4 Corporate-level strategy is concerned with two key issues: in what product markets and businesses

the firm should compete and how corporate headquarters should manage those businesses.5

Very High Levels of Diversification Unrelated: Less than 70% of revenue comes from the dominant
business, and there are no common links between businesses.

A firm uses a corporate-level diversification strategy for a variety of reasons (see Table 6.1).
Typically, a diversification strategy is used to increase the firm’s value by improving its overall
performance. Value is created either through related diversification or through unrelated
diversification when the strategy allows a company’s businesses to increase revenues or reduce
costs while implementing their business-level strategies.26 Other reasons for using a diversification
strategy may have nothing to do with increasing the firm’s value; in fact, diversification can have
neutral effects or even reduce a firm’s value. Value-neutral reasons for diversification include a
desire to match and thereby neutralize a competitor’s market power (e.g., to neutralize another
firm’s advantage by acquiring a similar distribution outlet). Decisions to expand a firm’s portfolio of
businesses to reduce managerial risk or increase top managers pay can have a negative effect on the
firm’s value. Greater amounts of diversification reduce managerial risk in that if one of the
businesses in a diversified firm fails, the top executive of that business does not risk total failure by
the corporation. As such, this reduces the top executives’ employment risk. In addition, because
diversification can increase a firm’s size and thus managerial compensation, managers have motives
to diversify a firm to a level that reduces its value.27 Diversification rationales that may have a
neutral or negative effect on the firm’s value are discussed later in the chapter.

Financial economies (unrelated diversification) • Efficient internal capital allocation • Business

restructuring

Financial economies (discussed later), rather than either operational or corporate relatedness, are
the source of value creation for firms using the unrelated diversification strategy.