Corporate Level Strategies

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Corporate Level Strategies

1S.Subramanian IIMK

Single & Multiple Business

Organizations

Single business organizations

Operates primarily in only one industry

Multiple Business Organizations

Operates in more than one industry

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How to create value for the corporation as a whole

2. 2. Corporate-Level Strategy (Companywide Strategy)

-- low cost

- differentiation

- integrated low cost/differentiation

-- focused low cost

- focused differentiation

How to create competitive advantage in each

business in which the company competes

1. 1. Business-Level Strategy (Competitive Strategy))

Multiple Business Organizations Have Multiple Business Organizations Have Two Two

Levels of StrategyLevels of Strategy

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Corporate Strategy

An action taken to gain a competitive

advantage through the selection and

management of a mix of businesses

competing in several industries or product

markets

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Corporate Strategy

Corporate strategies concerned with the broad and

long-term questions of

what business(es) the organization is in or wants to be in &

what it wants to do with those businesses

Task involves

Moves to enter new businesses

Actions to boost the combined performance of businesses

Ways to capture synergy among related businesses

Establishing investment priorities & steering corporate

resources into most attractive units

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Levels and Types of Diversification

Low Levels of Diversification

Moderate to High Levels of Diversification

Very High Levels of Diversification

Related linked (mixed

related & Unrelated)

< 70% of revenues from dominant business, and only limited links exist

AA

BB CC

Single business > 95% of revenues from a single business unit

AA

Dominant business Between 70% and 95% of revenues from a single business unit

BB

AA

UnrelatedUnrelated Business units not closely related

AA

BB CC

< 70% of revenues from dominant business; all businesses share product, technological and distribution linkages

Related constrainedAA

BB CC

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Reasons for Diversification

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Value-Creating Diversification:

Economies of Scope -Related Strategies

Related diversification wants to develop and exploit economies of scope between its businesses Economies of scope: Cost savings firm creates by successfully

sharing some of its resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses

Composed of related diversification strategies including Operational and Corporate relatedness

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Related Strategies

Operational Relatedness: Sharing activities

Related constrained diversified firms share activities in order to

create value

Share primary or support activities (in value chain)

Can gain economies of scope

Risky as ties create links between outcomes

Not easy, often synergies not realized as planned

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Related Strategies

Corporate Relatedness: Core competency transfer

Complex sets of resources and capabilities linking different

businesses through managerial and technological knowledge,

experience and expertise

Two sources of value creation

Core competence can be developed in one business unit and transferred

to other business units at no additional cost

Intangible resources difficult for competitors to understand and imitate,

so immediate competitive advantage over competition can be achieved

through transfer of corporate-level core competence

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Related Strategies

Combined Operational Relatedness & Corporate

Relatedness

Sharing activities and transferring core

competencies Walt Disney , Johnson &

Johnson

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Related Strategies- Market Power

Market Power

Exists when a firm is able to sell its products above the existing competitive level or to reduce costs of primary and support activities below the competitive level, or both.

Can come from increasing scale or size

Market power can also be created through:

Multipoint Competition

Exists when 2 or more diversified firms simultaneously compete in the same product or geographic markets.

Vertical Integration

Exists when a company produces its own inputs (backward integration) or owns its own source of output distribution (forward integration)S.Subramanian IIMK

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Vertical Integration Strategies

An organizations attempt to gain control of Its inputs (backward integration) -- supplier

Its output (forward integration) --distributor

Or both inputs and output

Purpose is to (1) reduce resource acquisition costs, & (2) deal with inefficient operations


Vertical Integration Strategies

Benefits

Reduced purchasing & selling costs

Improved coordination of functions & capabilities

Protected proprietary technology

Limitations

Reduced flexibility as firm is locked into products & technology

Create an exit barrier due to existence of assets that are hard to sell

Difficulties in integrating various operations

Financial costs of acquiring or starting up


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Unrelated Diversification

Creates value through two types of financial

economies

Financial economies cost savings realized through improved allocations of financial resources based on

investments inside or outside firm

Efficient internal capital market allocation (versus external

capital market)

Restructuring of acquired assets

Firm A buys firm B and restructures assets so it can operate more

profitably, then A sells B for a profit in the external market

S.Subramanian IIMK

Unrelated Diversification (contd)

Efficient Internal Capital Market Allocation

Corporate office distributes capital to business

divisions to create value for overall company

Corporate office gains access to information about

those businesses actual and prospective performance

Conglomerates have a fairly short life cycle

because financial economies are more easily

duplicated by competitors than are gains from

operational and corporate relatedness


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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


Value-creating

Strategies of

Diversification:

Operational and

Corporate

Relatedness


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Value-Neutral Diversification:

Incentives and Resources

Value-Neutral Incentives to Diversify

Antitrust Regulation and Tax Laws

Low Performance

Uncertain Future Cash Flows

Synergy and Firm Risk Reduction

Tangible and Intangible Resources and Diversification

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Value-Reducing Diversification:

Managerial Motives to Diversify

Top-level executives may diversify in order to diversity

their own employment risk and to increase their own

compensation, as long as profitability does not suffer

excessively

Diversification adds benefits to top-level managers but not

shareholders

This strategy may be held in check by governance

mechanisms or concerns for ones reputation

S.Subramanian IIMK

Documents

Corporate Level Strategies