Corporate Level Strategy:

Creating Value through

Diversification
Corporate Strategy
• Corporate strategy involves decisions relating to the choice of
businesses, allocation of resources among different businesses,
transferring skills and capabilities from one set of businesses to
others.
• Corporate strategy is concerned with two basic issues:
• What businesses should a firm compete in?
• How can these businesses be coordinated and managed so that they create
“Synergy.”
• Synergy means that the whole is greater than the sum of its parts. In
organisational terms, synergy means that as separate departments
within an organisation co-operate and interact, they become more
productive than if each were to act in isolation.
• Synergy can take place in one of the forms:
• Shared Know-how
• Coordinated Strategies
• Shared Tangible Resources
• Economies of Scale or Scope
• Pooled Negotiating Power
Expansion Strategies
• Growth strategies are the most widely pursued corporate strategies.
Companies that do business in expanding industries must grow to
survive. A company can grow internally by expanding its operations or
it can grow externally through mergers, acquisitions, joint ventures or
strategic alliances.
• Categories of Growth Strategies: Growth strategies can be divided
into three broad categories:
1. Intensive Strategies
2. Integration Strategies
3. Diversification Strategies
Intensive/Concentration Strategies
• Without moving outside the organisation’s current range of products or
services, it may be possible to attract customers by intensive advertising,
and by realigning the product and market options available to the
organisation. These strategies are generally referred to as intensification or
concentration strategies.
• There are three important intensive strategies:
• Market penetration: Market penetration seeks to increase market share for existing
products in the existing markets through greater marketing efforts.
• Market Development: Market development seeks to increase market share by
selling the present products in new markets.
• Product Development: Product development seeks to increase the market share by
developing new or improved products for present markets.
Integrative Strategies
• Integration basically means combining activities relating to the
present activity of a firm. Such a combination can be done on the
basis of the industry value chain.
• A firm can pursue vertical integration by starting its own operations or
by acquiring a company already performing the activities it wants to
bring in house. Thus, integration is basically of two types:
1. Vertical integration
2. Horizontal integration
Vertical Integration
• Expanding the firm’s range of activities backward into the sources of supply and/or
forward into the distribution channels is called “Vertical Integration”. There are two types
of vertical integration:
• Backward Integration: Backward integration involves gaining ownership or increased control of a
firm’s suppliers.
• Forward Integration: Forward integration involves gaining ownership or increased control over
distributors or retailers.
• Advantages of Vertical Integration: The following are the advantages of vertical
integration:
1. A secure supply of raw materials or distribution channels.
2. Control over raw materials and other inputs required for production or distribution
channels.
3. Access to new business opportunities and technologies.
4. Elimination of need to deal with a wide variety of suppliers and distributors.
• Risks
1. Increased costs, expenses and capital requirements.
2. Loss of flexibility in investments.
3. Problems associated with unbalanced facilities or unfulfilled demand.
4. Additional administrative costs associated with managing a more complex set of activities.
Horizontal Integration
• Horizontal integration is a strategy of seeking ownership or increased
control over a firm’s competitors. It is also termed as horizontal
diversification.
• This strategy generally involves the acquisition, merger or takeover of one
or more similar firms operating at the same stage of the industry value
chain.
• Horizontal integration is an appropriate strategy when:
1. A firm competes in a growing industry.
2. Increased economies of scale provide a major competitive advantage.
3. A firm has both the capital and human talent needed to successfully manage an
expanded organisation.
4. Competitors are faltering due to lack of managerial expertise or resources, which the
firm has.
Class Activity
• Give examples of vertical integration and assess the validity and
feasibility of those integrations
Diversification Strategies
• Diversification is the process of adding new businesses to the existing
businesses of the company. It adds new products or markets to the existing
ones.
• Diversification into both Related and Unrelated Businesses: Some
companies may diversify into both related and unrelated businesses. The
actual practice varies from company to company.
• There are three types of enterprises in this respect:
1. Dominant business enterprises: In such enterprises, one major “core” business
accounts for 50 to 80 per cent of total revenues and the remaining comes from small
related and unrelated businesses
2. Narrowly diversified enterprise: These are enterprises that are diversified around a
few (two to five) related or unrelated businesses .
