Corporate -Level

Strategy
LEARNING OBJECTIVES
1. The reasons for the failure of many diversification efforts.
2. How managers can create value through diversification initiatives.
3. How corporations can use related diversification to achieve synergistic
benefits through economies of scope and market power.
4. How corporations can use unrelated diversification to attain synergistic
benefits through corporate restructuring, parenting, and portfolio analysis.
5. The various means of engaging in diversification—mergers and
acquisitions, joint ventures/strategic alliances, and internal development.
6. Managerial behaviors that can erode the creation of value.

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Corporate Level Strategy
corporate-level strategy
- a strategy that focuses on gaining long-term revenue,
profits, and market value through managing operations in
multiple businesses.

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RELATED DIVERSIFICATION: ECONOMIES OF SCOPE
AND REVENUE ENHANCEMENT
Diversification - the process of firms expanding their operations
by entering new businesses.

Related diversification - a firm entering a different business in

which it can benefit from leveraging core competencies, sharing
activities, or building market power.

Economies of scope - cost savings from leveraging core

competencies or sharing related activities among businesses in
a corporation. 7
RELATED DIVERSIFICATION: ECONOMIES OF SCOPE
AND REVENUE ENHANCEMENT
Core competencies reflect the collective learning in
organizations—how to coordinate diverse production skills,
integrate multiple streams of technologies, and market diverse
products and services.
▷ The core competence must enhance competitive advantage(s) by
creating superior customer value
▷ Different businesses in the corporation must be similar in at least one
important way related to the core competence.
▷ The core competencies must be difficult for competitors to imitate or
find substitutes for.
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RELATED DIVERSIFICATION: ECONOMIES OF SCOPE
AND REVENUE ENHANCEMENT
sharing activities - having activities of two or more businesses’
value chains done by one of the businesses.

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RELATED DIVERSIFICATION: MARKET POWER
▷ market power - firms’ abilities to profit through restricting
or controlling supply to a market or coordinating with other
firms to reduce investment.
▷ pooled negotiating power - the improvement in bargaining
position relative to suppliers and customers.
▷ vertical integration - an expansion or extension of the firm
by integrating preceding or successive production processes.

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RELATED DIVERSIFICATION: MARKET POWER
▷ transaction cost - perspective that the choice of a
transaction’s governance structure, such as vertical
integration or market transaction, is influenced by
transaction costs, including search, negotiating, contracting,
monitoring, and enforcement costs, associated with each
choice.

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UNRELATED DIVERSIFICATION: FINANCIAL SYNERGIES
AND PARENTING
▷ unrelated diversification - a firm entering a different business that has
little horizontal interaction with other businesses of a firm.
▷ parenting advantage - the positive contributions of the corporate office
to a new business as a result of expertise and support provided and not
as a result of substantial changes in assets, capital structure, or
management.
▷ restructuring - the intervention of the corporate office in a new business
that substantially changes the assets, capital structure, and/or
management, including 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.
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UNRELATED DIVERSIFICATION: FINANCIAL SYNERGIES
AND PARENTING
▷ portfolio management - 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.

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THE MEANS TO ACHIEVE DIVERSIFICATION

▷ acquisitions - the incorporation of one firm into another through

purchase.
▷ mergers - the combining of two or more firms into one new legal entity

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THE MEANS TO ACHIEVE DIVERSIFICATION

▷ divestment - the exit of a business from a firm’s portfolio.

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THE MEANS TO ACHIEVE DIVERSIFICATION
THE MEANS TO ACHIEVE DIVERSIFICATION

▷ strategic alliance - a cooperative relationship between two or more

firms.
▷ joint ventures - new entities formed within a strategic alliance in which
two or more firms, the parents, contribute equity to form the new legal
entity
▷ internal development - entering a new business through investment in
new facilities, often called corporate enterpreneurship and new venture
development.

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HOW MANAGERIAL MOTIVES CAN ERODE VALUE
CREATION
▷ managerial motives - managers acting in their own self-interest rather
than to maximize long- term shareholder value.
○ growth for growth’s sake - managers’ actions to grow the size of
their firms not to increase long-term profitability but to serve
managerial self-interest.
○ egotism - managers’ actions to shape their firms’ strategies to serve
their selfish interests rather than to maximize long-term
shareholder value.

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HOW MANAGERIAL MOTIVES CAN ERODE VALUE
CREATION
▷ managerial motives
○ antitakeover tactics - managers’ actions to avoid losing wealth or
power as a result of a hostile takeover.
■ greenmail - a payment by a firm to a hostile party for the firm’s
stock at a premium, made when the firm’s management feels that
the hostile party is about to make a tender offer.
■ golden parachute -a prearranged contract with managers
specifying that, in the event of a hostile takeover, the target firm’s
managers will be paid a significant severance package.
■ poison pill - used by a company to give shareholders certain rights
in the event of takeover by another firm.

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