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Corporate – Level

Strategy

Ijaz Ahmed

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Introduction

• Business-level strategies• Competitive rivalry and competitive dynamics

associated with them

 –  concentrate on frms competing in a single

industry/product market.

• Corporate level Strategies – Strategies that frms use to diversify their operations

from a single business competing in a single

market into several product markets and, intoseveral businesses.

 – specifes actions a frm takes to gain a competitiveadvantage y selecting and managing a group o!di"erent usinesses competing in di"erent productmarkets.

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• #irms use corporatelevel strategies as ameans to gro! revenues and prots.

 – #irms can pursue market development y moving intodi"erent geographic markets

 – #irms can ac#uire competitors $horizontalintegration%

 – #irms buy a supplier or customer $verticalintegration%.

•  &he lecture !ocuses on diversication.

Introduction

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• 'pening Case

 – #oster(s )roup e*perienced di+culty in

integrating the eer and wine marketing andsales operations to share these activities.

• ,"ective frms care!ully evaluate theirgrowth options $including the di"erentcorporate level strategies% e!orecommitting frm resources to any o! them

Introduction

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• Corporate-level strategy is concerned with two key issues – in what product markets and usinesses the frm should compete

 – how corporate headuarters should manage those usinesses

• #or the diversifed corporation/ a usiness-level strategymust e selected !or each o! the usinesses

• #oster(s product divisions uses di"erent usiness-levelstrategies0 while oth !ocus on di"erentiation

 – the eer usiness !ocused more on di"erentiation y a massmarket approach

 – &he high-end o! the wine usiness targets uniue customers

ased on individual tastes

Introduction

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 &he 1ole o! 2iversifcation

•Diversification strategies play a major role in thebehavior of large firms.

• Product diversification concerns:The scope of the industries and markets in which the

firm competes.

ow managers buy! create and sell different

businesses to match skills and strengths with

opportunities presented to the firm.

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• Success!ul diversifcation is e*pected toreduce variability in the rm’sprotability as earnings are generated!rom di"erent usinesses.

• #irms incur development andmonitoring costs when diversi!ying/ theideal portfolio of businesses balances

diversifcation(s costs and enefts.

C$%s and their topmanagement teams

are responsible !or determining ideal

 &he 1ole o! 2iversifcation

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 &wo Strategy 3evels

•"usiness#level $trategy %&ompetitive'(ach business unit in a diversified firm chooses a

business#level strategy as its means of competing in

individual product markets.

• &orporate#level $trategy %&ompanywide'

$pecifies 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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Corporate-3evel Strategy 4ey5uestions•

&orporate#level $trategy)s *alueThe degree to which the businesses in the portfolio

are worth more under the management of the

company than they would be under other ownership.

+hat businesses shouldthe firm be in,

ow should the corporate

office manage the

group of businesses,

Business 6nits

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3,7,3S '# 2I7,1SI#ICA&I'8

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3ow levels o! 2i"erentiation

• Single-business diversicationstrategy 

•  &he frm generates 9: percent or more

o! its sales revenue !rom its coreusiness area – Bonanza

• Clothing – ;a"errjee(s

• Cra!ted leather wallets/ handags andaccessories !or men and women.

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• Dominant-business diversicationstrategy 

• #irm generates etween ome moving

 – ?arehousing and delivery

 – 'verland e*press $containers !or pharma etc%

3ow levels o! 2i"erentiation

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@oderate to >igh 3evel o!2iversifcation

• Related constrained diversication strategy 

• A frm generating more than = percent o! its revenueoutside a dominant usiness and whose usinesses arerelated to each other in some manner

• ?hen the links etween the diversifed frm(s usinesses

are rather direct

 – Nestle,• Baby food, Bottled water, Cereals, Chocolate, Coee, Dairy, Drinks,

Food, Ice cream, Pet care

 –P&G• Air fresheners, deodorants, babychild care, battery, body washsoa!,

colo"ne, cosmetics, dish washin", feminine care, hair colo#r, hair care,deter"entsla#ndry, oral care etc$

• ?ith a related constrained strategy/ a frm shares

resources and activities etween its usinesses.

