Corporate-Level Strategy

Additional Reading

Corporate-level Strategy: Definitions

Business-level strategy -Deals with how the business should

compete (e.g., cost leadership, differentiation, focus, integrated
strategies)

Corporate-level strategy 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 & Gambles 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 Gillettes toothbrush (Oral-B) and P&Gs

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 Diversification
1.

2.

3.

Low level of diversification

Single-business strategy

Dominant-business strategy

Moderate-to-high levels of diversification

Related constrained diversification strategy

Related linked diversification strategy

Very high levels of diversification

Unrelated diversification

Performance

Diversification and Firm Performance

Dominant
Business

Related
Constrained

Level of Diversification

Unrelated
Business

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. Companythe worlds

largest producer of chewing and bubble gums

Post-2008 Acquired by Mars Inc.

Dominant-business strategy

A
B

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

Moderate-to-High Diversification

Related constrained diversification strategy

B

< 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: Campbells

Moderate-to-High Diversification

Related linked diversification strategy

< 70% of revenue comes from the dominant business

Mix between related and unrelated diversification

A
B

D
C

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

Moderate-to-High Diversification

Related linked diversification strategy example 2

A
B

D
C

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

Performance

Diversification and Firm Performance

Dominant
Business

Related
Constrained

Level of Diversification

Unrelated
Business

3 Reasons Firms Diversify

1.

Value-creating reasons

Economies of scope
Market power

2.

Vertical Integration

Financial economies

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

2.

Ex: P&Gs paper towel business and baby diaper business both use
paper products as inputs; the firms paper production plant produces
inputs for both businesses

Corporate relatedness: transferring core competencies into business

Ex: Hondas 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 firms 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 firm2 main types
1. Efficient internal capital allocations can reduce risk of the firms portfolio
2. Restructuring of acquired assets

Value-creating Strategies of Diversification

Operational and Corporate Relatedness

High
Sharing
Activities:
Operational
Relatedness
Between
Business

Low

Related Constrained
Diversification
(Economies of Scope &
Market Power)

Both Operational and

Corporate Relatedness
(Rare Capability;
Can sometimes Create
Diseconomies of Scope)

Unrelated
Diversification
(Financial Economies)

Related Linked
Diversification
(Economies of Scope &
Market Power)

Low

High

Corporate Relatedness: Transferring Skills Into

Business Through Corporate Headquarters

Value-Neutral Reasons to Diversify

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-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