3. Broadly diversified enterprises: These enterprises are diversified around a wide-
ranging collection of related and unrelated businesses.
Unrelated Diversification:
Financial Synergies and Parenting
• In non-related diversification the creation of synergies derives from
the interaction of the corporate office with the individual business
units.
• There are two main sources of such synergies.
• First, the corporate office can contribute to “parenting” and restructuring of
businesses.
• Second, the corporate office can add value by viewing the entire corporation
as a family or “portfolio” of businesses and allocating resources to optimize
corporate goals of profitability, cash flow, and growth
Corporate Parenting
• Parenting advantage: the positive contributions of the corporate office to a
new business as a result of expertise and support provided from corporate
office.
• Parent companies improve plans and budgets and provide especially
competent central functions such as legal, financial, human resource
management, procurement, and the like. Such contributions often help
business units to substantially increase their revenues and profits.
• They also help subsidiaries make wise choices in their own acquisitions,
divestitures, and new internal development decisions.
• They work to improve a range of operating activities, such as new product
development processes, sales force activities, quality improvement, and
supply chain management.
Corporate Restructuring
• The intervention of the corporate office in a new business that substantially
changes the assets, capital structure, and/or management.
• It includes selling off parts of the business, changing the management, reducing
payroll and unnecessary sources of expenses, changing strategies, and infusing
the new business with new technologies, processes, and reward systems.
• Restructuring can involve changes in assets, capital structure, or management.
• Asset restructuring involves the sale of unproductive assets, or even whole lines of
businesses, that are peripheral. In some cases, it may even involve acquisitions that
strengthen the core business.
• Capital restructuring involves changing the debt-equity mix, or the mix between different
classes of debt or equity.
• Management restructuring typically involves changes in the composition of the top
management team, organizational structure, and reporting relationships.
Class Activity
• Give examples of companies that have recently opted for
diversification into unrelated businesses. Can you find out the reasons
behind their diversification?
Portfolio Management
• Portfolio management is a method of (a) assessing the competitive
position of a portfolio of businesses within a corporation, (b)
suggesting strategic alternatives for each business, and (c) identifying
priorities for the allocation of resources across the businesses.
• The key purpose of portfolio models is to assist a firm in achieving a
balanced portfolio of businesses. This consists of businesses whose
profitability, growth, and cash flow characteristics complement each
other and adds up to a satisfactory overall corporate performance.
• The Boston Consulting Group’s (BCG) growth/share matrix is among
the best known of these approaches
 Boston Consulting Group’s (BCG) approach
• SBU is plotted on a two-dimensional grid in
which the axes are relative market share and
industry growth rate.
• Each of the four quadrants of the grid has
different implications for the SBUs that fall into
the category:
• Stars are SBUs competing in high-growth industries
with relatively high market shares. These firms have
long-term growth potential and should continue to
receive substantial investment funding.
• Question Marks are SBUs competing in high-growth
industries but having relatively weak market shares.
Resources should be invested in them to enhance
their competitive positions.
• Cash Cows are SBUs with high market shares in low-
growth industries. These units have limited long-run
potential but represent a source of current cash flows
to fund investments in “stars” and “question marks.”
• Dogs are SBUs with weak market shares in low-growth
industries. Because they have weak positions and
limited potential, most analysts recommend that they
be divested.
Benefits & limitations of Portfolio Analysis
• It provides a snapshot of the businesses in a corporation’s portfolio.
• The corporate office can provide high-quality review and coaching for
the individual businesses.
• Portfolio analysis provides a basis for developing strategic goals and
reward/evaluation systems for business managers.
• It compare SBUs on only two dimensions, making the implicit but
erroneous assumption.
• Unless care is exercised, the process becomes largely mechanical,
substituting an oversimplified graphical model.
Ge Nine Cell Matrix
• This matrix was developed in 1970s by the General Electric Company
with the assistance of the consulting firm, McKinsey & Co., USA.
