CorporateLevel Strategies

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Chapter 6

• Corporate-Level Strategies

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Two Strategy Levels firms have BOTH types of
strategy

• Business-level Strategy (Division level)
• Each business unit in a diversified firm chooses
  a business-level strategy as its means of
  competing in individual product markets
• Corporate-level Strategy (Companywide)
• Specifies actions taken by the firm to gain a
  competitive advantage by selecting and managing a
  group of different businesses competing in
  several industries and product markets

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(Generic) Business-Level Strategy Key Questions

• 1.
• 2.

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Corporate-Level Strategy Key Questions

• 1. What businesses should the firm be in?
• 2. How should the corporate office manage the
  group of businesses?
• 3. Are the businesses worth
• more under company
• ownership than under
• other ownership?

Business Units
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Corporate-Level Strategy ?s . . .

• McDonalds -
• Chipotle Grill? C-stores? hotel?
• JetBlue -
• purchase LiveTV LLC?
• John Deere Company -
• start a wholesale landscaping business?
• Gillette Company
• Duracell, Braun, Oral-B?
• New York Times -
• ownership of papermills?

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few corporate-level strategies actually create
value . . . - pg. 154

• Yet again,
• strategy formulation might be easier than
  strategy implementation!
• Synergies (where the whole is greater than the
  sum of the parts) are easier to conceptualize
  than to actually realize.

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Corporate-Level Strategies

• Definitions of the corporate-level strategies are
  primarily based on the revenue generated by
  each division,
• and the relationship of the divisions to the
  firms core business.

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A firms core business location in the firm
of most developed (core) competencies

• Often can be identified by
• high proportion of firms profit
• high proportion of a firms assets
• original business of the firm
• division serving primary target markets

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Examples of core business at

• McDonalds -
• JetBlue
• John Deere
• Gillette -
• New York Times -

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Respect the importance/role of the organizations
core business!!

• WHY?

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The Main Corporate-Level Strategies can be
described as

• 1. undiversified
• - single business strategy (1)
• - dominant business strategy (2)
• 2. vertically integrated (3)
• - backward integration strategy
• - forward integration strategy
• 3. diversified
• - related diversification strategy (4)
• - unrelated diversification strategy (5)

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Levels and Types of Diversification
Figure 6.1
SOURCE Adapted from R. P. Rumelt, 1974,
Strategy, Structure and Economic Performance,
Boston Harvard Business School.
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OtterTail Corporation

• How many business units?
• Calculate revenue contributed by each business
  unit revenue from each unit
• total revenue for firm
• Corporate-level strategy ________________?

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Single Business Strategy
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Single- and Dominant- Business Strategy

• Advantages

• Disadvantages
• (Why move away from these strategies to
  diversification?)

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Vertical Integration Strategy

• When a firm produces its own inputs
• ______________ integration
• When a firm owns its own means of
• distribution _____________ integration

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Vertical Integration - Examples

• Forward Integration

• Backward Integration

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Forward and Backward Vertical Integration

• Forward vertical integration
• Ethan Allan
• agricultural cooperatives
• supplies manufacturing distribution
  retail
• 
  
• Gallo wine
• McDonalds
• Backward vertical integration

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Vertical Integration Strategy

• Advantages/
• Reasons for Use

• Disadvantages/Hazards

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Alternatives to Vertical Integration?
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Vertical Integration General strategic
advice?
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Diversification

• When a firm participates in more than one
• industry (or more than one major segment of
• an industry)
• And earns no more than 70 of its revenues
• from any one of its business units (note that it
• has more than one division).
• BROAD PRODUCT LINE ? DIVERSIFICATION!

