1. Corporate Level Strategy
Week 5
Copyright Guy Harley 2004

2. Outline Levels of diversification Reasons for diversification
Related diversification
Unrelated diversification
Diversification: Incentives and resources
Copyright Guy Harley 2004

3. What is corporate level strategy?
Strategies that detail actions to gain a competitive advantage through the selection and management of a mix of businesses competing in several industries or product markets
What business the firm should be in and how the corporate office should manage its group of business
Copyright Guy Harley 2004

4. Corporate Strategy
Developing and implementing multi-business strategies may be necessary for effective use of excess resources, capabilities and core competencies that have value across several businesses.
To enhance strategic competitiveness, & earn above average returns.
Copyright Guy Harley 2004

5. A Diversified Company has Two Strategy Levels
Business-Level Strategy (Competitive Strategy)
How to create competitive advantage in each business in which the company competes, using:
Low cost
Differentiation
Integrated low cost/ differentiation
Focused low cost
Focused differentiation
Corporate-Level Strategy (Companywide Strategy)
How to create value for the corporation as a whole 7

6. Corporate Strategy concerns Two Key Questions:
What businesses should the corporation be in?
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 it business-unit parts
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7. Primary Approach Primary approach to corporate level strategy:
Diversification
Firms diversify when they have excess resources, capabilities and core competencies that have multiple uses
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8. Levels of diversification
Firms vary according to
Relatedness
Connections between and among business units
Levels of diversification
Low
Medium
High
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9. Low levels of diversification
Single More than 95% of revenue comes from dominant business
Dominant
Between 70% & 95 % of sales in a single category eg Cadbury-Schweppes.
Tend to be vertically integrated.
Copyright Guy Harley 2004

10. Moderate Levels of Diversification
Related-constrained diversification
Less than 70% of revenue from dominant business and
Businesses share product, technological and distribution linkages
Related-linked diversification
Less than 70% of revenue comes from dominant business
Only limited links between businesses
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11. High Levels of Diversification
Unrelated diversification
Less than 70% of revenue from dominant business
No common links between businesses
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12. Single and Dominant Business Strategies
Advantages
(70-95% from single business)
More understanding of competitive dynamics
managers develop specialised skills
narrower range of business strategies
managing synergies
Disadvantages
More affected by economic downturn
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13. Diversified Position Advantages increased economies of scope
market power by blocking competitors through multi-point competition or vertical integration
financial economies
tax advantages
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14. Operational & Corporate Relatedness
Low
High
Related Constrained
Operational & Corporate Relatedness
High
Vertical integration
Sharing: Operational
Relatedness
Diseconomies of scope
Unrelated
Related Linked
Low
Financial Economies
Economies of Scope
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15. Adding Value by Diversification
Diversification most effectively adds value by one of two mechanisms:
By developing economies of scope between business units in the firms, which leads to synergistic benefits
By developing market power, which leads to greater returns
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16. Alternative Diversification Strategies
Related Diversification Strategies
Sharing Activities 1
Transferring Core Competencies 2
Unrelated Diversification Strategies
Efficient Internal Capital Market Allocation 3
Restructuring 4
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17. 1. - Sharing Activities
Sharing activities often lowers costs or raises differentiation
Sharing activities can lower costs if it:
Achieves economies of scale
Boosts efficiency of utilisation
Means more rapid movement through learning curve
Sharing activities can enhance potential for or reduce the cost of differentiation
Sharing activities must involve activities that are crucial to competitive advantage
Copyright Guy Harley 2004

18. Sharing Activities - Assumptions
Strong sense of corporate identity
Clear corporate mission that emphasises the importance of integrating business units
Incentive system that rewards more than just business-unit performance
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19. 2. - Transferring Core Competencies
Exploits interrelationships among divisions
Starts with value chain analysis:
Identify ability to transfer skills or expertise among similar value chains
Exploit ability to share activities
E.g. Two firms can share the same sales force, logistics network or distribution channels
Copyright Guy Harley 2004

