Norman, BUS 4385

Key Points:Chapter 6: Corporate-Level Strategy

• Understand the difference between business-level strategy and corporate level strategy

• Levels and Types of Diversification• Definitions• Identify the type of diversification used by a firm

• Understand the various reasons for diversification• How can diversification create value?• What reasons usually fail to create value?

• Understand the issues firms should evaluate when considering diversification

Norman, BUS 4385

Business-Level versus Corporate-LevelStrategy

• Business-Level (Competitive) Strategy• How to create value by competing in each individual

business

• Corporate-Level (Companywide) Strategy• How to create value for the corporation as a whole• Key questions

• What business(es) should a firm be in?• How should the corporate office manage this group

of businesses?

Norman, BUS 4385

Core Competencies and Corporate Strategy

• What core competencies should the corporation develop and exploit?

• How should these be shared across businesses?

Norman, BUS 4385

Figure 6.1: Levels and Types of Diversification

Low Levels of Diversification Single business: More than 95% of revenue from a

single business

Dominant business: Between 70% and 95% of revenue from a single business

Moderate to High Levels of Diversification Related constrained: Less than 70% of revenue from the

dominant business and all businessesshare product, technological, and distribution links

Related linked: Less than 70% of revenue from the dominant business, and only limited links between businesses

Very High Levels of Diversification Unrelated: Less than 70% of revenue from the

dominant business, and no commonlinks between businesses

A

A

B

B

A

C

B

A

C

B

A

C

Norman, BUS 4385

Table 6.1

Motives to Enhance Strategic Competitiveness• Economies of scope (related diversification)

• Sharing activities• Transferring core competencies

• Market power (related diversification)• Blocking competitors through multipoint competition• Vertical integration

• Financial economies (unrelated diversification)• Efficient internal capital allocation• Business restructuring

Motives with Neutral Effects on Strategic Competitiveness• Antitrust regulation, tax laws, low performance, uncertain future cash flows,

firm risk reduction, tangible resources, intangible resources

Managerial Motives that Reduce Strategic Competitiveness• Diversifying managerial employment risk• Increasing managerial compensation

Norman, BUS 4385

Vertical Integration

• Definition: a firm produces its own inputs or disposes of its own outputs

• Reasons companies vertically integrate• Market power• Savings on operational costs• Avoidance of market costs• Controls product quality (McDonald’s)• Protects technology• Builds entry barriers (e.g., Alcoa in aluminum,

bauxite mine)

Norman, BUS 4385

Vertical Integration

• Limits of vertical integration• Bureaucratic costs• Cost disadvantages• Rapid changes in technology• Risky when demand is unstable or unpredictable

• Firms must weigh:• Costs• Value derived from vertical integration

Norman, BUS 4385

Issues to Evaluate When Considering Diversification

• What resources, capabilities, and core competencies do we possess that would allow us to outperform competitors?

• What core competencies must we possess to succeed in a new product or geographic market?

• Will we only be a player in the new product or geographic market or will we emerge as a winner?

• Is it possible for us to leapfrog competitors (e.g., change the rules of competition)?

• Will diversification break up capabilities and competencies that should be kept together?

• What can the firm learn through its diversification and is it organized properly to acquire such knowledge?