CORPORATELEVEL

STRATEGY

Farahnaz Ghasem Jahroodi , Nagarjun Venkata Subbarao

Table Of Content• Define corporative-level Strategy• Corporate-level Strategy’s Value• The Role of Diversification• Type of Diversification• Levels of Diversification• Reason for Diversify• Value-Creating Strategies of Diversification• Value Neutral Diversification• Internal Incentives to Diversify (cont’d)• Value Reducing Diversification• Diversification & Firm Performance

2001 : Beringer wine

2005 : Southcrop

Corporate-Level strategyCorporate-Level strategy

Firms competing in single industry or product market

selecting and managing a group of different businesses competing in different product markets

Source:http://www.ceo2go.com

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

What businesses should the firm be in?

How should the corporate headquarters manage the group of businesses?

Business UnitsBusiness Units

Corporate-level Strategy’s Value

The Role of Diversification• It is a strategy adopted by the firms to acquire new firms to expand its product base and to maximize its revenue & earn above-average returns & comptetive advantages by creating value.

Type of Diversification

Concentric Conglomerate horizontal

Levels of Diversification: Low Level

Single Business

More than 95% of revenue

comes from a single business(Core)

Dominant Business

Between 70% and 95% of revenue

comes from a single business

AA

AA

B

Levels of Diversification: Moderate to High

6–8

Related Linked (mixedrelated and unrelated)Less than 70% of revenuecomes from the dominantbusiness, and there are onlylimited links betweenbusinesses.

Related Constrained

Less than 70% of revenue

comes from a single business

and all businesses share product, technological and distribution linkages.

CC

AA

BB CC

AA

BB

Levels of Diversification: Very High Levels

6–9

BB

AA

Unrelated Diversification

Less than 70% of revenue comes from the dominant business, and there are no common links between businesses.

Reason for Diversify

• Economies of scope (related diversification)

-Sharing activities &CC

• Market power (related D)-Blocking competitors through multipoint competition

-vertical integration

• Financial economies (unrelated D)

• Efficient internal capital allocation• Business restructuring

Value Creating

Diversification

Value Neutral

Diversification

Value

Reducing

Diversification

• Antitrust regulation• Tax laws• Low performance• Uncertain future cash flows

• Risk reduction for firm

• Tangible resources

• Intangible resources

• Diversifying managerial employment risk

• Increasing managerial compensation

Value-Creating Strategies of Diversification

6–11

HighLow

Corporate RelatednessTransferring of Core

Competencies

Operational Relatedness

Sharing Activities

High

Low

Source:Source:Strategic Management Competitiveness & Globalization Book (11th Edition )

Value-Creating (related Diversification Strategy)

Value-Creating (Related Diversification)

Firms create value by building upon or extending:

• Resources

• Capabilities

• Core competencies

Economies of Scope

• Cost savings that occur when a firm transfers capabilities and competencies developed in one of its businesses to another of its businesses.

Value-Creating (Unrelated Strategy)

Textron, Inc.• Operates in the aircraft, industrial, and finance industries

worldwide.

Segments :

-> Bell – Helicopters plus parts and service

-> Cessna – General aviation aircraft

-> Industrial – Auto parts, food containers, hydraulics

-> Finance – Aircraft finance, asset-based lending

Value-Creating (Unrelated Diversification Strategy)

Efficient internal capital allocation

Asset restructuring of purchased corporations

Value Neutral Diversification:

Incentives to Diversify

Antitrust regulations Tax laws affecting corporate and individual tax rates

Low performance Uncertain future cash flows Synergy - sought to reduce risk

Internal Incentives to Diversify (cont’d)

Diversification may be defensive strategy if:

Product line matures.

Product line is threatened.

Firm is small and is in mature or maturing industry.

Low Performance

Uncertain Uncertain Future Cash Future Cash

FlowsFlows

Internal Incentives to Diversify (cont’d)

• Synergy exists when the value created by businesses working together exceeds the value created by them working independently

• … but synergy creates joint interdependence between business units.

• A firm may become risk averse and constrain its level of activity sharing.

• A firm may reduce level of technological change by operating in more certain environments.

Low Performance

Uncertain Future Cash

Flows

Synergy and Firm Risk Reduction

Value Reducing Diversification: Managerial Motives to Diversity

Diversification & Firm Performance

Source:Source:Strategic Management Competitiveness & Globalization Book (9th Edition )

Diversification & Firm PerformanceP

ER

FO

RM

AN

CE

LEVEL OF DIVERSIFICATION

DominantBusiness

UnrelatedBusiness

RelatedConstrained

Source:www.openlearningworld.comSource:www.openlearningworld.com

Sources:• Strategic Management Competitiveness & Globalization

Book (11th Edition )• Strategic Management Competitiveness & Globalization

Book (9th Edition )• www.openlearningworld.com• www.strategy-train.eu• smallbusiness.chron.com

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