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Chapter 6 Corporate-Level Strategy Diane M. Sullivan, Ph.D. 2015 Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage Sections.

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Presentation on theme: "Chapter 6 Corporate-Level Strategy Diane M. Sullivan, Ph.D. 2015 Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage Sections."— Presentation transcript:

1 Chapter 6 Corporate-Level Strategy Diane M. Sullivan, Ph.D. 2015 Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage Sections modified from Gentner (2009)

2 The Strategic Management Process Insert figure 1.1 graphic  Previously, we have examined firms competing in a single industry or product market. After solidifying a position in a single industry or product market, firms will often want to diversify into multiple businesses.

3 Corporate-level Strategy: Definitions  Business-level strategy (Chapter 4) Deals with how the business should compete (e.g., cost leadership, differentiation, focus, integrated strategies)  Corporate-level strategy (Chapter 6) Definition: Specific actions a firm takes to gain an advantage by selecting and managing a group of different businesses  Primary form of corporate-level strategy is product diversification  Diversification involves using expertise and knowledge gained in one business to diversify into a business where it can be used in a related way 2 main concerns with corporate-level strategy: 1) What businesses the firm should be in 2) How the firm should manage the different business units

4 Corporate-level Strategy: Examples  Ex. 1: Proctor & Gamble’s Diversification Strategy Pre-2005: Product mix focused on women and baby care 2005: Acquired Gillette, which focused on consumer health care products geared toward men Synergy created by combining Gillette ’ s toothbrush (Oral-B) and P&G ’ s toothpaste (Crest) businesses to create Pro-Health oral care product line  Good for retailers (shelf space)  Strategy had potential but was more difficult to create operational relatedness between the products  Comingle employees requiring actual physical re-location/talent exit  Different ways to make business decisions  Conflicting organizational cultures  In 2007, Pro-Health overtook Colgate in market share  Ex. 2: Disney

5 3 Levels of Diversification 1. Low level of diversification Single-business strategy Dominant-business strategy 2. Moderate-to-high levels of diversification Related constrained diversification strategy Related linked diversification strategy 3. Very high levels of diversification Unrelated diversification

6 Level of Diversification Diversification and Firm Performance Performance Dominant Business Unrelated Business Related Constrained

7 Low-level Diversification  Single-business strategy Firm generates 95% or more of its sales revenue from its core business area Example (pre-2008): Wm. Wrigley Jr. Company—the world’s largest producer of chewing and bubble gums  Post-2008  Acquired by Mars Inc.  Dominant-business strategy Firm generates 70-95% of total sales revenue within a single business area Example: UPS generated 74% of revenue from U.S. package delivery business; 17% from international package business; 9% from non-package business A B A

8 Moderate-to-High Diversification  Related constrained diversification strategy < 70% of revenue comes from the dominant business There are direct links between the firm's businesses (e.g., share products, technology; marketing; and distribution linkages) Example: Campbell’s A BC

9 Moderate-to-High Diversification  Related linked diversification strategy < 70% of revenue comes from the dominant business Mix between related and unrelated diversification  Linked firms share fewer resources and assets among their businesses  Interested in constantly adjusting the mix in their portfolio of businesses and how to manage the businesses  Example: Rachel Ray A BC D

10 Moderate-to-High Diversification  Related linked diversification strategy example 2 A BC D

11 Very High Diversification  Unrelated diversification strategy Less than 70% of revenue comes from dominant business No relationships between businesses Often called conglomerates Example: Jarden Corporation A BC

12 Level of Diversification Diversification and Firm Performance Performance Dominant Business Unrelated Business Related Constrained

13 3 Reasons Firms Diversify 1. Value-creating reasons Economies of scope Market power  Vertical Integration Financial economies 2. Value-neutral reasons Antitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Tangible resources Intangible resources 3. Value-reducing reasons Diversifying managerial employment risk Increasing managerial compensation

14 Value-Creating Reasons to Diversify  Based a desire to develop resources that will enhance strategic competitiveness Ok, but how? Two main ways diversification strategies can create value 1. Operational relatedness: sharing activities between businesses  Ex: P&G ’ s paper towel business and baby diaper business both use paper products as inputs; the firm ’ s paper production plant produces inputs for both businesses 2. Corporate relatedness: transferring core competencies into business  Ex: Honda ’ s competence in engine design and manufacturing to motorcycles, lawnmowers, cars and trucks  Often achieved via transferring or hiring personnel with competencies

15 Operational & Corporate Relatedness Value  The types of value these create are referred to as  Economies of Scope (for related constrained and related-linked strategies)  Cost savings created by sharing its resources/capabilities or transferring core competencies of one businesses to another of its businesses  Market Power (for related constrained and related-linked strategies)  Exists when a firm sells its products above competitive levels and/or reduces the cost of its Value Chain activities below competitive levels  Influenced by a firm ’ s level of vertical integration  Financial Economies (for unrelated diversification)  Cost savings realized via improved allocations of financial resources based on investments inside or outside the firm — 2 main types 1.Efficient internal capital allocations can reduce risk of the firm ’ s portfolio 2.Restructuring of acquired assets

16 Value-creating Strategies of Diversification Operational and Corporate Relatedness Sharing Activities: Operational Relatedness Between Business Corporate Relatedness: Transferring Skills Into Business Through Corporate Headquarters LowHigh Low Related Linked Diversification (Economies of Scope & Market Power) Unrelated Diversification (Financial Economies) Both Operational and Corporate Relatedness (Rare Capability; Can sometimes Create Diseconomies of Scope) Related Constrained Diversification (Economies of Scope & Market Power)

17  External value-neutral reasons Antitrust Regulation and Tax Laws  Deregulation  Changing tax laws  Internal value-neutral reasons Low Performance Uncertain Future Cash Flows Firm Risk Reduction Resources and Diversification  Excess tangible resources like plant and equipment, sales force, etc. Value-Neutral Reasons to Diversify

18 Value-Reducing Reasons to Diversify  Managerial Motives Diversifying managerial employment risk  If one business fails, the whole firm will stay intact Increasing managerial compensation  Larger firms are more complex  Generally mean larger compensation packages


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