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PepsiCo, 2007
PepsiCo Americas Beverages
PepsiCo Americas Foods
PepsiCo Inter-national
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Diversification Strategy

• Advantages

• Disadvantages/Pitfalls

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The Curvilinear Relationship between
Diversification and Performance
Figure 6.3
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Strategic Motives for Diversification(note
motives ? outcomes!)
To Enhance Strategic Competitiveness Economies
of scope (related diversification) ? Sharing
activities ? Transferring core
competencies Market power (related
diversification) ? Blocking competitors through
multipoint competition ?(Vertical
integration) Financial economies (unrelated
diversification) ? Efficient internal capital
allocation ? Business restructuring
Table 6.1a
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Incentives and Resources for Diversification
Incentives and Resources with generally Neutral
Effects on Strategic Competitiveness Antitrust
regulation Tax laws Low performance Uncertai
n future cash flows Risk reduction for
firm Tangible resources Intangible
resources So - these are not the best reasons to
diversify!
Table 6.1b
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Managerial Motives for Diversification
Managerial Motives (Value Reduction)
Diversifying managerial employment risk
Increasing managerial compensation managerial
opportunism (Chapter 10)
Table 6.1c
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Related Diversification

• Firm creates value by building upon or extending
  its
• Resources
• Capabilities
• Core competencies
• Strongest resources, capabilities, and
  competencies are generally found in a firms core
  business.

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Related Diversification - Economies of Scope

• Value is created by extending important
  resources/capabilities/core competencies through
  two means, generally used together
• 1. Operational relatedness in sharing activities
  - value chain activities are shared among units
• 2. Corporate relatedness in transferring skills -
  competencies are transferred across units

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In related diversificationimplementation to
realize synergies (225)Example of PepsiCo

• Shared Activities
• (operational relatedness)
• distribution
• sales
• market research

• Skill Transfer
• (corporate relatedness)
• product development
• brand development
• brand excitement

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The Basic Value Chain -Places to lookfor
activity sharing and/orskill transferpossibilit
ies
Service
Marketing and Sales
Human Resource Management
Outbound Logistics
Technological Development
Firm Infrastructure
Operations
Procurement
Inbound Logistics
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Activity sharing and skill transfer . .

• can create efficiencies (especially activity
  sharing)
• can provide competitive advantages that are
  valuable, rare, and difficult to imitate due to
  complexity and combining tangible and intangible
  resources
• can fail due to implementation complications -
  managed interactions across business units are
  required

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Advice for sharing activities or transferring
skills

• Since sharing activities and
• transferring skills
• adds management complications,
• only select those that are
• competitively meaningful, with strong
• potential to add competitive advantage,
• or it generally isnt going to be
• worth the trouble!

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Unrelated Diversification

• Financial Economies
• Are cost savings realized through improved
  allocation of financial resources
• Two types of financial economies, generally NOT
  used together
• 1.
• 2.

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Unrelated Diversification - Efficient Internal
Capital Market Allocation

• Acquire sound, attractive autonomous companies
  that need growth capital
• Corporate office distributes capital from low
  growth divisions to high growth divisions to
  create value for overall company
• Operation like an internal capital market
• Corporate office gains proprietary access to
  information about those businesses actual and
  prospective performance

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A Prominent Local Unrelated Diversifier
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OtterTail Corporation

• Calculate operating profit margins for each
  business unit
• business unit operating profit
• business unit total revenue
• Calculate contribution to total firm operating
  profits from each business unit
• operating profit from each unit
• total operating profit for firm

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Unrelated Diversification Restructuring

• Restructuring creates financial economies
• A firm creates value by buying and selling other
  firms assets in the external market
• The corporate fixer-upper

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Unrelated Diversification - Implementation
Considerations

• Can be considered easier to implement than
  related diversification - WHY?
• BUT . . . .

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Cass County Electric CooperativeCEO Scott Handy

• Relatively successful
• Electric fireplace business
• IdeaOne Telecom

• Less than successful
• Rural cable television
• Cell phone service
• Home security
• Industrial land development

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Unrelated DiversificationPerformance Reputation

• diversifiction
• diworseification
• the conglomerate discount
• conclusion