Corporate Level Strategy

Corporate Level Strategy
Week 5
Copyright Guy Harley 2004

Outline
 Levels of diversification
 Reasons for diversification
 Related diversification
 Unrelated diversification
 Diversification: Incentives and resources

What is corporate level strategy?
 Strategies that detail actions to gain a
competitive advantage through the selection and
management of a mix of businesses competing
in several industries or product markets
 What business the firm should be in and how the
corporate office should manage its group of
business

Corporate Strategy
 Developing and implementing multi-business
strategies may be necessary for effective use of
excess resources, capabilities and core
competencies that have value across several
businesses.
 To enhance strategic competitiveness, & earn
above average returns.

A Diversified Company has Two Strategy Levels
Business-Level Strategy (Competitive Strategy)
How to create competitive advantage in each business in

which the company competes, using:
– Low cost – Focused low cost
– Differentiation – Focused differentiation
– Integrated low cost/
differentiation
Corporate-Level Strategy (Companywide Strategy)
How to create value for the corporation as a whole

Corporate Strategy concerns Two Key Questions:
What businesses should the corporation be in?
How should the corporate office manage the

array of business units?
Corporate strategy is what makes the corporate whole

add up to more than the sum of it business-unit parts
Primary Approach
Primary approach to corporate level strategy:
 Diversification
 Firms diversify when they have excess
resources, capabilities and core competencies
that have multiple uses

Levels of diversification
Firms vary according to
 Relatedness
 Connections between and among business
units
 Levels of diversification
 Low
 Medium
 High

Low levels of diversification
 Single
More than 95% of revenue comes from
dominant business
 Dominant
 Between 70% & 95 % of sales in a single
category eg Cadbury-Schweppes.
 Tend to be vertically integrated.

Moderate Levels of Diversification
 Related-constrained diversification
 Less than 70% of revenue from dominant
business and
 Businesses share product, technological and
distribution linkages
 Related-linked diversification
 Less than 70% of revenue comes from
dominant business
 Only limited links between businesses
High Levels of Diversification
Unrelated diversification
 Less than 70% of revenue from dominant
business
 No common links between businesses

Single and Dominant Business
Strategies
 Advantages
 (70-95% from single business)
 More understanding of competitive dynamics
 managers develop specialised skills
 narrower range of business strategies
 managing synergies
 Disadvantages
 More affected by economic downturn

Diversified Position
 Advantages
 increased economies of scope
 market power by blocking competitors through
multi-point competition or vertical integration
 financial economies
 tax advantages

Operational & Corporate Relatedness
Corporate
Low High
Relatedness
Related Operational
Constrained & Corporate
High Relatedness
Vertical
Sharing: Diseconomies
integration
Operational of scope
Relatedness
Unrelated Related
Linked
Low
Financial Economies of
Copyright Guy Harley 2004 Economies Scope
Adding Value by Diversification
Diversification most effectively adds value
by one of two mechanisms:
By developing economies of scope between
business units in the firms, which leads to
synergistic benefits
By developing market power, which leads to

greater returns
Alternative Diversification Strategies
Related Diversification Strategies
1 Sharing Activities
2 Transferring Core Competencies

Unrelated Diversification Strategies
3 Efficient Internal Capital Market Allocation
4 Restructuring

1. - Sharing Activities
 Sharing activities often lowers costs or raises
differentiation
 Sharing activities can lower costs if it:
 Achieves economies of scale
 Boosts efficiency of utilisation
 Means more rapid movement through learning curve
 Sharing activities can enhance potential for or reduce the
cost of differentiation
 Sharing activities must involve activities that are crucial
to competitive advantage

Sharing Activities - Assumptions
 Strong sense of corporate identity
 Clear corporate mission that emphasises the
importance of integrating business units
 Incentive system that rewards more than just
business-unit performance

2. - Transferring Core Competencies
 Exploits interrelationships among divisions
 Starts with value chain analysis:
 Identify ability to transfer skills or expertise
among similar value chains
 Exploit ability to share activities
 E.g. Two firms can share the same sales force,
logistics network or distribution channels

