Chapter 6

Chapter 6

Corporate-Level Strategy

Diane M. Sullivan, Ph.D. 2010

Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 CengageSections modified from Gentner (2009)

The Strategic Management Process

Insert figure 1.1 graphic Previously, we have

examined firms competing in a single industry or product market. After solidifying a position in a single industry or product market, firms will often want to diversify into multiple businesses.

Corporate-level Strategy: Definitions Business-level strategy (Chapter 4)

Deals with how the business should compete (e.g., cost leadership, differentiation, focus, integrated strategies)

Corporate-level strategy (Chapter 6) Definition: Specific actions a firm takes to gain an

advantage by selecting and managing a group of different businesses

Primary form of corporate-level strategy is product diversification Diversification involves using expertise and knowledge gained in one business to

diversify into a business where it can be used in a related way

2 main concerns with corporate-level strategy:

1) What businesses the firm should be in

2) How the firm should manage the different business units

Corporate-level Strategy: Examples

Ex. 1: Proctor & Gamble’s Diversification Strategy Pre-2005: Product mix focused on women and baby care 2005: Acquired Gillette, which focused on consumer health care

products geared toward men Synergy created by combining Gillette’s toothbrush (Oral-B) and

P&G’s toothpaste (Crest) businesses to create Pro-Health oral care product line

Good for retailers (shelf space) Strategy had potential but was more difficult to create operational

relatedness between the products Comingle employees requiring actual physical re-location/talent exit

Different ways to make business decisions

Conflicting organizational cultures

In 2007, Pro-Health overtook Colgate in market share

Ex. 2: Disney

3 Levels of Diversification1. Low level of diversification

Single-business strategy

Dominant-business strategy

2. Moderate-to-high levels of diversification Related constrained diversification strategy

Related linked diversification strategy

3. Very high levels of diversification Unrelated diversification

Level of Diversification

Diversification and Firm PerformanceP

erfo

rman

ce

DominantBusiness

UnrelatedBusiness

RelatedConstrained

Low-level Diversification Single-business strategy

Firm generates 95% or more of its sales revenue from its core business area

Example (pre-2008): Wm. Wrigley Jr. Company—the world’s largest producer of chewing and bubble gums

Post-2008 Acquired by Mars Inc.

Dominant-business strategy Firm generates 70-95% of total sales revenue within a single

business area

Example: UPS generated 74% of revenue from U.S. package delivery business; 17% from international package business; 9% from non-package business

A

B

A

Moderate-to-High Diversification Related constrained diversification strategy

< 70% of revenue comes from the dominant business

There are direct links between the firm's businesses (e.g., share products, technology; marketing; and distribution linkages)

Example: Campbell’s

A

B C

Moderate-to-High Diversification Related linked diversification strategy

< 70% of revenue comes from the dominant business

Mix between related and unrelated diversification Linked firms share fewer resources and assets among their businesses

Interested in constantly adjusting the mix in their portfolio of businesses and how to manage the businesses

Example: Rachel Ray

A

B C

D

Moderate-to-High Diversification Related linked diversification strategy example 2 A

B CMars, Inc.

49%

7%

42%

2%Petcare

Food

Snack Food

Drinks

Very High Diversification Unrelated diversification strategy

Less than 70% of revenue comes from dominant business

No relationships between businesses

Often called conglomerates Example: Jarden Corporation

A

B C

Level of Diversification

Diversification and Firm PerformanceP

erfo

rman

ce

DominantBusiness

UnrelatedBusiness

RelatedConstrained

3 Reasons Firms Diversify

1. Value-creating reasons Economies of scope Market power

Vertical Integration Financial economies

2. Value-neutral reasons Antitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Tangible resources Intangible resources

3. Value-reducing reasons Diversifying managerial

employment risk Increasing managerial

compensation

Value-Creating Reasons to Diversify

Based a desire to develop resources that will enhance strategic competitiveness

Ok, but how? Two main ways diversification strategies can create value

1. Operational relatedness: sharing activities between businesses Ex: P&G’s paper towel business and baby diaper business both use

paper products as inputs; the firm’s paper production plant produces inputs for both businesses

2. Corporate relatedness: transferring core competencies into business Ex: Honda’s competence in engine design and manufacturing to

motorcycles, lawnmowers, cars and trucks

Often achieved via transferring or hiring personnel with competencies

Operational & Corporate Relatedness Value The value these create are referred to as

Economies of Scope (for related constrained and related-linked strategies)

Cost savings created by sharing its resources/capabilities or transferring core competencies of one businesses to another of its businesses

Market Power (for related constrained and related-linked strategies)

Exists when a firm sells its products above competitive levels and/or reduces the cost of its Value Chain activities below competitive levels

Influenced by a firm’s level of vertical integration

Financial Economies (for unrelated diversification)

Cost savings realized via improved allocations of financial resources based on investments inside or outside the firm—2 main types

1. Efficient internal capital allocations can reduce risk of the firm’s portfolio

2. Restructuring of acquired assets

Value-creating Strategies of DiversificationOperational and Corporate Relatedness

Sharing Activities:OperationalRelatedness

BetweenBusiness

Corporate Relatedness: Transferring Skills Into Business Through Corporate Headquarters

Low High

High

Low

Related Linked Diversification

(Economies of Scope & Market Power)

UnrelatedDiversification

(Financial Economies)

Both Operational and Corporate Relatedness

(Rare Capability; Can sometimes Create

Diseconomies of Scope)

Related Constrained Diversification

(Economies of Scope &Market Power)

External value-neutral reasons Antitrust Regulation and Tax Laws

Deregulation

Changing tax laws

Internal value-neutral reasons Low Performance

Uncertain Future Cash Flows

Firm Risk Reduction

Resources and Diversification Excess tangible resources like plant and equipment, sales force, etc.

Value-Neutral Reasons to Diversify

Value-Reducing Reasons to Diversify

Managerial Motives Diversifying managerial employment risk

If one business fails, the whole firm will stay intact

Increasing managerial compensation Larger firms are more complex

Generally mean larger compensation packages