Norman, BUS 4385 Key Points: Chapter 6: Corporate-Level Strategy Understand the difference between business-level strategy and corporate level strategy Levels and Types of Diversification Definitions Identify the type of diversification used by a firm Understand the various reasons for diversification How can diversification create value? What reasons usually fail to create value? Understand the issues firms should evaluate when considering diversification

Norman, BUS 4385 Business-Level versus Corporate-Level Strategy Business-Level (Competitive) Strategy How to create value by competing in each individual business Corporate-Level (Companywide) Strategy How to create value for the corporation as a whole Key questions What business(es) should a firm be in? How should the corporate office manage this group of businesses?

Norman, BUS 4385 Core Competencies and Corporate Strategy What core competencies should the corporation develop and exploit? How should these be shared across businesses?

Norman, BUS 4385 Figure 6.1: Levels and Types of Diversification Low Levels of Diversification Single business:More than 95% of revenue from a single business Dominant business:Between 70% and 95% of revenue from a single business Moderate to High Levels of Diversification Related constrained:Less than 70% of revenue from the dominant business and all businesses share product, technological, and distribution links Related linked:Less than 70% of revenue from the dominant business, and only limited links between businesses Very High Levels of Diversification Unrelated:Less than 70% of revenue from the dominant business, and no common links between businesses A A B B A C B A C B A C

Norman, BUS 4385 Table 6.1 Motives to Enhance Strategic Competitiveness Economies of scope (related diversification) Sharing activities Transferring core competencies Market power (related diversification) Blocking competitors through multipoint competition Vertical integration Financial economies (unrelated diversification) Efficient internal capital allocation Business restructuring Motives with Neutral Effects on Strategic Competitiveness Antitrust regulation, tax laws, low performance, uncertain future cash flows, firm risk reduction, tangible resources, intangible resources Managerial Motives that Reduce Strategic Competitiveness Diversifying managerial employment risk Increasing managerial compensation

Norman, BUS 4385 Vertical Integration Definition: a firm produces its own inputs or disposes of its own outputs Reasons companies vertically integrate Market power Savings on operational costs Avoidance of market costs Controls product quality (McDonald’s) Protects technology Builds entry barriers (e.g., Alcoa in aluminum, bauxite mine)

Norman, BUS 4385 Vertical Integration Limits of vertical integration Bureaucratic costs Cost disadvantages Rapid changes in technology Risky when demand is unstable or unpredictable Firms must weigh: Costs Value derived from vertical integration

Norman, BUS 4385 Issues to Evaluate When Considering Diversification What resources, capabilities, and core competencies do we possess that would allow us to outperform competitors? What core competencies must we possess to succeed in a new product or geographic market? Will we only be a player in the new product or geographic market or will we emerge as a winner? Is it possible for us to leapfrog competitors (e.g., change the rules of competition) ? Will diversification break up capabilities and competencies that should be kept together? What can the firm learn through its diversification and is it organized properly to acquire such knowledge?