2. - Transferring Core Competencies
Assumptions
 Transferring core competencies leads to competitive
advantage only if the similarities among business units
meet the following conditions:
 Activities involved in the businesses are similar enough
for expertise sharing to be meaningful
 Transfer of skills involves activities that are important
to competitive advantage
 The skills transferred represent significant sources of
competitive advantage for the receiving unit

3. - Efficient Internal Capital Market Allocation
 Firms pursuing this strategy frequently diversify by
acquisition:
 Acquire sound, attractive companies
 Acquire units that are autonomous
 Acquire corporation to supply needed capital
 Portfolio managers transfer resources from units that
generate cash to those with high growth potential and
substantial cash needs
 Add professional management and control to sub-
units
 Sub-unit managers’ compensation is based on unit
results
3. - Efficient Internal Capital Market Allocation
Assumptions
 Managers have more detailed knowledge of a
firm relative to outside investors
 The firm need not risk competitive edge by
disclosing sensitive competitive information to
investor
 The firm can reduce risk by allocating resources
among diversified businesses, although
shareholders can generally diversify more
economically on their own

4. - Restructuring
 Seek out undeveloped, sick or threatened organisations
or industries
 Parent company (acquirer) intervenes and frequently:
 Changes sub-unit management team
 Shifts strategy
 Infuses firm with new technology
 Enhances discipline by changing control systems
 Divests part of firm
 Makes additional acquisitions to achieve critical mass
 Unit will often be sold after one-time changes are made,
since parent no longer adds value to ongoing operations

4. - Restructuring
Assumptions
 Requires keen management insight in selecting
firms with depressed values or unforeseen
potential
 Must do more than restructure companies:
 Need to initiate restructuring of industries to
create a more attractive environment

Summary Model of the Relationship between
Firm Performance and Diversification
Resources
Incentives Diversification
Strategy
Managerial
Motives
Incentives
 Economies of scope
 Sharing of activities
 Transferring core competencies
 Market Power
 Blocking competitors
 Vertical integration
 Financial economies
 Efficient internal capital allocation
 Business restructuring

Resources & Incentives
 Incentives & Resources with neutral effects
 Anti-trust regulation
 Tax laws
 Low performance
 Uncertain future cash flows
 Risk reduction
 Tangible resources
 Intangible resources

Incentives to Diversify
Internal Incentives
 Poor performance may lead some firms to
diversify in an attempt to achieve better returns
 To balance uncertain future cash flows
 In order to reduce risk

Reasons for diversification
 Managerial motives
 Diversifying managerial employment risks
 Increasing managerial compensation
 Effective governance mechanisms may restrict
such abuses

Diversification and Firm Performance
Performance
Dominant Related Unrelated

Business Constrained Business
Level of Diversification
Summary Model of the Relationship
between Firm Performance and
Diversification
Resources
Diversification Firm
Incentives
Strategy Performance
Managerial
Motives
Summary Model of the Relationship between
Firm Performance and Diversification
Capital Market
Intervention and
Resources Market for
Managerial Talent
Diversification Firm
Incentives
Strategy Performance
Managerial Internal Strategy

Motives Governance Implementation
Issues to Consider Prior to Diversification
 What resources, capabilities and core competencies do
we possess that would allow us to outperform
competitors?
 What core competencies must we possess in order to
succeed with a new product or geographical market?
 Is it possible to leapfrog competitors?
 Will diversification break up capabilities and
competencies that should be kept together?
 Will we only be a player in the new product or
geographical market, or will we emerge as a winner?
 What can the firm learn through its diversification?
 Is it organised properly to acquire such knowledge?
Acquisition and restructuring
strategies

Outline
 Mergers, acquisitions and takeovers
 Reasons for acquisitions
 Effective acquisitions
 Restructuring
 downsizing
 downscoping
 leveraged buyouts
 restructuring outcomes

Merger
 Merger
Two firms agree to integrate operations on a relatively
equal basis because they have resources and
capabilities that create stronger competitive advantage
 Acquisition
A transaction where one firm buys another firm with the
intent of more effectively using a core competency by
making the acquired firm a subsidiary within its portfolio
of businesses
 Takeover
An acquisition where the target firm did not solicit the
bid.

