Chapter 6: Corporate-Level Strategy

Overview:

Define and discuss corporate-level strategy Different levels and types of diversification Three primary reasons firms diversify Value creation: related diversification strategy Value creation: unrelated diversification strategy Incentives and resources encouraging diversification Management motives for overdiversification
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Introduction
Business-level Strategy An integrated and coordinated set of commitments and actions the firm uses to gain competitive advantage by exploiting core competencies in specific product markets Corporate-level Strategy Specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets

Expected to help firm earn above-average returns Value ultimately determined by degree to which the businesses in the portfolio are worth more under the management of the company then they would be under any other ownership
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Introduction
Corporate-level strategy concerns: The scope of the markets and industries the firm competes in How the firm manages their portfolio of businesses Mode of entry into new businesses

Internal development, acquisitions/merger, joint venture/strategic alliance

Level and type of diversification Capturing synergies between business units Allocating corporate resources

Product diversification is the primary form of corporate-

level strategy Diversification is often looked at as a growth strategy

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Introduction
Diversified firms vary according to level and type of

diversification (Figure 6.1)

Level # of different industries a firms competes in Type degree of relatedness between business units

Corporate-level strategy is also concerned with: Capturing economies of scope or synergies between business units (Related) Capturing financial synergies (Unrelated)

Levels and Types of Diversification

Reasons for Diversification (Table 6.1)

Value-Creating Diversification Strategies: Operational and Corporate Relatedness (Figure 6.2)

Value-Creating Diversification: Related Strategies

Purpose: Gain market power relative to

competitors 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 Can gain economies of scope Share primary or support activities (in value chain) Risky as ties create links between outcomes Related constrained diversified firms share activities in order to create value 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

Use related-linked diversification strategy

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Value-Creating Diversification: Related Strategies

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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Value-Creating Diversification: Related Strategies

Proctor and Gamble
Provides branded consumer goods products worldwide 3 GBUs

Beauty GBU

Beauty segment Grooming segment Health Care segment Snacks, Coffee, and Pet Care segment Fabric Care and Home Care segment Baby Care and Family Care segment
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Health and Well-Being GBU

Household Care GBU

Value-Creating Diversification: Related Strategies

Johnson and Johnson
Engages in the research and development, manufacture, and sale of

various products in the health care field worldwide 3 segments Consumer segment

Products for baby care, skin care, oral care, wound care, and womens health care fields, as well as nutritional and over-the-counter pharmaceutical products Products for anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology, and virology Products for circulatory disease management, orthopaedic joint reconstruction and spinal care, wound care and womens health, minimally invasive surgical, blood glucose monitoring and insulin delivery, and diagnostic products, as well as disposable contact lenses
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Pharmaceutical segment

Medical Devices and Diagnostics segment

Value-Creating Diversification: Related Strategies

Campbell Soup Company
Engages in the manufacture and marketing of branded

convenience food products worldwide 4 segments

U.S. Soup, Sauces, and Beverages Baking and Snacking International Soup, Sauces, and Beverages
North America Foodservice

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Value-Creating Diversification: Unrelated Strategies

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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Value-Creating Diversification: Unrelated Strategies

United Technologies Corporation Provides technology products and services to the building systems and aerospace industries worldwide

Otis segment elevators and escalators Carrier segment air conditioning and refrigeration UTC Fire and Security segment. Pratt and Whitney segment - aircraft engines; parts and services Hamilton Sundstrand segment - aerospace products and aftermarket services Sikorsky segment helicopters UTC also engages in the development and marketing of distributed generation power systems and fuel cell power plants for stationary, transportation, space, and defense applications
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Value-Creating Diversification: Unrelated Strategies

Textron, Inc. Operates in the aircraft, industrial, and finance industries worldwide. 4 segments

Bell helicopters plus parts and service Cessna general aviation aircraft Industrial auto parts, food containers, hydraulics, golf carts Finance aircraft finance, asset-based lending, distribution finance, golf finance, resort finance
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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

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Portfolio Analysis
Requires the continual evaluation of a firms portfolio of

business units This involves:

Assessing the attractiveness of the industries the firm competes in Assessing the competitive strength of a firm's business units Checking the competitive advantage potential of sharing activities and/or transferring competencies across business units Checking the potential for capturing financial economies

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Portfolio Analysis
Best Case Scenario: All of a firm's business units compete in attractive industries and have strong competitive positions and There are ample opportunities to capture economies of scope and/or financial economies Useful Tools for Portfolio Analysis Include: Nine cell industry attractiveness and competitive strength matrix BCG growth share matrix

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Portfolio Analysis
Nine cell industry attractiveness and competitive strength matrix

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Portfolio Analysis
BCG growth share matrix

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