20. 2. - Transferring Core Competencies
Assumptions
Transferring core competencies leads to competitive advantage only if the similarities among business units meet the following conditions:
Activities involved in the businesses are similar enough for expertise sharing to be meaningful
Transfer of skills involves activities that are important to competitive advantage
The skills transferred represent significant sources of competitive advantage for the receiving unit
Copyright Guy Harley 2004

21. 3. - Efficient Internal Capital Market Allocation
Firms pursuing this strategy frequently diversify by acquisition:
Acquire sound, attractive companies
Acquire units that are autonomous
Acquire corporation to supply needed capital
Portfolio managers transfer resources from units that generate cash to those with high growth potential and substantial cash needs
Add professional management and control to sub-units
Sub-unit managers’ compensation is based on unit results
Copyright Guy Harley 2004

22. 3. - Efficient Internal Capital Market Allocation
Assumptions
Managers have more detailed knowledge of a firm relative to outside investors
The firm need not risk competitive edge by disclosing sensitive competitive information to investor
The firm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their own
Copyright Guy Harley 2004

23. 4. - Restructuring
Seek out undeveloped, sick or threatened organisations 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
Unit will often be sold after one-time changes are made, since parent no longer adds value to ongoing operations
Copyright Guy Harley 2004

24. Must do more than restructure companies:
4. - Restructuring
Assumptions
Requires keen management insight in selecting firms with depressed values or unforeseen potential
Must do more than restructure companies:
Need to initiate restructuring of industries to create a more attractive environment
Copyright Guy Harley 2004

25. Summary Model of the Relationship between Firm Performance and Diversification
Resources
Diversification
Strategy
Incentives
Managerial
Motives
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26. Incentives Economies of scope Sharing of activities
Transferring core competencies
Market Power
Blocking competitors
Vertical integration
Financial economies
Efficient internal capital allocation
Business restructuring
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27. Resources & Incentives
Incentives & Resources with neutral effects
Anti-trust regulation
Tax laws
Low performance
Uncertain future cash flows
Risk reduction
Tangible resources
Intangible resources
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28. Incentives to Diversify
Internal Incentives
Poor performance may lead some firms to diversify in an attempt to achieve better returns
To balance uncertain future cash flows
In order to reduce risk
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29. Reasons for diversification
Managerial motives
Diversifying managerial employment risks
Increasing managerial compensation
Effective governance mechanisms may restrict such abuses
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30. Diversification and Firm Performance Level of Diversification
Dominant Business
Related Constrained
Unrelated Business
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Level of Diversification

31. Summary Model of the Relationship between Firm Performance and Diversification
Resources
Diversification
Strategy
Firm
Performance
Incentives
Managerial
Motives
Copyright Guy Harley 2004

32. Capital Market Intervention and Market for Managerial Talent
Summary Model of the Relationship between Firm Performance and Diversification
Capital Market Intervention and Market for Managerial Talent
Resources
Firm
Performance
Diversification
Strategy
Incentives
Internal
Governance
Strategy
Implementation
Managerial
Motives
Copyright Guy Harley 2004

33. Issues to Consider Prior to Diversification
What resources, capabilities and core competencies do we possess that would allow us to outperform competitors?
What core competencies must we possess in order to succeed with a new product or geographical market?
Is it possible to leapfrog competitors?
Will diversification break up capabilities and competencies that should be kept together?
Will we only be a player in the new product or geographical market, or will we emerge as a winner?
What can the firm learn through its diversification?
Is it organised properly to acquire such knowledge?
Copyright Guy Harley 2004

34. Acquisition and restructuring strategies
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35. Outline Mergers, acquisitions and takeovers Reasons for acquisitions
Effective acquisitions
Restructuring
downsizing
downscoping
leveraged buyouts
restructuring outcomes
Copyright Guy Harley 2004