Reasons for Acquisitions
 Increased market power
An acquisition intended to reduce the
competitive balance of the industry
 Overcome barriers to entry
Acquisitions overcome costly barriers to entry
that may make ‘start-ups’ economically
unattractive
 Costs\risks of new product development
Buying established businesses reduces the risk
involved in start-up ventures

Reasons for Acquisitions (cont.)
 Increased speed to market
Closely related to barriers to entry … allows
market entry in a more timely fashion
 Diversification
A quick way to move into businesses when a
firm lacks experience and depth in an industry
 Avoiding excessive competition
Firms may acquire businesses in which
competitive pressures are less intense than in
their core business

Poor Performance of Acquisitions
 Integration difficulties
Differing cultures can make integration of firms
problematic
 Inadequate evaluation of target
Winners curse’ bid causes acquirer to overpay
for firm
 Large or extraordinary debt
Costly debt can create onerous burden on cash
outflows

Poor Performance of Acquisitions (cont.)
 Inability to achieve synergy
Justifying acquisitions can increase estimate of expected
benefits
 Too much diversification
The acquirer does not have the expertise required to
manage unrelated businesses
 Managers overly focussed on acquisitions
Managers lose track of the core business by expending
too much effort on acquisitions
 Combined firm becoming too large
Large bureaucracy reduced innovation and flexibility

Effective Acquisitions
 Assets are complementary
Buying firms with assets that meet current needs to build
competitiveness
 Careful selection Process
Deliberate evaluation and negotiations are more likely to
lead to easy integration and building synergies Targets
are selected and ‘groomed’ prior to acquisition etc.
 Acquisition is friendly
Friendly deals make integration go more smoothly

Effective Acquisitions (cont.)
 Maintain Financial Slack
Provide enough additional financial resources so that
profitable projects are not foregone
 Low to Moderate Debt
Merged firm maintains financial flexibility
 Flexibility
Firm has experience at managing change and is flexible
and adaptable. Both firms are adaptable
 Innovation
Continue to invest in R&D as part of the firm’s overall
strategy

Restructuring
 Changes in the composition of the firms set of
businesses and/or financial structure
 Often in response to poor performance and
over-diversification
 Forms
 Downsizing- reduce costs by laying off employees or
eliminating operating units
 Downscoping- reduce the level of unrelatedness in
the firm –leads to greater focus
 Leveraged buyout
Leveraged Buyouts
 Purchase involving mostly borrowed funds
 Generally occurs in mature industries where R&D and
innovation are not central to value creation
 High debt load commits cashflows to repay debt,
creating strong discipline for management
 Increases concentration of ownership
 Focuses attention of management on shareholder value
 Greater oversight by ‘active investor’ board members
 Leads to more value-based decision making

Outcomes of restructuring
 Downsizing reduces labour costs, but also leads
to loss of human capital and lower performance?
 Downscoping reduces debt costs and
reestablishes emphasis on strategic controls
resulting in higher performance
 Leveraged buyouts provide emphasis on
strategic controls but increased debt costs, long
term result is increased performance but greater
risk

Restructuring and Outcomes
Short-Term Long-Term
Alternatives
Outcomes Outcomes
Reduced Loss of
Labour Costs Human Capital
Downsizing
Reduced Lower
Debt Costs Performance
Downscoping
Emphasis on Higher
Strategic Controls Performance
Leverage
d
Buyout High Debt Higher Risk
Costs

Corporate Level Strategy

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Corporate Level Strategy

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Corporate Level Strategy

Copyright Guy Harley 2004

Copyright Guy Harley 2004

Copyright Guy Harley 2004

Copyright Guy Harley 2004

Business-Level Strategy (Competitive Strategy)

How to create competitive advantage in each business in