MODULE 6

CORPORATE-LEVEL
STRATEGY
 Diversified firms formulates two types of strategies:
 Business-level strategy (or competitive)
DIVERSIFIED  Corporate-level strategy (or company-wide)

FIRMS USE A. Business-Level Strategy - used by firms to gain a

competitive advantage by exploiting core
CORPORATE- competencies in specific product markets
LEVEL B. Corporate-Level Strategy - used by firms to
diversify their operations from a single business
STRATEGIES competing in a single market into several product
markets and, most commonly, into several
businesses to gain a competitive advantage - to
increase the firm’s value
LEVELS AND
TYPES OF
DIVERSIFICATIO
N
REASONS FOR DIVERSIFICATION
VALUE-
Economies of scope are cost savings
CREATING
DIVERSIFICATIO that the firm creates by successfully
N: RELATED sharing some of its resources and
CONSTRAINED capabilities or transferring one or more
AND RELATED
corporate-level core competencies that
LINKED
DIVERSIFICATIO were developed in one of its businesses
N to another of its businesses.
 A. Sharing of activities (operational relatedness)
 Lowers cost when a company’s different business units

TWO KINDS OF sharing activities such as:

i. inventory delivery systems
OPERATIONAL ii. customer ordering systems

ECONOMIES: iii. purchasing practices

 Procter & Gamble (P&G) uses this corporate-level
strategy. P&G’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 example of a
shared activity. In addition, because they both produce
consumer products, these two businesses are likely to share
distribution channels and sales networks.
 B. Transfer of corporate-level core competencies (corporate
relatedness) Corporate-level core competencies are complex
sets of resources and capabilities that link different businesses,
TWO KINDS OF primarily through managerial and technological knowledge,
experience, and expertise.
OPERATIONAL  The second business who received a core competence
eliminates the need to allocate resources to develop it.
ECONOMIES:  Core competencies are intangible resources that are difficult
to understand and imitate—the second business gains an
immediate competitive advantage over its rivals
 Honda - transfer of its competence in engine design and
manufacturing to its business such as motorcycles, cars,
trucks and lawnmowers.
 Hewlett-Packard (HP) – transferred its competence in ink
printers to its high-end printers using the ink-based
technology.
 Market power exists when a
firm is able to sell its products
above the existing competitive
MARKET POWER level or to reduce the costs of its
primary and support activities
below the competitive level, or
both.
 A. Efforts to gain scale
• Acquisition of a company that is already established in a particular industry
or location.
• Nestle’s baby food business was already established in Brazil and China
but not in USA. It bought Gerber which has the 80% US market.
B. Multipoint Competition
•
INCREASING This exists when two or more diversified firms simultaneously compete in
the same product areas or geographic markets
MARKET POWER • FeDEx are now in both overnight delivery and air and ground shipping
THROUGH: which is the stronghold of United Parcel Services. DHL the strongest
European shipping company is now in US market.
C. Vertical Integration
• This exists when a company produces its own inputs (backward
integration) or owns its own source of output distribution (forward
integration).
• Market power is gained as the firm develops the ability to save on its
operations, avoid market costs, improve product quality, and, possibly,
protect its technology from imitation by rivals.
VALUE-CREATING DIVERSIFICATION:
UNRELATED DIVERSIFICATION
Unrelated Diversification Strategy Creates Value Through Financial Economies
Financial economies are cost savings realized through improved allocations of financial
resources based on investments inside or outside the firm.
A. Efficient internal capital allocation
• The corporate headquarters office distributes capital to its businesses to create value
for the overall corporation. A firm’s corporate headquarters generally have access to
detailed and accurate information regarding the actual and prospective performance
of the company’s portfolio of businesses. They have the best information to make
capital distribution decisions.
B. Business restructuring
• Seek out undeveloped, sick or threatened organizations at low prices, restructuring
them and selling them at a price that exceeds their cost generates a positive return on
the firm’s invested capital.
C. Come from external environment which include antitrust regulations and tax laws
• Government antitrust policies and tax laws provided incentives for U.S. firms to
diversify in the 1960s and 1970s
• Before 1986 Tax Reform Act, higher taxes on dividends favored spending retained
earnings on acquisitions
• After 1986, firms made fewer acquisitions with retained earnings, shifting to the use
of debt to take advantage of tax deductible interest payments
D. Come from internal environment
• Poor performance may lead some firms to diversify to attempt to achieve better
returns. Example: eBay diversified to eBay Express online shopping when it’s auction
business line’s growth slowed down. Firms may diversify to balance uncertain future
cash flows. Example: Thomson Corp. once owned 130 local newspapers Across
North America and Times in UK lost advertisement revenues due to the entry of
Internet. It then diversified to buy Reuters Group.
• Firm may diversify into different businesses in order to reduce risk of corporate
failure because of relatedness of the firm’s business units.
• Managers often have incentives to diversify in order to increase their compensation
and reduce employment risk, although effective governance mechanisms may restrict
such abuses.
VALUE-NEUTRAL DIVERSIFICATION:
INCENTIVES AND RESOURCES
Even when incentives to diversify exist, a firm must have the types and
levels of resources and capabilities needed to successfully use a corporate-
level diversification strategy. Although both tangible and intangible
resources facilitate diversification, they vary in their ability to create value.
Indeed, the degree to which resources are valuable, rare, difficult to imitate,
and non-substitutable influence a firm’s ability to create value through
diversification.
VALUE-REDUCING DIVERSIFICATION:
MANAGERIAL MOTIVES TO DIVERSIFY
A.Compensation Hike
Diversification and firm size are highly correlated, and as firm size increases, so does
executive compensation. Because large firms are complex, difficult-to-manage
organizations, top-level managers commonly receive substantial levels of compensation
to lead them
B. Managerial Risk Reduction
Greater levels of diversification can increase a firm’s complexity, thus stronger corporate
governance mechanisms, such as the board of directors, monitoring by owners, executive
compensation practices, and the market for corporate control, may limit managerial
tendencies to over-diversify.
VALUE-CREATING
DIVERSIFICATION: RELATED
CONSTRAINED AND RELATED
LINKED DIVERSIFICATION

A. Upper Left Quadrant - Firms with a

strong capability in managing
operational synergy through vertical
integration
B. Lower Right Quadrant - Firms with
highly developed corporate
capability for transferring core
competencies across business
C. Lower Left Quadrant - Firms with
financial economies as source of
value creation
D. Upper Right Quadrant - Difficult for
competitors to understand and learn
how to imitate
VALUE-CREATING DIVERSIFICATION: RELATED
CONSTRAINED AND RELATED LINKED DIVERSIFICATION

Simultaneous Operational Relatedness and Corporate Relatedness

A. by sharing activities among its different movie distribution companies
( Touchstone Pictures, Hollywood Pictures, and Dimension Films)
through corporate relatedness as it cross-sells products that are
highlighted in its movies through the distribution channels that are part of
its Parks and Resorts and Consumer.