AB3602

Strategic Management

Week 6 - Corporate-level Strategy

Caleb Tse
Strategy, IB and Entrepreneurship Division
Nanyang Business School
Nanyang Technological University

AY2023-24 S2
 Agenda
Explain Corporate-level Strategies
• What is Corporate Level Strategy?
• Types of Diversification
• Motives for Diversification
• Operational & Corporate Relatedness
• Market Power via Vertical Integration
• How to use Portfolio Management Tools

10-min Break

Group Discussion – Strategic Audit Project Brainstorming

Strategic Management Framework
Corporate Strategy
From Business Strategy to Corporate Strategy

• Business Strategy • Corporate Strategy

... ...
Healthcare Other Healthcare Other
(e.g., Energy Industries (e.g., Energy industries
diagnostic (e.g., (e.g., diagnostic (e.g., (e.g.,
imaging) renewable building and imaging) renewable building and
power) automation) power) automation)

• Key question • Key question

– How can the diagnostic imaging
division create and sustain a
competitive advantage?
▪ Competitive advantage driven by
resources/capabilities and activities
▪ Built on a deep understanding of the
industry context
– How can Siemens obtain and sustain
a competitive advantage?
▪ Emphasis on scope and links
across business units
▪ Built on deep understanding of
each component business unit
 What is Corporate Strategy?

Corporate Strategy
A 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

What range of products

Diversification Two main
and services to offer?
objectives of
corporate
strategy
Where to compete? Geographic Scope
 What is Corporate Strategy?

Corporate Strategy
A 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

What range of products

and services to offer?

Where to compete?
 What is Corporate Strategy?

Corporate Strategy
A 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

• Is used as a means to grow revenues and profits

• Focuses on diversification
• Is expected to help the firm earn above-average returns by creating value
• Is concerned with two key issues:
• In what product markets and businesses should the firm compete?
• How corporate headquarters should manage those businesses: Buy, “borrow,”
create, sell?
 Levels and Types of Diversification

There are five categories

of businesses according to
increasing levels of
diversification:
❖ Single business
❖ Dominant business
❖ Related constrained
❖ Related linked
❖ Unrelated
Q: What is the link between firm age,
size and diversification?
 Low Levels of Diversification
• Single-business diversification strategy:
• 95 percent or more of firms’ sales revenue from its core business area
• Dominant-business diversification strategy
• The firm generates between 70 and 95 percent of its total revenue within
a single business area

Dominant: Package
delivery
Secondary: Non-
Single-business: packaged businesses
Pepper sauce
 Moderate/High Levels of Diversification
• Related constrained diversification strategy
• <70% of revenue comes from the dominant business and all business
share product, technological, distribution linkages
• Related linked diversification strategy
• <70% of revenue comes from the dominant business, and there are only
limited links between businesses

Dominant: Meals & Dominant: Healthcare

Beverages Other: Aviation
Other: Snacks Other: Energy
 Very High Levels of Diversification
• Unrelated diversification strategy
• <70% of revenue comes from the dominant business, and
there are no common links between businesses
Q: What do most of
these FMCG
corporate firms use
as diversification
strategy?
Motives For Corporate Strategy
Motives for Diversification
Motives for Diversification
 Value-Creating Diversification Strategies

❖ What is Synergy?

❖ Operational relatedness provides

opportunities to share resources
among the operational activities of
the firm.
❖ Corporate relatedness provides
opportunities for transferring
corporate-level competencies
across businesses of the firm.
 Value Creating Diversifications:
Related Diversification

• Why related diversification?

