Developing corporate-

level strategy options

Learning outcomes define and explain the two main elements of corporate-level strategy;

outline the benefits and costs of corporate-level strategy options;

identify the levels of diversification in corporate strategy and their

implications for

strategy options;

describe the role of corporate headquarters and identify the implications

for strategy development;

use the product portfolio matrix to choose between corporate-level strategy

options;

outline the main corporate-level strategy tools available to a corporate

headquarters.
Business to corporate

• Having examined strategy options at the business level in the

last chapter, we now consider options at the corporate level
• The business level focuses on individual markets and firms that
operate in a single industry
• Some firms will choose to diversify beyond a single area and
operate in several mar- kets, each with its own strategy, business
team and profit centre
• there will be a require- ment for a corporate strategy to co-
ordinate, manage and communicate with each business area and
with outside organisations such as banks and shareholders
The case of news corporation

• operates at the separate business levels of newspapers,

television broadcasting and film production amongst
others. Each subsidiary has its competitors and strategic
decisions at the business level.
• News Corporation headquarters acts at the corporate
level when it makes decisions across all the various
companies – for example, new investment in the internet
along with a reduction in its interests in satellite
transmission. Such corporate decisions may be about
diversification issues into new media and beyond
Corporrate level strategy

Definitions
• The strategic decisions that lead companies to
diversify from one business into other business
areas, either related or unrelated
• means the role of the corporate headquarters in
directing and influencing strategy across a
multi-product group of companies.
Strategic options in the corporate level
Diversification

• Diversification strategy occurs when an organisation moves away from a

single product or dominant business area into other business areas, which
may or may not be related to the original business

• Some diversified groups seem to have very little connection across parts
of the group – for example, at GE, its healthcare division does not appear
to have much connection with its commercial finance division

• Equally, other diversified groups have a clear connection between the

various parts – for example, at the multinational company Nestlé, its
global ice cream business with the same brand symbol around the world–
has at least one connection with its worldwide Nescafé coffee business:
both companies call on the same supermarket customers.
Corporate level benefits and
costs of diversifying
• multi-business corporations are major
contributors to all the economies of the
leading nations of the world. In the USA
and Western Europe, such cor- porations
account for around 60 per cent of industrial
output
• such companies are usually also multi-
product companies with a diversified
portfolio of business interests
Diversifying at corporate level

• In multi-product companies, each of the subsidiaries will have

a large or a limited trading connection with another part of the
group

• at GE, the consumer finance division will have only

limited connections with the media division because
these divisions have few common customers and
resources
• at GE, the consumer and industrial division may have
some common interest with the energy division
because they both have common industrial customers
Benefits of corporate level
strategy diversification
• competitive resources and strong market
position of one division of an organisation
might be used to support another division
• Example is the Virgin Group where the
strong Virgin brand has been used to
support quite different businesses from
cosmetics to airlines.
Benefits of corporate level
strategy diversification
• Corporate strategy benefits can also occur through sharing
resources and activities across a range of related businesses
within a corporate group
• For example, the US consumer products group Procter and
Gamble (P&G) is market leader in both paper towels and in
Pampers babies’ nappies (diapers).
• Both of these products are manufactured from paper that is
produced in a P&G joint fac- tory to gain economies of scale
and jointly reduce their costs
 There are three
principal cost the size and cost
areas associated of the
with the higher headquarters
risks of staff;
Cost of corporate diversification:

level strategy
diversification
 the complexity the lack of a
and management competitive
of the diversified resource-based
firm; focus.
The size and cost of
headquarters staff

• The most obvious disadvantage of operating a

diversified firm is the need to employ a corporate
headquarters.
• there was a ‘wide variation in the absolute size of
corporate headquarters
• numbers of staff in headquarters varied from two for a
company in Chile to 17,100 for a company in Germany
• Typically, headquarters staff might include general
management, legal, financial, reporting and control, and
taxation
The complexity and management of the diversified firm

• during the 1980s, corporations began to realise that such diversification

carried costs associated with the internal management
• Some of the large corporations were broken up into their constituent
parts, at least in part because they became too complex to manage
The lack of a During the 1990s, the resource-based view (RBV) of the firm ––
competitive became increasingly prominent in strategy development
resource-based focus

From a corporate perspective, such an approach suggested that the

heavily diversified firm is lacking in competitive focus and
therefore has few competitive advantages

From this viewpoint, it would be better to break up the corporation

Three levels of diversification
• For the purposes of strategy options development, it is useful to
identify three main levels of diversification:
1 close-related diversification,
2 distant related diversification
3 unrelated diversification.
Close-related diversification

