7-1© 2006 by Nelson, a division of Thomson Canada Limited. Corporate-Level Strategy Chapter Seven

7-2© 2006 by Nelson, a division of Thomson Canada Limited. Corporate-level strategy specifies actions to be taken by the firm to gain a competitive advantage by selecting & managing a group of different businesses competing in several industries & product markets Corporate Strategy concerns 2 key questions: 1. What businesses should the firm in? 2. How should the corporate office manage the array of business units?

7-3© 2006 by Nelson, a division of Thomson Canada Limited. Firms Vary by Degree of Diversification Single-business > 95% of revenues from a single business unit Low Levels of Diversification AA Dominant-business Between 70% & 95% of revenues from a single business unit BBAA Unrelated-Diversified Business units not closely related High Levels of Diversification AA BBCC Moderate to High Levels of Diversification < 70% of revenues from dominant business; bus.s share product, technological & distribution links Related constrained Related linked (mixed) < 70% of revenues from dominant business, only limited links exist AABBCC BB AA CC

7-4© 2006 by Nelson, a division of Thomson Canada Limited. Summary Model of the Relationship between Firm Performance & Diversification Resources Incentives ManagerialMotives Diversification Strategy

7-5© 2006 by Nelson, a division of Thomson Canada Limited. Transferring Core Competencies 2 Efficient Internal Capital Market Allocation Unrelated Diversification Strategies 3 Restructuring 4 Sharing Activities 1 Related Diversification Strategies Alternative Diversification Strategies

7-6© 2006 by Nelson, a division of Thomson Canada Limited. Sharing Activities can lower costs if it: Example: Laboratory costs forcing drug companies to merge in order to continue R&D efforts. * Achieves economies of scale* Boosts efficiency of utilization * Helps move more rapidly down Learning Curve. Sharing Activities can enhance differentiation if it: Example: Shared order processing system may allow the firm to discover new features customers value from a group of products. 1 Sharing Activities Involves activities crucial to competitive advantage.* Key Characteristics

7-7© 2006 by Nelson, a division of Thomson Canada Limited.* Exploits Interrelationships among divisions* Start with Value Chain analysis Identify ability to transfer skills or expertise among similar value chains Exploit ability to share activities Key Characteristics 2 Transferring Core Competencies

7-8© 2006 by Nelson, a division of Thomson Canada Limited. 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. Key CharacteristicsFirms using this strategy often diversify by acquisition: 3 Efficient Internal Capital Market Allocation

7-9© 2006 by Nelson, a division of Thomson Canada Limited. Key Characteristics Seek out undeveloped, sick or threatened organizations or industries Often sells unit after making one-time changes since parent no longer adds value to ongoing operations. Parent firm (acquirer) intervenes & frequently: - Changes sub-unit management team - Shifts strategy - Divests part of firm - Makes additional acquisitions to achieve critical mass - Infuses firm with new technology - Enhances discipline by changing control systems 4 Restructuring

7-10© 2006 by Nelson, a division of Thomson Canada Limited. Performance Level of Diversification Dominant Business Unrelated Business Related Constrained Diversification & Firm Performance