• Economies of scope: Cost savings through sharing resources and
capabilities or transferring one or more corporate-level core
competencies
• Operational relatedness: Sharing of value chain activities
• Corporate relatedness: Transferring of corporate level core
competencies
• Market power: Sell above competitive level, reduce the costs below
competitive level, or both
• Multipoint competition
• Vertical integration

Let’s focus on economies of scope first

Relatedness Between Business Units
Two Approaches
 Economies of Scope:
Operational Relatedness

• Firms can create operational relatedness by sharing either (value chain):

• A primary activity: Supply chain, inventory, distribution, and more
• A support activity: R&D, information systems, finance, and more

• Sharing activities is usually associated with the related constrained

diversification corporate-level strategy

• Operational relatedness: Cautionary tale

• Is costly to implement and coordinate
• May create unequal benefits for the divisions involved
Example: P&G
P&G’s History & Strategy

• Starting in 1837 candle + soap: Stearic Acid

as the common ingredients, extracted from
animal fats and vegetable oils (palm,
coconut, and more)

• In 1911 Crisco shortening: vegetable oils

(mainly palm)
P&G = high operational relatedness
To grow, it shares across all its
brands/SBUs
• Primary activities such as supply
chain, distribution, inventory
management, production and
marketing/customer service
• Secondary activities such as R&D
innovation, financial systems
 Economies of Scope:
Corporate Relatedness

• Corporate-level core competencies are complex sets of resources

and capabilities that link different businesses, primarily through
managerial and technological knowledge, experience, and
expertise:
• Typically associated with related-linked diversification
• Know-how transferred between separate activities with no physical or
tangible resource involved is a transfer of a corporate-level core
competence (HQ), not operational sharing of activities.

• Related-linked creates value in two ways

• Expenses of developing a core competence are reduced (incurred once)
• Intangibility: Difficult for competitors to understand and imitate
Example: Virgin Group
 Simultaneous Operational &
Corporate Relatedness

• The ability to simultaneously create economies of scope by sharing

activities (operational relatedness) and transferring core
competencies (corporate relatedness):
• Is difficult for competitors to understand and imitate
• Is very expensive to undertake
• Often results in discounted assets by investors
Example: Disney
 Related Diversifications:
Market Power

• Market power may be gained by firms successfully using a related

diversification strategy
• Sell above (price level), reduce costs below, or both when compared with competitors

• Market power is fostered through pressure to engage in:

• Multipoint competition - when two or more diversified firms simultaneously compete in
the same product areas or geographical markets.
• Vertical integration - when a company produces its own inputs (backward integration)
or owns its own source of output distribution (forward integration).
Upstream
Market Power: Vertical Integration

Downstream Vertical integration

Firm’s ownership of raw
material production or final
product/service distribution
channels

Tends to correspond to the

number of industry value
chain stages in which a firm
participates.

Transformation of raw material into

finished goods and services. Each
stage typically represents a
different industry.
 Market Power:
Vertical Integration Example

https://www.youtube.com/watch?v=eH3n94IHRGk
 Market Power: Vertical Integration
• Vertical integration advantages:
• Securing critical supplies
• Lowering costs & improving quality & facilitating planning
• Fend off imitation on technologies
• Facilitating investments in specialized assets

• Vertical integration limitations:

• Internal transactions may be expensive and reduce profitability (e.g. obligations)
• Bureaucratic costs may be present
• Substantial investments in specific technologies are required, reducing a firm’s
flexibility
• Changes in demand create capacity balance and coordination problems
 Value Creating Diversifications:
Unrelated Diversification
• Firms do not seek operational relatedness or corporate relatedness when
using the unrelated diversification corporate-level strategy

• Financial economies are cost savings realized through improved allocations

of financial resources based on investments inside or outside the firm

• Two sources:
• Efficient internal capital market allocation: Better than external capital market, and if firm
debt/equity stabilities is high, potentially lower costs of capital
• Asset restructuring
 Value Neutral Diversifications

• Diversification is sometimes pursued for value-neutral reasons

• Different incentives
• The quality of the firm’s resources may permit only value-neutral
diversification

• External Incentives
• Antitrust regulations: Can diversifications take place or not?
• Tax laws: Deduction of tax for certain expansions of firms