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• %elated linked diersi'cationstrate"y  – &he diversifed company with a port!olio

o! usinesses that have only a !ew linksetween them is called a mi*ed relatedand unrelated frm

@oderate to >igh 3evel o!2iversifcation

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7ery >igh level o! 2iversifcation

• Unrelated diversication strategy

• A highly diversifed frm that has no relationshipsetween its usinesses – (ess than )*+ reen#e from the dominant b#siness

 – Commonly/ frms using this strategy are calledcon"lomerates$

 – Nishat "ro#!• e-tile

• Cement . 2.). 4han Cement Company 3imited $2)4CC% at 4allar4ahar

• 'nancial serices ./CB0

• Ins#rance .Adam1ee and 2ec#rity General0

• Power "eneration

• Pa!er !rod#cts. 8ishat Shoaia Daper @ills 0

• Aiation .Phoni-0

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• >ashoo group – >ospitality

 – 'il and gas

 – I& – Investments

 – @inerals

 – Ceramics

 – Dharma

 – 1eal estate

 – Commodity trading

7ery >igh level o! 2iversifcation

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• Atlas – Sponsors $sherazi investments%

 – ,ngineering $>onda/ attery/

engineering/ metals%

 – Dower

 – #inancial $asset management/

insurance% – &rading

7ery >igh level o! 2iversifcation

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Levels and &ypes of 'iversication

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1easons !or 2iversifcation

• 2iversifcation strategy is used toincrease the frm(s value yimproving its overall per!ormance.

• 7alue is created either through – related diversifcation or

 – unrelated diversifcation

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 &ale 6.1 1easons !or 2iversifcation

Value-Creating Diversification

• (conomies of scope %relateddiversification'

• $haring activities

• Transferring core competencies

• -arket power %related

diversification'

• "locking competitors through

multipoint competition

• *ertical integration

• inancial economies %unrelated

diversification'

• (fficient internal capital

allocation

• "usiness restructuring

Value-Neutral Diversification

•  /ntitrust regulation• Ta0 laws

• 1ow performance

• 2ncertain future cash flows

• 3isk reduction for firm

• Tangible resources

• 4ntangible resources

Value-Reducing

Diversification

•Diversifying managerialemployment risk

• 4ncreasing managerial

compensation

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1elated 2iversifcation

•irm creates value by building upon ore0tending:3esources

&apabilities

&ore competencies

• (conomies of $cope&ost 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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1elated 2iversifcation ,conomies o!Scope•

*alue is created from economies of scopethrough:

5perational relatedness in sharing activities

&orporate relatedness in transferring skills or

corporate core competencies among units.

• The difference between sharing activities and

transferring competencies is based on how theresources are jointly used to create economies

of scope.

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Sharing Activities

• 5perational 3elatedness

&reated by sharing either a primary activity such as inventory delivery

systems! or a support activity such as purchasing.

 /ctivity sharing re6uires sharing strategic control over business units.

 /ctivity sharing may create risk because business#unit ties create links

between outcomes.

P78)s paper towel business and baby diaper business both use paper

products as a primary input to the manufacturing process. The firm)s

paper production plant produces inputs for both businesses and is an

e0ample of a shared activity. 4n addition! because they both produce

consumer products! these two businesses are likely to share distribution

channels and sales networks.

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8ote

• 'pening Case/ #oster(s )roup sought to create operationalrelatedness etween the eer and wine usiness.

• #irms e*pect activity sharing among units to result in increasedstrategic competitiveness and improved fnancial returns.

•  &hrough its shared product approach/ #oster(s )roup was unaleto improve its market share position/ especially in the wineusiness.

• Caution pursuing operational relatedness is not easy/ and o!tensynergies are not realized as planned.

• I! demand !or one usiness(s product is reduced/ it may notgenerate su+cient revenues to cover the f*ed costs reuired to

operate the shared !acilities.

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 &rans!erring Corporate Competencies

• &orporate 3elatedness 2sing comple0 sets of resources and capabilities to link different

businesses through managerial and technological knowledge!

e0perience! and e0pertise.

• &reates value in two ways:

(liminates resource duplication in the need to allocate resources

for a second unit to develop a competence that already e0ists in

another unit.

Provides intangible resources %resource intangibility' that are

difficult for competitors to understand and imitate.•  / transferred intangible resource gives the unit receiving it an

immediate competitive advantage over its rivals.

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•

The e0pense of developing a core competence hasalready been incurred in one of the firm)s

businesses! transferring this competence to a second business

eliminates the need for that business to allocate

resources to develop it.

• ewlett#Packard %P'

firm transferred its competence in ink printers to high#endcopiers.

3ather than the standard laser printing technology in

most high#end copiers! P is using ink#based technology.

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•

*irgin 8roup 1td. transfers its marketing corecompetence across airlines! cosmetics! music!

drinks! mobile phones! health clubs! and a

number of other businesses.

• onda has developed and transferred its

competence in engine design and manufacturing

among its businesses making products such as

motorcycles! lawnmowers! and cars and trucks.

