Chapter 6 CorporateLevel Strategy Diane M Sullivan Ph

Chapter 6 Corporate-Level Strategy Diane M. Sullivan, Ph. D. 2011 Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage Sections modified from Gentner (2009)

The Strategic Management Process p Previously, we have examined firms competing in a single industry or product market. After solidifying a position in a single industry or product market, firms will often want to diversify into multiple businesses. Insert figure 1. 1 graphic

Corporate-level Strategy: Definitions p Business-level strategy (Chapter 4) n p Deals with how the business should compete (e. g. , cost leadership, differentiation, focus, integrated strategies) Corporate-level strategy (Chapter 6) n Definition: Specific actions a firm takes to gain an advantage by selecting and managing a group of different businesses p Primary form of corporate-level strategy is product diversification § Diversification involves using expertise and knowledge gained in one business to diversify into a business where it can be used in a related way n 2 main concerns with corporate-level strategy: 1) What businesses the firm should be in 2) How the firm should manage the different business units

Corporate-level Strategy: Examples p Ex. 1: Proctor & Gamble’s Diversification Strategy n Pre-2005: Product mix focused on women and baby care n 2005: Acquired Gillette, which focused on consumer health care products geared toward men n Synergy created by combining Gillette’s toothbrush (Oral-B) and P&G’s toothpaste (Crest) businesses to create Pro-Health oral care product line p Good for retailers (shelf space) p Strategy had potential but was more difficult to create operational relatedness between the products § Comingle employees requiring actual physical re-location/talent exit § Different ways to make business decisions § Conflicting organizational cultures p p In 2007, Pro-Health overtook Colgate in market share Ex. 2: Disney

3 Levels of Diversification 1. 2. 3. Low level of diversification n Single-business strategy n Dominant-business strategy Moderate-to-high levels of diversification n Related constrained diversification strategy n Related linked diversification strategy Very high levels of diversification n Unrelated diversification

Performance Diversification and Firm Performance Dominant Business Related Constrained Level of Diversification Unrelated Business

Low-level Diversification p Single-business strategy n Firm generates 95% or more of its sales revenue from its core business area n Example (pre-2008): Wm. Wrigley Jr. Company—the world’s largest producer of chewing and bubble gums p p A Post-2008 Acquired by Mars Inc. Dominant-business strategy A B n Firm generates 70 -95% of total sales revenue within a single business area n Example: UPS generated 74% of revenue from U. S. package delivery business; 17% from international package business; 9% from non-package business

Moderate-to-High Diversification p A Related constrained diversification strategy B n < 70% of revenue comes from the dominant business n There are direct links between the firm's businesses (e. g. , share products, technology; marketing; and distribution linkages) n Example: Campbell’s C

Moderate-to-High Diversification p Related linked diversification strategy n < 70% of revenue comes from the dominant business n Mix between related and unrelated diversification D A B C p Linked firms share fewer resources and assets among their businesses p Interested in constantly adjusting the mix in their portfolio of businesses and how to manage the businesses p Example: Rachel Ray

Moderate-to-High Diversification p Related linked diversification strategy example 2 A B C

Very High Diversification p A Unrelated diversification strategy n Less than 70% of revenue comes from dominant business n No relationships between businesses n Often called conglomerates n Example: Jarden Corporation B C

Performance Diversification and Firm Performance Dominant Business Related Constrained Level of Diversification Unrelated Business

3 Reasons Firms Diversify 1. Value-creating reasons n n Economies of scope Market power p n 2. Vertical Integration Financial economies Value-neutral reasons n n n n Antitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Tangible resources Intangible resources 3. Value-reducing reasons n n Diversifying managerial employment risk Increasing managerial compensation

Value-Creating Reasons to Diversify p Based a desire to develop resources that will enhance strategic competitiveness Ok, but how? n Two main ways diversification strategies can create value 1. Operational relatedness: sharing activities between businesses p 2. Ex: P&G’s paper towel business and baby diaper business both use paper products as inputs; the firm’s paper production plant produces inputs for both businesses Corporate relatedness: transferring core competencies into business p Ex: Honda’s competence in engine design and manufacturing to motorcycles, lawnmowers, cars and trucks p Often achieved via transferring or hiring personnel with competencies

Operational & Corporate Relatedness Value p The value these create are referred to as p Economies of Scope (for related constrained and related-linked strategies) p p p Cost savings created by sharing its resources/capabilities or transferring core competencies of one businesses to another of its businesses Market Power (for related constrained and related-linked strategies) p Exists when a firm sells its products above competitive levels and/or reduces the cost of its Value Chain activities below competitive levels p Influenced by a firm’s level of vertical integration Financial Economies (for unrelated diversification) p Cost savings realized via improved allocations of financial resources based on investments inside or outside the firm— 2 main types 1. Efficient internal capital allocations can reduce risk of the firm’s portfolio 2. Restructuring of acquired assets

Value-creating Strategies of Diversification Operational and Corporate Relatedness High Sharing Activities: Operational Relatedness Between Business Low Related Constrained Diversification (Economies of Scope & Market Power) Both Operational and Corporate Relatedness (Rare Capability; Can sometimes Create Diseconomies of Scope) Unrelated Diversification (Financial Economies) Related Linked Diversification (Economies of Scope & Market Power) Low High Corporate Relatedness: Transferring Skills Into Business Through Corporate Headquarters

Value-Neutral Reasons to Diversify p External value-neutral reasons n p Antitrust Regulation and Tax Laws p Deregulation p Changing tax laws Internal value-neutral reasons n Low Performance n Uncertain Future Cash Flows n Firm Risk Reduction n Resources and Diversification p Excess tangible resources like plant and equipment, sales force, etc.

Value-Reducing Reasons to Diversify p Managerial Motives n Diversifying managerial employment risk p n If one business fails, the whole firm will stay intact Increasing managerial compensation p Larger firms are more complex p Generally mean larger compensation packages