1. Corporate-Level Strategy
Chapter 6
Corporate-Level Strategy
Should we Diversify?

2. Two Levels of Strategy
A diversified company has two levels of strategy
1. Business-Level Strategy (Competitive Strategy)
How to create competitive advantage in each business in which the company competes
- low cost - differentiation
- focused low cost - focused differentiation
- integrated low cost/
differentiation
2. Corporate-Level Strategy (Company-wide Strategy)
How to create value for the corporation as a whole

3. Key Questions in Corporate Strategy
1. What businesses should the corporation be in?
2. How should the corporate office manage the array of business units?
Corporate Strategy is what makes the corporate whole add up to more than the sum of its business unit parts
Business Unit
Business Unit

4. Adding Value by Diversification
Diversification most effectively adds value by either of two mechanisms:
Economies of scope: cost savings attributed to transferring the capabilities and competencies developed in one business to a new business
Market power: when a firm is able to sell its products above the existing competitive level or reduce the costs of its primary and support activities below the competitive level, or both

5. Reasons for Diversification
Incentives
Reasons to Enhance Strategic Competitiveness
Economies of scope
Market power
Financial economics
Resources
Managerial
Motives

6. Reasons for Diversification
Incentives
Resources with varying effects on value creation and strategic competitiveness
Resources
Tangible resources
financial resources
physical assets
Intangible resources
tacit knowledge
customer relations
image and reputation
Managerial
Motives

7. Reasons for Diversification
Incentives
Managerial Motives (Value Reduction)
Diversifying managerial employment risk
Increasing managerial compensation
Resources
Managerial
Motives

8. Managerial Motives to Diversify
Managers have motives to diversify
diversification reduces employment risk
diversification increases size; size is associated with executive compensation
Effective governance mechanisms may restrict such motives!!

9. Levels and Types of Diversification
Low Levels of Diversification
Business Unit
Single Business
> 95% of business from a single business unit
Business Unit
Dominant Business
Between 70 and 95% of business from a single business unit

10. Alternative Diversification Strategies
Related Diversification Strategies
sharing activities
transferring core competencies
Unrelated Diversification Strategies
efficient internal capital market allocation
restructuring

11. Levels and Types of Diversification
Moderate to High Levels of Diversification
Business Unit
Business Unit
Business Unit
Related Constrained
<70% of revenues from dominant business; all businesses share product, technological and distribution linkages

12. Sharing activities Related Diversification Strategies:
Sharing activities often lowers costs or raises differentiation
Sharing activities can lower costs if it:
achieves economies of scale
boosts efficiency of utilization
Sharing activities can enhance potential for or reduce the cost of differentiation
Must involve activities that are crucial to competitive advantage

13. Levels and Types of Diversification
Moderate to High Levels of Diversification
Business Unit
Related Linked (Mixed)
< 70% of revenues from dominant business, and only limited links exist
Business Unit
Business Unit

14. Transferring Core Competencies
Related Diversification Strategies:
Transferring Core Competencies
Exploits interrelationships among divisions
Start with value chain analysis
identify ability to transfer skills or expertise among similar value chains
exploit ability to transfer activities

15. Levels and Types of Diversification
Very High Levels of Diversification
Business Unit
Unrelated
< 70% of revenue comes from the dominant business, and there are no common links between businesses
Business Unit
Business Unit

16. Unrelated Diversification Strategies:
Efficient internal capital market allocation
Firms pursuing this strategy frequently diversify by acquisition:
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

17. Unrelated Diversification Strategies: Restructuring
Seek out undeveloped, sick or threatened organizations or industries
Parent company (acquirer) intervenes and frequently:
changes sub-unit management team
shifts strategy
infuses firm with new technology
enhances discipline by changing control systems
divests part of firm
makes additional acquisitions to achieve critical mass
Frequently sell unit after making one-time changes since parent no longer adds value to ongoing operations