Download Report

Chapter 6: Corporate-Level Strategy
 Overview:







Define and discuss corporate-level strategy
Different levels and types of diversification
Three primary reasons firms diversify
Value creation: related diversification strategy
Value creation: unrelated diversification strategy
Incentives and resources encouraging diversification
Management motives for overdiversification
1
2
Introduction
 Business-level Strategy
 An integrated and coordinated set of commitments and
actions the firm uses to gain competitive advantage by
exploiting core competencies in specific product markets
 Corporate-level Strategy
 Specifies actions a firm takes to gain a competitive advantage
by selecting and managing a group of different businesses
competing in different product markets


Expected to help firm earn above-average returns
Value ultimately determined by degree to which “the businesses in
the portfolio are worth more under the management of the company
then they would be under any other ownership”
3
Introduction
 Corporate-level strategy concerns:
 The scope of the markets and industries the firm
competes in
 How the firm manages their portfolio of businesses
 Mode of entry into new businesses




Internal development, acquisitions/merger, joint
venture/strategic alliance
Level and type of diversification
Capturing synergies between business units
Allocating corporate resources
 Product diversification is the primary form of corporate-
level strategy
 Diversification is often looked at as a growth strategy
4
Introduction
 Diversified firms vary according to level and type of
diversification (Figure 6.1)


Level – # of different industries a firms competes in
Type – degree of relatedness between business units
 Corporate-level strategy is also concerned with:
 Capturing economies of scope or synergies between
business units (Related)
 Capturing financial synergies (Unrelated)
5
Levels and Types of Diversification
6
Reasons for Diversification (Table 6.1)
7
Value-Creating Diversification Strategies:
Operational and Corporate Relatedness (Figure 6.2)
8
Value-Creating Diversification:
Related Strategies
 Purpose: Gain market power relative to
competitors
 Related diversification wants to develop and exploit
economies of scope between its businesses

Economies of scope: Cost savings firm creates by
successfully sharing some of its resources and
capabilities or transferring one or more corporate-level
core competencies that were developed in one of its
businesses to another of its businesses
 Composed of ‘related’ diversification strategies
including Operational and Corporate relatedness
9
Value-Creating Diversification:
Related Strategies
 Operational Relatedness: Sharing activities
 Can gain economies of scope
 Share primary or support activities (in value chain)
 Risky as ties create links between outcomes
 Related constrained diversified firms share activities in
order to create value
 Not easy, often synergies not realized as planned
10
Value-Creating Diversification:
Related Strategies
 Corporate Relatedness: Core competency transfer
 Complex sets of resources and capabilities linking
different businesses through managerial and
technological knowledge, experience and expertise
 Two sources of value creation



Core competence can be developed in one business unit and
transferred to other business units at no additional cost
Intangible resources difficult for competitors to understand and
imitate, so immediate competitive advantage over competition
can be achieved through transfer of corporate-level core
competence
Use related-linked diversification strategy
11
Value-Creating Diversification:
Related Strategies
 Market Power

Exists when a firm is able to sell its products above the existing
competitive level or to reduce costs of primary and support activities
below the competitive level, or both.

Can come from increasing scale or size
 Market power can also be created through:
 Multipoint Competition


Exists when 2 or more diversified firms simultaneously compete in the
same product or geographic markets.
Vertical Integration

Exists when a company produces its own inputs (backward integration)
or owns its own source of output distribution (forward integration)
12
Value-Creating Diversification:
Related Strategies
Proctor and Gamble
 Provides branded consumer goods products worldwide
 3 GBUs

Beauty GBU



Health and Well-Being GBU



Beauty segment
Grooming segment
Health Care segment
Snacks, Coffee, and Pet Care segment
Household Care GBU


Fabric Care and Home Care segment
Baby Care and Family Care segment
13
Value-Creating Diversification:
Related Strategies
Johnson and Johnson
 Engages in the research and development, manufacture, and sale of
various products in the health care field worldwide
 3 segments
 Consumer segment


Pharmaceutical segment


Products for baby care, skin care, oral care, wound care, and women’s
health care fields, as well as nutritional and over-the-counter
pharmaceutical products
Products for anti-infective, antipsychotic, cardiovascular, contraceptive,
dermatology, gastrointestinal, hematology, immunology, neurology,
oncology, pain management, urology, and virology
Medical Devices and Diagnostics segment

Products for circulatory disease management, orthopaedic joint
reconstruction and spinal care, wound care and women’s health,
minimally invasive surgical, blood glucose monitoring and insulin
delivery, and diagnostic products, as well as disposable contact lenses
14
Value-Creating Diversification:
Related Strategies
Campbell Soup Company
 Engages in the manufacture and marketing of branded
convenience food products worldwide
 4 segments

U.S. Soup, Sauces, and Beverages
Baking and Snacking
International Soup, Sauces, and Beverages

North America Foodservice


15
Value-Creating Diversification:
Unrelated Strategies
 Creates value through two types of financial
economies
 Financial economies – cost savings realized
through improved allocations of financial resources
based on investments inside or outside firm


Efficient internal capital market allocation (versus
external capital market)
Restructuring of acquired assets

Firm A buys firm B and restructures assets so it can operate
more profitably, then A sells B for a profit in the external
market
16
Value-Creating Diversification:
Unrelated Strategies
United Technologies Corporation
 Provides technology products and services to the building
systems and aerospace industries worldwide







Otis segment – elevators and escalators
Carrier segment – air conditioning and refrigeration
UTC Fire and Security segment.
Pratt and Whitney segment - aircraft engines; parts and
services
Hamilton Sundstrand segment - aerospace products and
aftermarket services
Sikorsky segment – helicopters
UTC also engages in the development and marketing of
distributed generation power systems and fuel cell power
plants for stationary, transportation, space, and defense
applications
17
Value-Creating Diversification:
Unrelated Strategies
Textron, Inc.
 Operates in the aircraft, industrial, and finance
industries worldwide.
 4 segments




Bell – helicopters plus parts and service
Cessna – general aviation aircraft
Industrial – auto parts, food containers, hydraulics,
golf carts
Finance – aircraft finance, asset-based lending,
distribution finance, golf finance, resort finance
18
Value-Neutral Diversification:
Incentives and Resources
 Value-Neutral Incentives to Diversify





Antitrust Regulation and Tax Laws
Low Performance
Uncertain Future Cash Flows
Synergy and Firm Risk Reduction
Tangible and Intangible Resources and
Diversification
19
Value-Reducing Diversification:
Managerial Motives to Diversify
 Top-level executives may diversify in order to
diversity their own employment risk and to increase
their own compensation, as long as profitability does
not suffer excessively


Diversification adds benefits to top-level managers but
not shareholders
This strategy may be held in check by governance
mechanisms or concerns for one’s reputation
20
Portfolio Analysis
 Requires the continual evaluation of a firms portfolio of
business units
 This involves:




Assessing the attractiveness of the industries the firm
competes in
Assessing the competitive strength of a firm's business units
Checking the competitive advantage potential of sharing
activities and/or transferring competencies across business
units
Checking the potential for capturing financial economies
21
Portfolio Analysis
 Best Case Scenario:
 All of a firm's business units compete in attractive industries
and have strong competitive positions
and
 There are ample opportunities to capture economies of scope
and/or financial economies
 Useful Tools for Portfolio Analysis Include:
 Nine cell industry attractiveness and competitive strength
matrix
 BCG growth share matrix
22
Portfolio Analysis
 Nine cell industry attractiveness and competitive strength matrix
23
Portfolio Analysis
 BCG growth share matrix
24