36. Merger
Merger Two firms agree to integrate operations on a relatively equal basis because they have resources and capabilities that create stronger competitive advantage
Acquisition A transaction where one firm buys another firm with the intent of more effectively using a core competency by making the acquired firm a subsidiary within its portfolio of businesses
Takeover An acquisition where the target firm did not solicit the bid.
Copyright Guy Harley 2004

37. Reasons for Acquisitions
Increased market power An acquisition intended to reduce the competitive balance of the industry
Overcome barriers to entry Acquisitions overcome costly barriers to entry that may make ‘start-ups’ economically unattractive
Costs\risks of new product development Buying established businesses reduces the risk involved in start-up ventures
Copyright Guy Harley 2004

38. Reasons for Acquisitions (cont.)
Increased speed to market Closely related to barriers to entry … allows market entry in a more timely fashion
Diversification A quick way to move into businesses when a firm lacks experience and depth in an industry
Avoiding excessive competition Firms may acquire businesses in which competitive pressures are less intense than in their core business
Copyright Guy Harley 2004

39. Poor Performance of Acquisitions
Integration difficulties Differing cultures can make integration of firms problematic
Inadequate evaluation of target Winners curse’ bid causes acquirer to overpay for firm
Large or extraordinary debt Costly debt can create onerous burden on cash outflows
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40. Poor Performance of Acquisitions (cont.)
Inability to achieve synergy Justifying acquisitions can increase estimate of expected benefits
Too much diversification The acquirer does not have the expertise required to manage unrelated businesses
Managers overly focussed on acquisitions Managers lose track of the core business by expending too much effort on acquisitions
Combined firm becoming too large Large bureaucracy reduced innovation and flexibility
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41. Effective Acquisitions
Assets are complementary Buying firms with assets that meet current needs to build competitiveness
Careful selection Process Deliberate evaluation and negotiations are more likely to lead to easy integration and building synergies Targets are selected and ‘groomed’ prior to acquisition etc.
Acquisition is friendly Friendly deals make integration go more smoothly
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42. Effective Acquisitions (cont.)
Maintain Financial Slack Provide enough additional financial resources so that profitable projects are not foregone
Low to Moderate Debt Merged firm maintains financial flexibility
Flexibility Firm has experience at managing change and is flexible and adaptable. Both firms are adaptable
Innovation Continue to invest in R&D as part of the firm’s overall strategy
Copyright Guy Harley 2004

43. Restructuring
Changes in the composition of the firms set of businesses and/or financial structure
Often in response to poor performance and over-diversification
Forms
Downsizing- reduce costs by laying off employees or eliminating operating units
Downscoping- reduce the level of unrelatedness in the firm –leads to greater focus
Leveraged buyout
Copyright Guy Harley 2004

44. Leveraged Buyouts Purchase involving mostly borrowed funds
Generally occurs in mature industries where R&D and innovation are not central to value creation
High debt load commits cashflows to repay debt, creating strong discipline for management
Increases concentration of ownership
Focuses attention of management on shareholder value
Greater oversight by ‘active investor’ board members
Leads to more value-based decision making
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45. Outcomes of restructuring
Downsizing reduces labour costs, but also leads to loss of human capital and lower performance?
Downscoping reduces debt costs and reestablishes emphasis on strategic controls resulting in higher performance
Leveraged buyouts provide emphasis on strategic controls but increased debt costs, long term result is increased performance but greater risk
Copyright Guy Harley 2004

46. Emphasis on Strategic Controls
Restructuring and Outcomes
Short-Term Outcomes
Long-Term Outcomes
Alternatives
Reduced Labour Costs
Loss of
Human Capital
Downsizing
Lower Performance
Reduced Debt Costs
Downscoping
Higher Performance
Emphasis on Strategic Controls
Leveraged
Buyout
High Debt Costs
Higher Risk