• With close-related diversification, the different companies

within the group may have different products or services but
have some form of close affinity such as common customers,
common suppliers or common overheads
• Unilever group includes separate companies in such businesses
as Magnum ice cream, Flora margarine, Hellman’s mayonnaise
and Knorr soups
Distant-related diversification

• In distant-related diversification, although the different

companies in the group will have quite dif- ferent
products or services, possibly using wholly different
technologies, they will share the same underpinning
core competencies or some other area of technology or
service that would benefit from co-ordination by a
central headquarters
• For example, 3M has many diversified businesses, but
its underpinning core competencies in adhesives and
coatings are used widely throughout the group
Unrelated diversification

• In unrelated diversification, the different

companies in the group have little in
common with regard to products, customers
or technologies. However, they benefit
from the resources of the headquar- ters
with regard to the availability of lower-cost
finance, quality of management direction
and other related matters
Corporate headquarters characteristics

•  an understanding of or familiarity with the key factors for success relevant for all of the diverse
industries in which each of its subsidiaries is engaged;
• an ability to contribute something extra beyond the subsidiaries that it manages – these might be
from any of the areas identified earlier (e.g. R&D, finance);
•  following from the above two points, an ability to define its HQ role accordingly. Essentially, if
the diversified group is highly related, then HQ has a strong strategy linking role; if the group is
highly diversified, then HQ has a role closer to a banker who leaves the strategy to the subsidiaries,
raises the finance for the group and assesses the performance of subsidiaries. The next section
explains this is in more depth.
Main HQ Operations

• Ethics and corporate social responsibility issues

• https://www.youtube.com/watch?v=33Theeovq1
c

• Stakeholder management and communication,

including shareholders
• Control and guidance of subsidiaries - Both
Nokia and Unilever have closely related
subsidiaries with strong engagement from the
centre,
 Main HQ Operations
• Remuneration, incentives and people evaluation -For many multi-
product groups and corporations, this is a vital role of the
headquarters. Each company will have its own approach, but any
company that values its employees will regard this as a key topic
• Legal and treasury. All companies have legal requirements with
regard to tax and company report- ing that must be coordinated
from the centre. In addition, many companies will have a treasury
function at HQ: the role here is to manage the cash across the
group and to raise new funds for the group, as required
Five key HQ Actions
Making
decisions on
company
Many organisations According to this
diversification Diversified
companies have a
will not wish to risk
having all their
argument, the key
strategy is to
range of products
products in the same produce a balanced
serving many
markets and at the portfolio of products
customers in
same stages of – some low-risk but
different markets:
development: they dull growth, some
such companies
will follow a higher-risk with
have a diversified
strategy of future potential and
portfolio of products
diversification. rewards
BCG Analysis
• The portfolio matrix analyses the range of products possessed by an
organisation (its portfolio) against two cri- teria: relative market share
and market growth
• This matrix is one means of analysing the balance of an organisation’s
product portfolio, the purpose being to produce the best balance of
growth versus stable products within a diversified company
BCG Analysis
• According to this matrix, two basic factors define a product’s strategic
stance in the market place:
• relative market share – for each product, the ratio of the share of the
organisation’s product divided by the share of the market leader
• market growth rate – for each product, the market growth rate of the
product category.
Issues with the BCG matrix
• The definition of market growth. What is high market growth and what is low? Conventionally, this is
often set above or below 5 per cent per annum, but there are no rules.
• The definition of the market. It is not always clear how the market should be defined. It is always
possible to make a product dominate a market by defining the market narrowly enough. For example,
do we consider the entire European steel market, where Usinor would have a small share, or do we take
the French segment only, when the Usinor share would be much higher? This could radically alter the
conclusions.
• The definition of relative market share. What constitutes a high relative share and a low share?
Conventionally, the ratio is set at 1.5 (the market share of the organisation’s product divided by the
market share of market leader’s product) but why should this be so?
Summary
• The benefits of corporate-level diversification lie in three areas: internal to the group, external to the group and
financial benefits

• The costs of corporate-level diversification arise from three areas: the size and cost of headquarters staff; the
complexity and management of the diversified firm; and the lack of a competitive resource-based focus.

• Diversification occurs when a company moves away from a single product into other business areas that may or may
not be related to the original business.

• Parenting concerns the corporate headquarters of a group of subsidiaries whose areas of business may be unrelated to
each other.

• The role of the corporate headquarters is to add value to the subsidiaries that are associated with the organisation,
otherwise the cost of running a corporate headquarters cannot be justified.

• Portfolio analysis provides a means of analysing a company that has a range of products.