CORPORATE LEVEL

STRATEGY

Milan Neupane
Loreta Froyalde

Definition:

- Overall
organizational
strategy
that
addresses the question "what business or
businesses are we in or should we be in?
- How to gain a competitive advantage by
selecting and managing a group of different
businesses competing in different product markets

Corporate Level Strategy

Main concern:

Corporate Strategy deals primarily with plans for

the entire organization and change as the
capabilities of the organization develop and as the
environment of the organization changes.

Corporate Level Strategy

Focuses on:

Investment level portfolio

Delivers benefits to primary beneficiary such as
increasing the wealth of shareholders through
profitability of the overall corporate portfolio

Corporate Level Strategy

Goal of Corporate Strategy:

To build corporate advantage

Earn above normal returns
Three tests on the existence of corporate advantage

1.
Does ownership of the business create benefit somewhere in
the corporation?
2.
Are those benefits greater than the cost of corporate overhead?
3.
Does the corporation create more value with the business than
any other possible corporate parent or alternative governance
structure?
Corporate Level Strategy

Figure 1.1 Hierarchy of strategy

Corporate Strategy

Responsibility of corporate
Level Managers

Two way Influence

Business
Strategies

Responsibility of business level

General managers

Two way Influence

Functional Strategies
(R&D, manufacturing,
human resources, etc.)

marketing,

finance,

Responsibility of heads of major

functional activities within a
business unit or division

Two way Influence

Operating Strategies
(regions & districts, plants dept. within functional
areas)

Corporate Level Strategy

Responsibility of plant
managers, geographic unit
managers, & lower level
supervisors

Three (3) dimensions of Corporate Scope:

Diversification
Vertical Integration
Geographic Scope

Geographic scope
Diversification

Diversification
Vertical Integration
Corporate Level Strategy

What is Diversification?

A strategy that involves entering one or more industries that

are different from a companys core/original industry in order
to find ways to use distinctive competences to increase the
value of products offered by those other industries
Means crafting strategy for a multi-business, multi-industry
company
Diversification can be related or unrelated

Corporate Level Strategy

Corporate Level Strategy

Corporate Level Strategy

Levels and types of diversification: therelated ratio

Low Levels of Diversification
Single business > 95% of revenues from single
business unit
Dominant business
Between 70% and 95% of
revenues from single business unit B
Moderate to High Levels of Diversification
Related constrained < 70% of revenues from dominant
all businesses share activities in value chain

business;

Related linked (mixed) < 70% of revenues from dominant

business; only limited links exist
Very High Levels of Diversification
Unrelated-Diversified
Business units not closely related

Corporate Level Strategy

Why Choose Diversification?

- Have excess resources
- Permitting superior internal governance
- Transferring competences among businesses
- Realizing economies of scope

Corporate Level Strategy

Disadvantages of Diversification:
- Seasonal, cyclical or economic downturns in related
industries can be felt more severely
- The necessary integration, creation of efficiencies
and cost savings, or achievement of competitive
advantage may be elusive

Corporate Level Strategy

Corporate level strategy

Mail

Business
level

DPWN
Express

Logistics

Financial
Services

KEY ISSUES:
CORPORATE STRATEGY:

What businesses should we be in?

How should these be managed?

How to create value for the corporation as a

whole?

Corporate Level Strategy

What is Vertical Integration?

Strategy that involves the firm expanding into its value system by
making some or all of its own inputs and/or distributing or selling
some or all of its own products
Number of stages a firm engages in the value chain
Forward (into distribution channels) vs.
backward integration (sources of supply)
- Make vs. buy
Means becoming a multi-industry business through merger,
acquisition or by establishing its own operations in upstream or
downstream industries.

Corporate Level Strategy

Vertical Integration:

Number of stages a firm engages in the value chain

IBM
IT Hardware

Software
Vertical Dimension
IT Consulting and
Outsourcing

Corporate Level Strategy

Vertical Integration-

Corporate Level Strategy

Vertical Integration-

Corporate Level Strategy

Synergies

Cost-driven synergies: Sharing of activities lowers

costs

- Supply-based joint resources (Economies of scope): if a firm

produces two related products, the total costs of producing them
jointly is lower than the sum of the cost of producing them separately
(share fixed costs between different products) due to resource
sharing.

Examples : common distribution facilities, brands,

joint R&D

Corporate Level Strategy

Transferring Core Competencies

It means taking something that an organization is

good at and using it in a new industry.
The most famous example of this of all time was
Henry Ford and his mass production/assembly line
techniques. Today Ford is most famous for cars,
however Ford took his ideas and applied them to farm
equipment, large trucks, and even airplanes! Some of
these businesses remain to this day as you can still
find Ford farm equipment.