• Internal Incentives
• Low performance (past) & uncertain future cash flows (future)
• Synergy & reduction of risk for the firm
 Value Reducing Diversifications
• Managerial motives to diversify beyond value-creating and value-
neutral levels: Empire-building
• Positive correlation between diversification and size: The desire for increased
compensation and status
• Reduced managerial risk (e.g. lower risk of job loss)

• Linked with over-diversification and a subsequent reduction in a

firm’s ability to create value: Loss of governance efficiency

• This managerial agency problem can be partially solved (Later in

Chapter 10)
• Governance mechanisms (board of directors)
• Monitoring by owners
• Executive compensation practices
• The market for corporate control
 Corporate Diversification Performance
• Are the individual businesses worth more under the company’s management than
if each were managed in separate firms?
 Essential Consideration:
Resource, Diversifications, & Performance

• A firm must have the types and levels of resources and capabilities
needed to successfully use a corporate-level diversification strategy

• The level of diversification with the greatest potential positive effect on

performance is based partly on the effects of the interaction of resources,
managerial motives, and incentives on the adoption of particular
diversification strategies.
Options to Implement Corporate Strategy
Broad Options For Product Diversification Implementation Issues For Various Options

Direct Ownership

Important questions to be answered

• Do we have the necessary capabilities and competences to
Product successfully diversify?
Diversification
Acquisitions
• Do we have enough resources (financial, managerial, etc) to take
over another firm?
• How can we overcome various post integration issues?
Direct ― Cultural issues between firms
Ownership
Alliances ― Retention of key personnel
― Integration of functions, people and processes

Internal Development
• How can we develop new capabilities and competencies required by
diversification by ourselves?
• Will we be able to build up capabilities and competencies in a timely
manner?

Internal Development / Alliances

Acquisitions
Organic Growth • Can we find a suitable partner in the endeavor?
• How to structure the alliance to ensure success?
• How to reduce potential agency and coordination issues?

The Choice of Expansion Will Have to Take into Consideration the Firm’s Unique Strengths &
Weaknesses, and Various External Factors
Internal Portfolio Management
BCG Growth-share Matrix:
Restructuring
The Product Portfolio: BCG Model

Four situations (Classifications):

❖ Stars with large cash use and generation patterns
❖ Cash cows generate more cash than they use
❖ Question marks need more cash than they can generate
❖ Dogs (or Deadwood) require more attention to divest
 Limitations of the BCG matrix

• No economies of scope: If we get rid of the dog, we get rid of economies of scope.
For eg., if Toyota’s cost of producing a Tacoma pickup and a sedan is lower than
producing each of those independently, then there are synergies which exist. If we
get rid of one, the cost structure goes up!

• In addition to losing economies of scope, we also lose out on cross-selling

The McKinsey Matrix (GE)
 The McKinsey Matrix (GE)
Industry Attractiveness:
❖ Market growth rate
❖ Market Size
❖ Demand Variability
❖ Industry profitability
❖ Industry rivalry
❖ Global opportunities
❖ General environment factors
Q: What are the limitations for McKinsey Matrix?
Business Unit Strength:
❖ Market share
❖ Growth in market share
❖ Brand equity
❖ Distribution channel access
❖ Production capacity
❖ Profit margins relative to
competitors
Guidelines from Portfolio Management
Allocate resources to businesses accordingly:
❖ Keep and invest in businesses which are located in attractive industries
and where we have core competencies (i.e., strong competitive position
in an attractive industry)
❖ Divest businesses which are located in unattractive industries and where
we do not have core competencies
❖ Selective investment in moderately attractive industries where
competencies are not strong

❖ KEY: Be mindful of economies of scope (operational & corporate

relatedness)
Source: Adapted from R. E. Hoskisson & M. A. Hitt, 1990, Antecedents
and performance outcomes of diversification: A review and critique of
theoretical perspectives, Journal of Management, 16: 498.
Diversification and Firm Performance
10-min break
 Strategic Audit:
Group Discussion
 See you next week

Individual Critical Thinking Assignment

Due – REC Solar