6–27

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1elated 2iversifcation @arketDower EEE•

-arket power e0ists when a firm can:$ell its products above the e0isting competitive leveland9or

3educe the costs of its primary and support activitiesbelow the competitive level. %scale'

 /c6uisition leads to increase the market share

beyond e0isting firms thus increasing market power 

8ained by

1elated 2i ersifcation @arket Do er

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1elated 2iversifcation @arket Dower$cont(d%

•-ultipoint &ompetition Two or more diversified firms simultaneously compete in the same

product areas or geographic markets.

2P$ and ed(0 in two markets! overnight delivery and ground shipping!

illustrate multipoint competition.

"locking competitor through multipoint competition

• *ertical 4ntegration

"ackward integrationa firm produces its own inputs.

orward integrationa firm operates its own distribution system for

delivering its outputs.

• -arket power is gained as the firm develops the ability to save

on its operations! avoid market costs! improve product 6uality!

and! possibly! protect its technology from imitation by rivals

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1elated 2iversifcation Comple*ity

•

$imultaneous 5perational 3elatedness and&orporate 3elatedness

4nvolves managing two sources of knowledge

simultaneously:• 5perational forms of economies of scope

• &orporate forms of economies of scope

-any such efforts often fail because ofimplementation difficulties.

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6nrelated 2iversifcation

•

inancial (conomies /re cost savings reali;ed through improved

allocations of financial resources.

• "ased on investments inside or outside the firm

&reate value through two types of financial

economies:

• (fficient internal capital allocations

• Purchase of other corporations and the restructuring theirassets

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6nrelated 2iversifcation $cont(d%

•

(fficient 4nternal &apital -arket /llocation&orporate office distributes capital to business

divisions to create value for overall company.

• &orporate office gains access to information about those

businesses) actual and prospective performance.• (0ternals have limited access to info.

• 4nfo will be available to competitors – risk

financial economies are more easily duplicated bycompetitors than are gains from operational and

corporate relatedness.

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6nrelated 2iversifcation 1estructuring

•

3estructuring creates financial economies / firm creates value by buying and selling assets in

the e0ternal market.

the diversified firm buys another company!restructures that company)s assets in ways that allow

it to operate more profitably! and then sells the

company for a profit in the e0ternal market

• -ay not prove beneficial in i#tec or service

based industry because of intangible assets

concern

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7alue-neutral diversifcation

•

*alue#neutral reasons for diversification include  a desire to match and thereby neutrali;e acompetitor)s market power 

• (0ternal incentives include antitrust regulationsand ta0 laws.

• 4nternal incentives include low performance!

uncertain future cash flows! and the pursuit of

synergy and reduction of risk for the firm.

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,*ternal Incentives to 2iversi!y

•  /ntitrust laws in ?s and

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,*ternal Incentives to 2iversi!y $cont(d%

• igh ta0 rates on dividends cause acorporate shift from dividends to

buying and building companies in high#

performance industries.

• Ta0 3eform /ct

3educed individual ordinary income ta0

rate from C? to AB percent.

Treated capital gains as ordinary

income.

Thus created incentive for shareholders

to prefer dividends to ac6uisition

investments.

Anti-trust3egislation

 &a* 3aws

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Internal Incentives to 2iversi!y

• igh performance eliminates theneed for greater diversification.

• 1ow performance acts as

incentive for diversification.

• irms plagued by poor

performance often take higher

risks %diversification is risky'.

3owDer!ormance

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#I)61, 6.3   &he Curvilinear 1elationship etween2iversifcation and Der!ormance

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Internal Incentives to 2iversi!y $cont(d%

• Diversification may bedefensive strategy if:

Product line matures.

Product line is threatened.irm is small and is in mature

or maturing industry.

3owDer!ormance

6ncertain#uture Cash

#lows

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Internal Incentives to 2iversi!y $cont(d%

• Diversification leads to (5$cope

• $ynergy e0ists when the value created

by businesses working together

e0ceeds the value created by them

working independently

• but synergy creates joint

interdependence between business

units.

•  / firm may become risk averse and

constrain its level of activity sharing.•  / firm may reduce level of technological

change by operating in more certain

environments.

3owDer!ormance

6ncertain#uture Cash

#lows

Synergyand 1isk

1eduction

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1esources and 2iversifcation

•

 / firm must have both: 4ncentives to diversifyThe resources re6uired to create value through

diversificationcash and tangible resources %e.g.!

plant and e6uipment'

• *alue creation is determined more by

appropriate use of resources than by incentives

to diversify.

• -anagerial -otives to Diversify-anagerial risk reduction

Desire for increased compensation

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#I)61, 6.4  

Summary @odel o!the 1elationship

etween #irmDer!ormance and2iversifcation