Corporate Level Strategy

Hence, the most significant part of the work are

these three task, to wit:
evaluate the strategies,
put them into action and
they must monitored
These strategies will be powerful enough to lift the
companys performance for the long term direction
of the organization as a whole.

Corporate Level Strategy

Corporate-level
Strategy

 Corporate-level strategy and purpose

Different levels of diversification with different corporatelevel strategies
Three primary reasons firms diversify
How firms can create value by using a related diversification
strategy
Two ways value can be created with an unrelated
diversification strategy
The incentives and resources that encourage diversification
Motives that can encourage managers to over diversify a firm.

Topics to be discussed

2001
2005

 Specifies actions a firm takes to gain a competitive

advantage by selecting and managing a group of different
businesses competing in different product markets.

Corporate-level Strategy

Dont put your eggs in

one basket

 Low Levels of Diversification

Moderate and High Levels of Diversification
Very High Levels of Diversification

Levels of Diversification

1.) Single business diversification strategy

It is a corporate-level strategy wherein the firm generates
95% or more of its sales revenue from its core business area.
2.) Dominant-business diversification strategy
The firm generates between 70% and 95% of its total
revenue within a single business area.

Low Levels of
Diversification

Examples of Low-level Diversification

(Single business)

Examples of Low-level Diversification

(Dominant business)

1.) Related Diversification Strategy

A firm generating more than 30% of its revenue

outside a dominant business and whose
businesses are related to each other in some
manner

Moderate and High Levels

of Diversification

2.) Related-linked Diversification Strategy

Share fewer resources and assets between their
businesses, concentrating instead on transferring
knowledge and core competencies between the
businesses.

 A highly diversified firm that has no relationships

between its businesses
These businesses are not related to each other, and the
firm makes no efforts to share activities or to transfer
core competencies between or among them.

Very High Level of

Example of Very High

Levels of Diversification

Value-Creating Diversification
Economies of scope
Sharing activities
Transferring Core Competencies
Market Power
Blocking competitors through multipoint competition
Vertical Integration
Financial Economies
Efficient internal capital allocation
Business Restructuring

Reasons for
Diversification

Value-Neutral Diversification

Antitrust regulation
Tax laws
Low performance
Uncertain future cash flows
Risk reduction for firm
Tangible resources
Intangible resources

Value-Reducing Diversification
Diversifying managerial employment risk
Increasing managerial compensation

Reasons for
Diversification

 These are cost savings that the 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

Economies of Scope

 Firms expect activity sharing among units to result in

increase strategic competitiveness and improved financial
returns.
Activity sharing is also risky because ties among a firms
businesses creates links between outcomes.

Operational relatedness:
Sharing Activities

Corporate Relatedness: Transferring

Core Competencies
These are complex sets of resources and capabilities that
link different businesses primarily through managerial
and technological knowledge, experience, and expertise.

 Market power exists when a firm is able to sell its

products above the existing competitive level or to reduce
the costs of its primary and support activities below the
competitive level, or both.

Market Power

 Multipoint exists when two or more diversified firms

simultaneously compete in the same product areas or
geographical markets.

Multipoint Competition

 Vertical integration exists when a company produces its

own inputs or owns its own source of output distribution.

Vertical Integration

 Financial Economies are cost savings realized through

improved allocations of financial resources based on
investments inside or outside the firm.

Financial Economies

 Efficient internal capital allocations reduce risk among

the firms businesses

Efficient Internal Capital

Market Allocation

 The diversified firm buys another company, restructures

that companys assets in ways that allow it to operate
more profitably, and then sells the company for a profit in
the external market.

Restructuring of acquired
assets

 Antitrust laws prohibiting mergers that created increased

market power were stringently enforced during that
period.
Tax effects of diversification stem not only from
corporate tax changes, but also from individual tax rates.

Antitrust regulation and

tax laws

 Some research shows that low returns are related to

greater levels of diversification. If high performance
eliminates the need for greater diversification, then low
performance may provide an incentive for diversification.

Low Performance

 Diversified firms pursuing economies of scope often have

investments that are too inflexible to realize synergy
between business units.

Synergy and Firm Risk

Reduction

 Tangible resources may create resource interrelationships

in production, marketing, procurement, and technology
defined earlier as activity sharing.
Intangible resources are more flexible than tangible
physical assets in facilitating diversification.

Tangible and Intangible

Resources

END..