HI6006

Competitive Strategy

Lecture 6: Corporate Level Strategy

The Strategic Management Process
KNOWLEDGE OBJECTIVES

Define corporate-level strategy and discuss its

purpose.

Describe different levels of diversification with

different corporate-level strategies.

Explain three primary reasons firms diversify.

Describe how firms can create value by using a

related diversification strategy.
KNOWLEDGE OBJECTIVES

Explain the two ways value can be created with an

unrelated diversification strategy.

Discuss the incentives and resources that

encourage diversification.

Describe motives that can encourage managers to

over diversify a firm.
 IMPORTANT DEFINITIONS

Corporate-level strategy: What businesses

should a firm compete in?
 There are three key questions to address:

In what product markets (industries)

should the firm compete?

How can corporate headquarters best manage

those businesses?

How will we manage or business portfolio

 IMPORTANT DEFINITIONS
Corporate-level strategies
 Market development – moving into different
geographic markets
 Product development – developing new
products and/or significantly improving on existing
products
 Horizontal integration – acquiring competitors;
horizontal movement at the same point in the
value chain
 Vertical integration – becoming your own
supplier or distributor through acquisition; vertical
movement up or down the value chain
 IMPORTANT DEFINITIONS
Corporate-level strategy: Diversification
 Diversification:
– involves growing into new business areas either
related (similar) or unrelated (different) to existing
business
– allows a firm to create value by productively using
excess resources.
 IMPORTANT DEFINITIONS
Corporate-level strategy: Diversification
 Diversified firms:
– operate in several different and unique product
markets and likely in several businesses
– uses two types of strategies: corporate-level (or
company-wide) and business-level (or
competitive)
– must select a business-level strategy for each
one of its businesses.
 IMPORTANT DEFINITIONS
Corporate-level strategy: Diversification
 Product diversification
– is a primary form of corporate-level strategy
– concerns the scope of the markets and industries
in which a firm competes.
 The ideal portfolio of businesses balances
diversification’s costs and benefits.
– Profitability variability is reduced as earnings are
generated from different businesses.
– It offers independence/flexibility to shift
investments to those markets with the greatest
returns.
Levels and Types of Diversification
 LEVELS OF DIVERSIFICATION
 A firm’s diversified businesses are related when
they share links across:
– products (goods or services)
– technologies
– distribution channels.
 The more links among businesses, the more
‘constrained’ is the relatedness of diversification.
 ‘Unrelated’ refers to the absence of direct links
between businesses.
 LOW LEVELS OF DIVERSIFICATION

• Single business strategy – corporate-level strategy

in which the firm generates 95 per cent or more of its
sales revenue from its core business area
• Example: Wrigley Company

– the world’s largest producer of chewing and bubble gums,

historically used a single-business strategy while operating in
few product markets, i.e. single business strategy
– In 2005, Wrigley employed the dominant-business strategy
when it acquired the confectionary assets of Kraft Foods Inc.,
including Life Savers and Altoids.
– In 2008, Wrigley was acquired by Mars, a privately held global
confection company, becoming just one company in Mars
Corporate, among a (low-level) diversified portfolio of
companies, all in the sweet-chocolate product market /
industry.
 Dominant business diversification strategy

• Corporate-level strategy whereby firm

generates 70–95 per cent of total sales
revenue within a single business area

• Current Example: United Parcel Service (UPS)

Activity: Consider other well-known corporates that

use the ‘dominant business diversification strategy’
 Related constrained diversification strategy

• Less than 70 per cent of revenue comes from the

dominant business.
• There are direct links (i.e. shared products,
technology and distribution linkages) between the
firm’s businesses.
• Examples: Proctor & Gamble, SAB Miller
(dominant in beer; other includes footwear,
furniture, retail, property),
 Related-linked diversification strategy
(a mix of related and unrelated)

• Mixed - Less than 70 per cent of revenue comes

from the dominant business.
and
• Linked firms sharing fewer resources and assets
among their businesses (compared with related
constrained) and concentrating on the transfer of
knowledge and competencies among the
businesses
• Example: General Electric (similar Management
and HR strategies although diversified business
interests)
 Unrelated Diversification

Unrelated
• Less than 70 per cent of revenue comes from
dominant business.
and
• There are no relationships between
businesses.

• Examples: Samsung Corporation,

Wesfarmers
Reasons for Diversification
Two dimensions of diversification
 VALUE-CREATING DIVERSIFICATION
This is a hybrid diversification strategy

• Operational relatedness in sharing activities (e.g

similar process controls are applied in a furniture factory and a
clothing factory; a car assembly line and a motorbike assembly
line)

• Corporate relatedness in transferring skills or

corporate core competencies among units (e.g. the
same managerial practices can be applied to a pharmaceutical
plant that is highly regulated and an educational institution)

Activity: Discuss and propose some other examples

of a seeming hybrid diversification strategy
 Managing a Corporate Portfolio

 Which companies are currently giving the

corporation high returns on their investment?

 Which companies require investment to become

profitable contributors?

 Which companies should the corporate sell off /

exit?

The Boston Consulting Group (BCG) famously developed a

model for these types of questions
 Boston Consulting Group (BCG) Model

 By comparing current market share against

future market growth potential, a corporate can
decide which of the companies in its portfolio to
invest in, to exit, or to ‘exploit’ without further
investment.

 Exploiting without further investment means to

take as much cash profit as possible, while it
lasts, and to limit investment in resources or
capacity to a minimum.
The BCG Matrix
 BCG assumptions
 A STAR company = One that is in a high growth
potential market and has current high market share
(sales). Keep these and invest further.
 A DOG company is one that is in a low growth potential
market and has a low current market share (sales).
Discard these.
 A CASH COW company is one that is in a low growth
potential market but currently enjoys high market share
(sales). Milk it while you can !
 A QUESTION MARK company (?) is one that is in a high
growth potential market but currently has low market
share (sales). Decide how committed the corporation is
to being in that market. If so, invest in this company to
ensure accelerated growth in market share.
 SOME REASONS WHY FIRMS ENGAGE IN UNRELATED
DIVERSIFICATION

 Restructuring creates financial economies.

 A firm creates value by buying, restructuring
and selling the restructured firms’ assets in the
external market.
 To balance or mitigate economic risk - An
economic downturn can present opportunities
but also some risks.
 Expedience – i.e. maintain core competencies
by focusing on mature, low-technology
businesses, while also expanding into more
modern, high-tech businesses.
 Summary – Rationale for Diversification

• Synergy exists when the value created by

Low businesses working together exceeds the
performance value created by them working
independently.
Uncertain • However, synergy creates joint
future cash interdependence between business units.
flows • A firm may reduce the level of
technological change by operating in more
Synergy and certain environments, resulting in more
risk related types of diversification.
reduction • A firm may become risk averse, constrain
its level of activity sharing and forgo
potential benefits of synergy, resulting in
more unrelated types of diversification.
 Introduction to Case Analysis

 Read the Case – looking to identify (highlight)

key strategic issues
 Decide which Strategy Model or theoretical
concepts are relevant to this case
 Use the model as your ‘template’ to summarise
the key issues identified in the case
 Form a picture of how this company (case)
applies the strategy model or theoretical
concepts
 Evaluate how well the company (case) has
applied Strategy Theory
 Tutorial Activities in small groups

Consider the Movie Exhibition Industry (Case 8;

page 483):
How has the Film Industry diversified over the past
50 years?
What operational differences have occurred?
What corporate synergies can be observed?
How has the Value Chain changed for the likes of
MGM, Universal, Paramount etc?
Additional Activity: Do the same for the Music
Industry