Corporate-Level

Strategy

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copied or duplicated, or posted to a publicly accessible website, in
whole or in part.
Two Strategy Levels

• Business-level Strategy (Competitive)

– Each business unit in a diversified firm chooses a
business-level strategy as its means of competing in
individual product markets.

• Corporate-level Strategy (Companywide)

– Specifies actions taken by the firm to gain a
competitive advantage by selecting and managing a
group of different businesses competing in several
industries and product markets.

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The Role of Diversification

• Diversification strategies play a major

role in the behavior of large firms.

• Diversification concerns:
–The scope of the industries and markets
in which the firm competes.
–How managers buy, create and sell
different businesses to match skills and
strengths with opportunities presented
to the firm.

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Levels of Diversification: Low Level

Single Business
More than 95% of
revenue comes A
from a single
business.

Dominant Business
Between 70% and
95% of revenue
A
comes from a single
B
business.

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Levels of Diversification: Moderate to High
• Related Constrained •Related Linked (mixed
– Less than 70% of related and unrelated)
revenue comes from –Less than 70% of
a single business and revenue comes from the
all businesses share dominant business, and
product, there are only limited
technological and links between
distribution linkages. businesses.

A A

B C B C

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Levels of Diversification: Very High Levels

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

It is called ‘conglomerates’ .

B C

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Reasons for Diversification
Typically, a diversification strategy is
used to increase the firm’s value by
improving its overall performance.

However, diversification may be

Value-Neutral

or even

•Value Reducing too

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Reasons for Diversification (continued)

Value-Creating Diversification Strategy

Ways:

•Operational Relatedness

•Corporate relatedness

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Related Diversification
• Firm creates value by building upon or
extending:
–Resources
–Capabilities
–Core competencies

• Economies of Scope
–Cost savings that occur when a firm
transfers capabilities and competencies
developed in one of its businesses to
another of its businesses.

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Related Diversification: Economies of Scope

• Value is created from economies of scope

through:
–Operational relatedness in sharing activities/
tangible (plant, equipment, other physical
recourses) recourses.
–Corporate relatedness in transferring skills
or corporate core competencies/intangible
(know-how, capabilities, competencies)
resources among business.

• It depends how sharing tangible and

intangible resources are jointly used to
create economies of scope.

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Related Diversification: Market Power

• Market power exists when a firm can:

–Sell its products above the existing

competitive level and/or

–Reduce the costs of its primary and

support activities below the competitive
level.

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Related Diversification: Market Power
(cont’d)

• Multipoint Competition
–Two or more diversified firms
simultaneously compete in the same
product areas or geographic markets.

• Vertical Integration
–Backward integration— producing its own
inputs by one of its own enterprises.
–Forward integration— using its own output
for its own enterprise.

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Related Diversification: Complexity

• Simultaneous Operational Relatedness

and Corporate Relatedness
–Involves managing two sources of resources
and knowledge simultaneously:
•Operational forms of economies of scope
•Corporate forms of economies of scope
–Many such efforts often fail because of
implementation difficulties.
–However, if it can be done successfully the
firm would get sustainable competitive
advantages, as the competencies are less
imitable.

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Unrelated Diversification

Unrelated diversifications usually do not

create value through operational
relatedness or corporate relatedness.
Unrelated diversified firms enjoy:
•Financial Economies
–Are cost savings realized through improved
allocations of financial resources.
–Create value through two types of financial
economies:
•Efficient internal capital allocations
•Purchase of other corporations and the
restructuring their assets
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Unrelated Diversification (cont’d)

• 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
My focus on
Creating value by buying and selling other
firms’ assets in the external market.

Should think before

Focusing on mature, low-technology
businesses.
Focusing on businesses not reliant on a client
orientation.

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Value-Neutral Diversification: Incentives
and Resources

• The objectives firms seek when using

diversification strategies to help the firm
create value. However, these strategies are
sometimes used with value-neutral rather
than value-creating objectives in mind.

• Some incentives (external) and firm’s

resources (internal) may influence this value-
neutral diversifications.

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Value-Neutral Diversification: Incentives
and Resources

• Antitrust Regulation and Tax Laws

• Low Performance

• Uncertain Future Cash Flows

• Resources – idle money, some sorts of

knowledge/expertise

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Value-Reducing Diversification: Managerial
Motives to Diversify

The desire for increased compensation and

reduced managerial risk are two motives for
top level executives to diversify their firm
beyond value-creating and value-neutral
levels.

In slightly different words, top-level

executives may diversify a firm in order to
diversify their own employment risk, as long
as profitability does not suffer excessively.

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