Copyright © 2004 South-Western. All rights reserved.6–1 Chapter 5 Review: Factors affecting the...

Copyright © 2004 South-Western. All rights reserved. 6–1

Chapter 5 Review: Factors affecting the likelihood of competitive

response . . .The factor listed below increasesdecreases

the likelihood of

competitive response

• poor competitive intelligence• first mover incentives• strategic action required• corporate arrogance• high emotional/ego involvement• actor is reputable/credible


Figure 1.1Figure 1.1

The Strategic

Management Process


Chapter 6: Corporate-Level Strategies• Corporate-level strategies;

advantages and disadvantages of each

- single business

- dominant business

- vertical integration

- related diversification

(activity sharing and skill transfer)

- unrelated diversification

(capital reallocation; restructuring)• Core business


Corporate-level strategy encompasses the entire organization;

Business-level strategy is at the ____________ level

S oft D rin ks F rito -L ay Trop ican a

P ep s iC o


Two Strategy Levels

• Business-level Strategy (Competitive)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


Corporate-Level Strategy: Key Questions• Corporate-level Strategy’s Value

The degree to which the businesses in the portfolio are worth more under the management of the company than they would be under other ownership

What businesses should the firm be in?

How should the corporate office manage the group of businesses?

Business UnitsBusiness Units


Some Corporate-Level Strategy Questions:• McDonald’s -

Chipotle Grill? C-stores? hotel? rec center?• Ebay -

purchase of Skype internet phone provider?• John Deere & Company -

wholesale landscaping business?• Ford Motor Company -

Hertz Rent-A-Car?• New York Times -

ownership of papermills?


“few corporate-level strategies actually create value . . . “ - pg. 170

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.


Levels and Types of Diversification

SOURCE: Adapted from R. P. Rumelt, 1974, Strategy, Structure and Economic Performance, Boston: Harvard Business School.



Common evolution pattern of corporate-level strategies

• Single business• Dominant business• Vertical integration• Vertical integration with by-products

diversification• Related-constrained diversification• Related-linked diversification• Unrelated diversification• Related-constrained diversification


Single- and Dominant- Business Strategy

Advantages Disadvantages

(Why move away from these strategies toward

diversification?)


Vertical Integration Strategy

When a firm produces its own inputs =

__________________ integration

When a firm owns its own means of

distribution = ________________ integration


Forward and Backward Vertical Integration

Forward vertical integration

supplies manufacturing distribution retail

Backward vertical integration


Vertical Integration Strategy

Advantages/

Reasons for Use

Disadvantages/Hazards


Alternatives to Vertical Integration?


Diversification Strategy =participation in >1 industry (segment),

structuring into separate divisions,with no single division contributing

>70% of sales revenue

C on su m er P rod u c ts1 8 % o f sa les ;

1 3 % o f op era tin g p ro fit

P h arm aceu tica ls4 7 % o f sa les ;


D evices an d D iag n os tics3 5 % o f sa les ;


Joh n son & Joh n son


Diversification Strategy

Advantages Disadvantages/Pitfalls


Strategic Motives for Diversification

To Enhance Strategic Competitiveness:

• Economies of scope (related diversification)Sharing activitiesTransferring core competencies

• Market power (related diversification)Blocking competitors through multipoint competition(Vertical integration)

• Financial economies (unrelated diversification)Efficient internal capital allocationBusiness restructuring

Table 6.1aTable 6.1a


Incentives and Resources for DiversificationIncentives and Resources with Neutral Effects on Strategic Competitiveness• Antitrust regulation

• Tax laws

• Low performance

• Uncertain future cash flows

• Risk reduction for firm

• Tangible resources

• Intangible resources

So - these are not the best reasons to diversify!

Table 6.1bTable 6.1b


Managerial Motives for Diversification

Managerial Motives (Value Reduction)

• Diversifying managerial employment risk

• Increasing managerial compensation

“managerial opportunism” (Chapter 10)

Table 6.1cTable 6.1c


The Curvilinear Relationship between Diversification and Performance



Related Diversification

• Firm creates value by building upon or extending its:

ResourcesCapabilitiesCore competencies


Best resource/capabilities for diversification are typically found in a

firm’s core business:“Core business”

represents the business unit or division containing the firm’s most developed skills;

often can be identified by• high proportion of firm’s profit

• high proportion of a firm’s assets• original business of the firm

• division serving primary target markets


Related Diversification - Economies of Scope• Value is created by extending important

resources/capabilities/core competencies through:

Operational relatedness in sharing activities -

value chain activities are shared among units

Corporate relatedness in transferring skills - competencies are transferred across units


In related diversification:implementation to realize synergies -

Example of PepsiCo

Shared Activities

(operational relatedness)

• distribution• sales• market research

Skill Transfer

(corporate relatedness)

• product development• brand development• brand excitement


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


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 isn’t going to be

worth the trouble!


Unrelated Diversification

• Financial EconomiesAre cost savings realized through improved

allocation of financial resourcesCreate value through two types of financial

economies:Efficient internal capital allocationPurchasing other corporations and

restructuring their assets


Unrelated Diversification - Efficient Internal Capital Market AllocationAcquire 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


Otter Tail Corporation - partial view

E lec tric i ty3 0 % o f sa les rev e nu e ;

7 5 % o f n e t in co m e

M an ufa ctu r ing2 6 % o f sa les rev e nu e ;

1 6 % o f n e t in co m e

H e a lth S erv ices1 3 % o f sa les rev e nu e ;

7 % o f n e t in co m e

O tte r T a il C orpo ra tion


Unrelated Diversification: Restructuring• Restructuring creates financial economies

A firm creates value by buying and selling other firms’ assets in the external market

The idea is basically, “buy low, sell high”

“The corporate fixer-upper” - buy underperforming firms or units, fix the problems, and sell for a higher price


Unrelated Diversification - Implementation Considerations

• Can be considered easier to implement than related diversification

• No required commonalities and/or interactions between units

• Each unit is basically “stand-alone”, and operates independently of the other units, except for centralized resource allocation


Unrelated Diversification:Performance Reputation

• “diversifiction”

• “diworseification”

• the conglomerate discount

• conclusion = unrelated diversification generally produces poor performance

Copyright © 2004 South-Western. All rights reserved.6–1 Chapter 5 Review: Factors affecting the...

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