firm buys a controlling, 100
percent interest in another firm with the
intent of making the acquired firm a
subsidiary business within its portfolio.
Mergers, Acquisitions, and Takeovers
What Are the Differences?
–
 Key Terms

Takeover – special type of acquisition
strategy wherein the target firm did not
solicit the acquiring firm's bid

Hostile Takeover – unfriendly takeover
strategy that is unexpected and
undesired by the target firm
Mergers and Acquisitions
Reasons of Acquisitions
Market Power
Overcome Entry Barriers
Increased Speed
Lower Risk
New Technologies/Capabilities
Diversify
Gain Competitive Advantages
Reduced profits in current industry
Reduce overdependence
Mergers and Acquisitions
Problems with Acquisitions
Integration of two firms
Overpayment/Debt
Overestimation of Synergy
Overdiversification
Managerial energy absorption
Become too large
Substitute for innovation
Inadequate evaluation
Transaction costs
Mergers and Acquisitions
Results
Poor
Performance
Who Wins?
Acquired Firm
Shareholders
Failures of Acquisitions
30 - 40% average acquisition premium
Acquiring firm’s value drops 4% in the 3 months
following acquisitions
30 - 50% of acquisitions are later divested
Acquirers underperform S&P by 14%, peers by
4%
3 month performance before and after

30% substantial losses, 20% some losses,
33% marginal returns, 17% substantial returns
Why, then, do executives acquire?
Often, for personal reasons
Firm size and executive compensation are
related
When do executives loss their jobs?


1) Acquired - larger firms harder to acquire
2) Performing poorly - employment risk is
reduced as returns are less volatile
Effective Acquisitions
 Complementary assets or resources
 Friendly acquisitions facilitate integration of firms
 Effective due-diligence process (assessment of target firm
by acquirer, such as books, culture, etc.)
 Financial slack
 Low debt position

High debt can…

Increase the likelihood of bankruptcy

Lead to a downgrade in the firm’s credit rating

Preclude needed investment in activities that contribute to the firm’s
long-term success
 Innovation
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 Flexibility and adaptability
When/Why to Diversify?
To create shareholder value
Porter’s Three Point Test
1) Attractiveness Test
2) Cost of Entry Test
3) Better off Test
Should pass all 3
Types of Acquisitions to
Increase Market Power
 Horizontal Acquisitions

Acquisition in the same industry

Exploits cost- and revenue-based synergies

Similarities lead to smoother integration and
higher performance
 Vertical Acquisitions

Increase of market power by controlling
more of the value chain
 Related Acquisitions

Acquisition of a firm in a highly related industry

Increase of market power by leveraging core
competencies to gain a competitive advantage
Entry Barriers that Acquisitions Overcome
 Economies of scale in established
competitors
 Differentiated products by competitors
 Enduring relationships with customers that
create product loyalties with competitors