chapter 6

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Chapter 6: Corporate-Level Strategy

Overview: Define and discuss corporate-level strategy Different levels and types of diversification Three primary reasons firms diversify Value creation: related diversification strategy Value creation: unrelated diversification strategy Incentives and resources encouraging diversification Management motives for overdiversification

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Introduction

Business-level Strategy An integrated and coordinated set of commitments and

actions the firm uses to gain competitive advantage by exploiting core competencies in specific product markets

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

Expected to help firm earn above-average returns Value ultimately determined by degree to which “the businesses in

the portfolio are worth more under the management of the company then they would be under any other ownership”

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Introduction

Corporate-level strategy is concerned with: What product markets and businesses the firm should

compete in How corporate headquarters should manage those

businesses Product Diversification: primary form of corporate-level

strategy Concerns:

The scope of the markets and industries firm competes in How the firm manages their portfolio of businesses

Diversification is often looked at as a growth strategy

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Introduction

Diversified firms vary according to level and type of diversification (Figure 6.1) Level – # of different industries a firms competes in Type – degree of relatedness between business units

Corporate-level strategy is also concerned with: Capturing economies of scope or synergies between

business units (Related) Capturing financial synergies (Unrelated)

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Levels and Types of Diversification

Low Levels

Single Business Strategy Corporate-level strategy in which the firm generates 95% or

more of its sales revenue from its core business area

Wrigley

Dominant Business Diversification Strategy Corporate-level strategy whereby firm generates 70-95% of total

sales revenue within a single business area

UPS

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Moderate to High Levels

Related Constrained Diversification Strategy Less than 70% of revenue comes from the dominant business

Direct links (i.e., share products, technology and distribution linkages) between the firm's businesses

Related Linked Diversification Strategy (Mixed related and unrelated)

Less than 70% of revenue comes from the dominant business

Mixed: Linked firms sharing fewer resources and assets among their businesses (compared with related constrained, above), concentrating on the transfer of knowledge and competencies among the businesses

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Very High Levels: Unrelated Less than 70% of revenue comes from dominant business

No relationships between businesses

Often referred to as conglomerates

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Reasons for Diversification (Table 6.1)

Value-creating Economies of scope (Related) Market power (Related) Financial economies (Unrelated)

Value-neutral Antitrust regulation, tax laws, low performance,

uncertain future cash flows, firm risk reduction, tangible resources, intangible resources

Value-reducing Increasing managerial compensation Managerial risk reduction

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Value-Creating Diversification Strategies: Operational and Corporate Relatedness (Figure 6.2)

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Value-Creating Diversification (VCD): Related Strategies

Purpose: Gain market power relative to competitors

Related diversification wants to develop and exploit economies of scope between its businesses Economies of scope: Cost savings 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

Value Creating Diversification: Composed of ‘related’ diversification strategies including Operational and Corporate relatedness

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Operational Relatedness: Sharing activities Can gain economies of scope Share primary or support activities (in value chain)

Risky as ties create links between outcomes Related constrained diversified firms share activities in

order to create value Not easy, often synergies not realized as planned

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Corporate Relatedness: Core competency transfer Complex sets of resources and capabilities linking

different businesses through managerial and technological knowledge, experience and expertise

Two sources of value creation Core competence can be developed in one business unit and

transferred to other business units at no additional cost Intangible resources difficult for competitors to understand and

imitate, so immediate competitive advantage over competition can be achieved through transfer of corporate-level core competence

Use related-linked diversification strategy

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Market Power Exists when a firm is able to sell its products above the existing

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

Can come from increasing scale Market power can also be created through:

Multipoint Competition

Exists when 2 or more diversified firms simultaneously compete in the same product or geographic markets.

Vertical Integration Exists when a company produces its own inputs (backward integration)

or owns its own source of output distribution (forward integration)

Virtual integration – when this is done through e-commerce

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Proctor and Gamble Provides branded consumer goods products worldwide 3 GBUs

Beauty GBU Beauty segment Grooming segment

Health and Well-Being GBU Health Care segment Snacks, Coffee, and Pet Care segment

Household Care GBU Fabric Care and Home Care segment Baby Care and Family Care segment

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Johnson and Johnson Engages in the research and development, manufacture, and sale of

various products in the health care field worldwide 3 segments

Consumer segment Products for baby care, skin care, oral care, wound care, and women’s

health care fields, as well as nutritional and over-the-counter pharmaceutical products

Pharmaceutical segment Products for anti-infective, antipsychotic, cardiovascular, contraceptive,

dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology, and virology

Medical Devices and Diagnostics segment Products for circulatory disease management, orthopaedic joint

reconstruction and spinal care, wound care and women’s health, minimally invasive surgical, blood glucose monitoring and insulin delivery, and diagnostic products, as well as disposable contact lenses

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Campbell Soup Company Engages in the manufacture and marketing of branded

convenience food products worldwide 4 segments

U.S. Soup, Sauces, and Beverages Baking and Snacking International Soup, Sauces, and Beverages North America Foodservice

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Value-Creating Diversification (VCD): Unrelated Strategies

Creates value through two types of financial economies

Financial economies – cost savings realized through improved allocations of financial resources based on investments inside or outside firm Efficient internal capital market allocation (versus

external capital market) Restructuring of acquired assets

Firm A buys firm B and restructures assets so it can operate more profitably, then A sells B for a profit in the external market

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United Technologies Corporation Provides technology products and services to the building

systems and aerospace industries worldwide Otis segment – elevators and escalators Carrier segment – air conditioning and refrigeration UTC Fire and Security segment. Pratt and Whitney segment - aircraft engines; parts and

services Hamilton Sundstrand segment - aerospace products and

aftermarket services Sikorsky segment – helicopters UTC also engages in the development and marketing of

distributed generation power systems and fuel cell power plants for stationary, transportation, space, and defense applications

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Textron, Inc. Operates in the aircraft, industrial, and finance

industries worldwide. 4 segments

Bell – helicopters plus parts and service Cessna – general aviation aircraft Industrial – auto parts, food containers, hydraulics,

golf carts Finance – aircraft finance, asset-based lending,

distribution finance, golf finance, resort finance

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Value-Neutral Diversification: Incentives and Resources

Value-Neutral Incentives to Diversify Antitrust Regulation and Tax Laws Low Performance Uncertain Future Cash Flows Synergy and Firm Risk Reduction Resources and Diversification

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Value-Reducing Diversification: Managerial Motives to Diversify

Top-level executives may diversify in order to diversity their own employment risk and to increase their own compensation, as long as profitability does not suffer excessively Diversification adds benefits to top-level managers but

not shareholders This strategy may be held in check by governance

mechanisms or concerns for one’s reputation

chapter 6

Documents

businesses value

diversification vcd

diversification table

level strategy concerns

firms businesses

type of diversification

growth strategy

transfer of corporate