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
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.
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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 4

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

6. Level of Diversification
Diversification and Firm Performance
Performance
Dominant
Business
Unrelated
Related
Constrained
Level of Diversification 67

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 B C

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 B C D

10. Moderate-to-High Diversification
Related linked diversification strategy example 2 A B C D

11. Very High DiversificationB C
Unrelated diversification strategy
Less than 70% of revenue comes from dominant business
No relationships between businesses
Often called conglomerates
Example: Jarden Corporation

12. Level of Diversification
Diversification and Firm Performance
Performance
Dominant
Business
Unrelated
Related
Constrained
Level of Diversification 67

13. 3 Reasons Firms Diversify
Value-creating reasons
Economies of scope
Market power
Vertical Integration
Financial economies
Value-neutral reasons
Antitrust regulation
Tax laws
Low performance
Uncertain future cash flows
Risk reduction for firm
Tangible resources
Intangible resources
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
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
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
Efficient internal capital allocations can reduce risk of the firm’s portfolio
Restructuring of acquired assets

16. Both Operational and Corporate Relatedness
Value-creating Strategies of Diversification
Operational and Corporate Relatedness
Related Constrained
Diversification
(Economies of Scope &
Market Power)
Both Operational and Corporate Relatedness
(Rare Capability;
Can sometimes Create Diseconomies of Scope)
High
Sharing Activities:
Operational
Relatedness
Between
Business
Unrelated
Diversification
(Financial Economies)
Related Linked
Diversification
(Economies of Scope & Market Power)
Low
Low
High
Corporate Relatedness: Transferring Skills Into Business Through Corporate Headquarters 63

17. Value-Neutral Reasons to Diversify
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.

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