Ge Nine Cell Matrix
• The business strength is measured by considering such factors as:
1. Relative market share
2. Profit margins
3. Ability to compete on price and quality
4. Knowledge of customer and market
5. Competitive strengths and weaknesses
6. Technological capacity
7. Calibre of management
• Industry attractiveness is measured considering such factors as:
1. Market size and growth rate
2. Industry profit margin
3. Competitive intensity
4. Economies of scale
5. Technology
6. Social, environmental, legal and human aspects
 Ge Nine Cell Matrix
• The strategies are chosen depending on the
zone in which the product or business unit
happens to fall:
• 1. If the product falls in the ‘green zone’, i.e., if the
business strength is strong and industry is at least
medium in attractiveness, the strategic decision
should be to expand, to invest and to grow.
• 2. If the product falls in the ‘yellow zone’ i.e. if the
business strength is low but industry attractiveness is
high, it needs caution and managerial discretion for
making the strategic choice.
• 3. If the product falls in the ‘red zone’ i.e. the
business strength is average or weak and
attractiveness is also ‘low’ or ‘medium’, the
appropriate strategy should be divestment.
Differences between BCG and GE Matrices
Means to Achieve Diversification
• Mergers and Acquisitions
• Strategic Alliances and Joint Ventures
• Internal Development
Mergers and Acquisitions
• Although the terms mergers and acquisitions are used quite
interchangeably, there are some key differences. With acquisitions ,
one firm buys another either through a stock purchase, cash, or the
issuance of debt.
• Mergers , on the other hand, entail a combination or consolidation of
two firms to form a new legal entity.
• Mergers and acquisitions are complex area of a company long-term
strategy. The process takes a long time, at times, even years.
MOTIVES FOR MERGERS AND ACQUISITIONS
• Synergy: It is the concept that the value and performance of two companies combined will be
greater than the sum of the separate individual parts.
• Growth: Mergers or acquisitions can exponentially increase the growth of the company, as it has
more resources at its disposal.
• Exploiting the Market: Taking over another company or merger could facilitate a monopoly-like
situation, which would give the company an edge over its competitors.
• As an Answer to Government Policies: Mergers and acquisitions also take place in order to cope
with adverse government policies, which may require a certain size of a firm to exist. Some
governments offer tax breaks and other incentives to large corporations.
• Transfer of Technology: Another popular reason for mergers and acquisitions is transfer of
technology, especially for highly specialized companies with unique technologies.
• To Handle Large Clients: Mergers and acquisitions, especially in the service industry, also take
place in order to follow big clients.
• Diversification: Mergers and acquisitions allow companies to diversify into other areas of
business, hence it spreads risks and present opportunity for more sales, profits and recognition in
the market.
Strategic Alliances and Joint Ventures
• A strategic alliance is a cooperative relationship between two (or
more) firms. Alliances may be either informal or formal—that is,
involving a written contract.
• Joint ventures represent a special case of alliances, wherein two (or
more) firms contribute equally. A joint venture involves two separate
entities undertaking a company or business together, sharing its
profit, loss and control.
Features of Joint Venture
• Agreement: Two or more firms come to an agreement, to undertake a business, for a
definite purpose and are bound by it.
• Joint Control: There exist a joint control of the co-venturers over business assets,
operations, administration and even the venture.
• Pooling of resources and expertise: Firms pool their resources like capital, manpower,
technical know-how, and expertise, which helps in large-scale production.
• Sharing of profit and loss: The co-venturers agree to share the profits and losses of the
business in an agreed ratio.
• Access to advanced technology: By entering into joint venture firms get access to various
techniques of production, marketing and doing business, which decreases the overall
cost and also improves quality.
• Dissolution: Once the term or purpose of the joint venture is complete, the agreement
comes to an end, and the accounts of the coventurers, are settled, as and when it is
dissolved.
Objectives of Joint Venture
• To enter foreign market and even new or emerging market.
• To reduce the risk factor for heavy investment.
• To make optimum utilisation of resources.
• To gain economies of scale.
• To achieve synergy.
Internal Development
• Corporations may diversify into new products, markets, and
technologies through internal development.
• When a company is entering a new business through investment in
new facilities, it is often called corporate enterpreneurship and new
venture development.
• Here all growth is established without the aid of external resources or
external parties.
