1. Chapter 6 – Corporate-Level Strategy

2. Two Strategy Levels Business-level strategy (competitive)
Each business unit in a diversified firm chooses a business-level strategy as its means of competing in individual product markets
Corporate-level strategy (company-wide)
Specifies actions taken by the firm to gain a competitive advantage by selecting and managing a group of different businesses competing in several industries and product markets

3. Corporate-Level Strategy: Key Questions
Corporate-level strategy’s value
The degree to which the businesses in the portfolio are worth more under the management of the company than they would be under other ownership
What businesses should the firm be in?
How should the corporate office manage the group of businesses?
Business Units

4. Example – Conglomerate Discount
GE overall: 70% increase in profits since 2001, but $20bn decrease in market value
General Electric’s planned sale of its plastics business to Saudi Basic Industries is double-edged sword:
Unit sold at $11.6bn, in contrast to investors’ valuation of $8bn
Sale unlocked 45% more value for shareholders
Many of GE’s assets may have more value than GE’s share price suggests
Source: Cox, R. & Cass, D. (2007). “Placing value on GE’s parts”, The Wall Street Journal, Tuesday, May 22: C14.

5. Portfolio Matrix
Market Share
High
Low ?
High
Market Growth
Low

6. Levels and Types of Diversification

7. Motives for Diversification
To Enhance Strategic Competitiveness:
1. Economies of scope (related diversification)
Sharing activities
Transferring core competencies
2. Market power (related diversification)
Blocking competitors by multipoint competition
Vertical integration
3. Financial economies (unrelated diversification)
Efficient internal capital allocation
Business restructuring
Related
Unrelated

8. Economies of Scope (EoS)
Firm creates value by building upon or extending its:
Resources
Capabilities
Core competencies
Definition:
Cost savings that occur when a firm makes use of capabilities and competencies developed in one of its businesses in another of its businesses
Value is created from economies of scope through:
Operational relatedness in sharing activities
Corporate relatedness in transferring skills or corporate core competencies among units
Related

9. Market Power Market power exists when a firm can:
Sell its products above the existing competitive level and/or
Reduce the costs below the competitive level
Multipoint Competition
Two or more diversified firms simultaneously compete in the same product or geographic markets
Vertical Integration
Backward integration – firm produces its own inputs
Forward integration – firm operates its own distribution system for delivering its outputs
Related

10. Financial Economies
Cost savings realized through improved allocations of financial resources
Based on investments inside or outside the firm
Create value through two types of financial economies:
Efficient internal capital allocation
Purchasing other corporations and restructuring their assets
Unrelated

11. Examples
Intuitively, which of the following strategies make sense? Why (please explain)?
Apple introduces an I-Pod player with a larger memory.
PepsiCo distributes Lay’s Potato Chips to the same stores where it sells Pepsi Cola.
General Electric borrows money from Bank of America at 3 percent interest rate and then makes capital available to its jet engine subsidiary at 8 percent interest.

12. Motives for Diversification
Incentives and Resources with Neutral Effects:
Antitrust regulation / Tax Law
Antitrust laws in 1960s and 1970s discouraged mergers that created increased market power
Tax rate on dividend vs. capital gain
Low performance
Firms plagued by poor performance often take higher risks (diversification is risky)
Uncertain future cash flows
Diversification may be defensive strategy if, Product line matures or is threatened

13. Motives for Diversification
Managerial Motives (Value Reduction)
Diversifying managerial employment risk
Increasing managerial compensation