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Corporate Level Strategies
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Single & Multiple Business
Organizations
Single business organizations
Operates primarily in only one industry
Multiple Business Organizations
Operates in more than one industry
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How to create value for the corporation as a whole
2. 2. Corporate-Level Strategy (Companywide Strategy)
- - low cost
- differentiation
- integrated low cost/differentiation
- - focused low cost
- focused differentiation
How to create competitive advantage in each
business in which the company competes
1. 1. Business-Level Strategy (Competitive Strategy) )
Multiple Business Organizations Have Multiple Business Organizations Have Two Two
Levels of Strategy Levels of Strategy
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Corporate Strategy
An action taken to gain a competitive
advantage through the selection and
management of a mix of businesses
competing in several industries or product
markets
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Corporate Strategy
Corporate strategies concerned with the broad and
long-term questions of
what business(es) the organization is in or wants to be in &
what it wants to do with those businesses
Task involves
Moves to enter new businesses
Actions to boost the combined performance of businesses
Ways to capture synergy among related businesses
Establishing investment priorities & steering corporate
resources into most attractive units
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Levels and Types of Diversification
Low Levels of Diversification
Moderate to High Levels of Diversification
Very High Levels of Diversification
Related linked (mixed
related & Unrelated)
< 70% of revenues from dominant
business, and only limited links exist
AA
BB CC
Single business
> 95% of revenues from a single
business unit
AA
Dominant business Between 70% and 95% of revenues
from a single business unit
BB
AA
Unrelated Unrelated Business units not closely related
AA
BB CC
< 70% of revenues from dominant
business; all businesses share product,
technological and distribution linkages
Related constrained
AA
BB CC
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Reasons for Diversification
S.Subramanian IIMK
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Value-Creating Diversification:
Economies of Scope -Related Strategies
Related diversification wants to develop and
exploit economies of scope between its
businesses
Economies of scope: Cost savings firm creates by successfully
sharing some of its resources and capabilities or transferring
one or more corporate-level core competencies that were
developed in one of its businesses to another of its
businesses
Composed of related diversification strategies
including Operational and Corporate relatedness
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Value-Creating Diversification:
Related Strategies
Operational Relatedness: Sharing activities
Related constrained diversified firms share activities in order to
create value
Share primary or support activities (in value chain)
Can gain economies of scope
Risky as ties create links between outcomes
Not easy, often synergies not realized as planned
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Value-Creating Diversification:
Related Strategies
Corporate Relatedness: Core competency transfer
Complex sets of resources and capabilities linking different
businesses through managerial and technological knowledge,
experience and expertise
Two sources of value creation
Core competence can be developed in one business unit and transferred
to other business units at no additional cost
Intangible resources difficult for competitors to understand and imitate,
so immediate competitive advantage over competition can be achieved
through transfer of corporate-level core competence
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Value-Creating Diversification:
Related Strategies
Combined Operational Relatedness & Corporate
Relatedness
Sharing activities and transferring core
competencies Walt Disney , Johnson &
Johnson
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Value-Creating Diversification:
Related Strategies- Market Power
Market Power
Exists when a firm is able to sell its products above the
existing competitive level or to reduce costs of primary
and support activities below the competitive level, or
both.
Can come from increasing scale or size
Market power can also be created through:
Multipoint Competition
Exists when 2 or more diversified firms simultaneously compete in the
same product or geographic markets.
Vertical Integration
Exists when a company produces its own inputs (backward integration)
or owns its own source of output distribution (forward integration)
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Vertical Integration Strategies
An organizations attempt to gain control
of
Its inputs (backward integration) -- supplier
Its output (forward integration) --
distributor
Or both inputs and output
Purpose is to (1) reduce resource
acquisition costs, & (2) deal with inefficient
operations
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Vertical Integration Strategies
Benefits
Reduced purchasing &
selling costs
Improved coordination of
functions & capabilities
Protected proprietary
technology
Limitations
Reduced flexibility as firm
is locked into products &
technology
Create an exit barrier due
to existence of assets that
are hard to sell
Difficulties in integrating
various operations
Financial costs of acquiring
or starting up
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Value-Creating Diversification:
Unrelated Diversification
Creates value through two types of financial
economies
Financial economies cost savings realized through
improved allocations of financial resources based on
investments inside or outside firm
Efficient internal capital market allocation (versus external
capital market)
Restructuring of acquired assets
Firm A buys firm B and restructures assets so it can operate more
profitably, then A sells B for a profit in the external market
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Unrelated Diversification (contd)
Efficient Internal Capital Market Allocation
Corporate office distributes capital to business
divisions to create value for overall company
Corporate office gains access to information about
those businesses actual and prospective performance
Conglomerates have a fairly short life cycle
because financial economies are more easily
duplicated by competitors than are gains from
operational and corporate relatedness
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Unrelated Diversification: Restructuring
Restructuring creates financial economies
A firm creates value by buying and selling other firms
assets in the external market
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Value-creating
Strategies of
Diversification:
Operational and
Corporate
Relatedness
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Value-Neutral Diversification:
Incentives and Resources
Value-Neutral Incentives to Diversify
Antitrust Regulation and Tax Laws
Low Performance
Uncertain Future Cash Flows
Synergy and Firm Risk Reduction
Tangible and Intangible Resources and Diversification
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Value-Reducing Diversification:
Managerial Motives to Diversify
Top-level executives may diversify in order to diversity
their own employment risk and to increase their own
compensation, as long as profitability does not suffer
excessively
Diversification adds benefits to top-level managers but not
shareholders
This strategy may be held in check by governance
mechanisms or concerns for ones reputation
S.Subramanian IIMK