• Internal growth strategies have a few disadvantages. For instance,
developing internal capabilities can be slow and time-consuming,
expensive, and risky if not managed well.
Retrenchment Strategies
• A company may pursue retrenchment strategies when it has a weak
competitive position in some or all of its product lines resulting in
poor performance. In an attempt to eliminate the weaknesses that
are dragging the company down, management may follow-
• Turnaround
• Divestment
• Bankruptcy
• Liquidation
Turnaround
• A firm is said to be sick when it faces a severe cash crunch or a consistent
downtrend in its operating profits. Such firms become insolvent unless
appropriate internal and external actions are taken to change the financial
picture of the firm. This process of recovery is called “turnaround strategy”.
• Any successful turnaround strategy consists of three inter-related phases:
• The first phase is the diagnosis of impending trouble by understanding early warning
signals of corporate sickness.
• The second phase involves analyzing the causes of sickness to restore the firm on its
profit track. These measures are of both short-term and long-term nature.
• The third and final phase involves implementation of change process and its
monitoring.
Turnaround
• The turnaround strategies may be classified into two broad
categories. These are strategic turnaround and operating
turnaround.
• The strategic turnaround choices may involve either a new way to
compete existing business or entering an altogether new business.
• The operating turnaround strategies are of four types:
1. Revenue-increasing strategies
2. Cost-cutting strategies
3. Asset-reduction strategies
4. Combination strategies
Divestment
• Selling a division or part of an organisation is called divestment.
• Reasons for Divestitures
• Poor fit of a division: When the parent company feels that a particular division within the company
cannot be managed profitably, it may think of selling the division to another company.
• Reverse synergy: Reverse synergy exists when the parts are worth more separately than they are
within the parent company's corporate structure. In such a case, an outside bidder might be able to
pay more for a division than what the division is worth to the parent company.
• Poor performance: Companies may want to divest divisions when they are not sufficiently profitable.
The division may earn a rate of return, which is less than the cost of capital of the parent company.
• Cash flow factors: Selling a division results in immediate cash inflows. The companies that are under
financial distress or in insolvency may be forced to sell profitable and valuable divisions to tide over
the crisis.
• To correct the mistakes committed in investment decisions: Companies may realise that a
diversification into unrelated areas was a big mistake. To correct the mistake committed earlier, they
had to go for divestment.
• To reduce the debt burden: Many companies sell their assets or divisions to reduce their debt and
bring the balance in the capital structure of the firm.
• To help to finance new acquisitions: Companies may sell less profitable divisions and buy more
profitable divisions in order to increase the profitability of the company as a whole.
Principles for successful divestment
• Remove the emotion from the decision: Managers need to consider objectively the
prospects for each unit in the firm and how this unit fits with the firm’s overall strategy.
• Know the value of the business you are selling: Divesting firms can generate greater
interest in and higher bids for units they are divesting if they can clearly articulate the
strategic value of the unit.
• Time the deal right: This involves timing, where the firm regularly evaluates all its units
so that it can divest units when they are no longer highly valued in the firm but will still
be of value to the outside market.
• Run divestitures systematically through a project office: Firms should look at developing
the ability to divest units as a distinct form of corporate competencies.
• Communicate clearly and frequently: Corporate managers need to clearly communicate
to internal stakeholders, such as employees, and external stakeholders, such as
customers and stockholders, what their goals are with divestment activity,
Bankruptcy
• This is a form of defensive strategy. It allows organisations to file a
petition in the court for legal protection to the firm, in case the firm is
not in a position to pay its debts. The court decides the claims on the
company and settles the corporation's obligations.
Liquidation
• Liquidation occurs when an entire company is dissolved and its assets are
sold. When there are no buyers for a business which wants to be sold, the
company may be wound up and its assets may be sold to satisfy debt
obligations.
• Liquidation becomes the inevitable strategy under the following
circumstances:
• When an organisation has pursued both turnaround strategy and divestiture strategy,
but failed.
• When an organisation's only alternative is bankruptcy. A company can legally declare
bankruptcy first and then wind up the company to raise needed funds to pay debts.
• When the shareholders of a company can minimize their losses by selling the assets
of a business.