Corporate-Level Strategy

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 Outline
• What is corporate-level strategy?
• Related diversification
– Benefits and costs
• Unrelated diversification
– Benefits and costs
• Incentives to diversify

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 What is corporate-level strategy ?

• Different from business-level strategy

– Business-level strategy is concerned with how to
compete in a single business/industry
– Corporate-level strategy is about how to achieve
competitive advantage by operating in more than
one business/industry (what businesses should a
company be in?)

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 Corporate-Level Strategy: Key Question
• Key Question
What businesses should
a firm be in? (what
combination of businesses?)
A B C D
“Corporate strategy
relates to the scope of
Phone PC Hotel washer
Washer Dryer
the firm”

Business Units

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• Corporate-level strategy’s value is ultimately
determined by the degree to which
– “the businesses in the portfolio are worth more under the
management of the company than they would be under
any other ownership”

X Y
X

A B A B

Value1 (A+B) Value2 (A+B)

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Two generic types: based on the relationships
between businesses
X Y

A B C D

Related diversification Unrelated diversification

through
• Input
• Throughput
• Output

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 Levels of diversification
Low levels of diversification
95% or more of revenue comes form a single A

1. Single business business

Between 70% and 95% of revenue comes form A
B
2. Dominant business a single business
Moderate to high levels of diversification
A
Less than 70% of revenue comes form the
dominant business, and all businesses share B C
3. Related constrained product, technological, and distribution linkages
A
Less than 70% of revenue comes form the
4. Related linked (mixed dominant business, and there are only limited B C
related and unrelated): links between businesses
Very high levels of diversification
A
Less than 70% of revenue comes from the
dominant business, and there are no common B C
5. Unrelated: links between businesses
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• Related constrained:
– Cable firms share resources and activities across
businesses (television programming, high-speed Internet,
and phone service). For instance, P&G’s paper production
plant produces inputs for both paper towel and baby
diaper businesses; may share distribution channels as well.
• Related linked:
– Transfer knowledge and core competencies between
businesses. For instance, GE.
• Unrelated:
– Conglomerates

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Pros and cons of (un)related
diversification

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 Related Diversification: Benefits & Costs

Benefits Costs
• Coordination costs
– Economies of scope
• Sharing activities • Integration costs
• Transferring core
competencies
– Market power

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 Related Diversification
• Economies of scope
– Cost savings that occur when a firm shares activities
among businesses or transfers core competencies
developed in one of its businesses to another of its
businesses (2 + 2 = 3)
– Revenue enhancement from being within the same
corporate parent (2 + 2 = 5)

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 Sharing Activities

• Operational Relatedness
– Tangible resources, like plant and equipment or other physical
assets, often must be shared.
– Less tangible resources, like manufacturing know-how, also can be
shared.

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 Transferring Core Competencies

• Corporate Relatedness
– Corporate level core competencies are complex sets of
resources and capabilities that link different businesses,
primarily through managerial and technological
knowledge, experience, and expertise.
– Often with no physical or tangible resources involved
– GE: rotation of managers across business units

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 Economies of Scope:
Core Competency (related linked)

Business 2
Business 1

GE Core Competency
Boundarylessness, learning
from other divisions,
corporate culture and
control, rotation of
managers across business
units, corporate branding
and reputation effects

Business 3 Business 4

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Casio and Its Core Competency
of Miniaturization

Synthesizing know-hows
1. Miniaturization
2. microprocessors design
3. material sciences
4. Ultrathin precision casting

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 Related Diversification:
Market Power
• Market power exists when a firm can:
– Sell its products above the competitive level and/or
– Reduce the costs of its primary and support activities
below the competitive level

Cendant’s Portfolio of Related Businesses: Travel

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 Market power
• Vertical integration
– Produces its own inputs (backward integration)
– Owns its output distribution (forward integration)
• Horizontal integration
– High market share

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 Unrelated Diversification

Benefits (financial Costs

economies)
– Efficient internal capital • Management costs
allocation
– Business restructuring

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 Unrelated Diversification (cont’d)
• 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 relatively short life cycle because financial
economies are more easily duplicated by competitors than are gains
from operational and corporate relatedness

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 Restructuring
• The central notion of restructuring: “Buy low and sell high”
• Assumptions
– the corporate office knows how to find troubled businesses
– required skills & resources to turn around the businesses
• Three types of restructuring
– Asset restructuring: sell unproductive assets & buy assets to
strengthen core business
– Capital restructuring: change the debt-equity mix & the mix of
different types of debts or equity
– Management restructuring: change the management system (TMT
composition, organization culture & structure, compensation, etc.)
https://abcnews.go.com/Business/video/general-electric-unveils-
massive-restructuring-30224104
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https://abcnews.go.com/Business/video/general-electric-unveils-
massive-restructuring-30224104 21
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 Discussion
• Our university has four schools: (1) Business
school; (2) Science school; (3) Engineering
school; (4) Social science school.
• How should we categorize our university into
related vs unrelated diversification? Justify
• Pros and cons of this structure.

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Incentives to diversify

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 External Incentives to Diversify
Anti-trust  Antitrust laws may discourage mergers
Legislation that created increased market power
(vertical or horizontal integration),
diversification tends to be unrelated
 Relaxation of antitrust enforcement
results in more and larger mergers

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External Incentives to Diversify
Anti-trust  High tax rates on dividends cause a
Legislation corporate shift from dividends to
buying and building companies in high-
performance industries
Tax Laws

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Internal Incentives to Diversify
Low  High performance eliminates the
Performance need for greater diversification
 Low performance acts as
incentive for diversification
 Firms with poor performance
often take higher risks
(diversification is risky)

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Internal Incentives to Diversify
Low  Diversification may be defensive
Performance strategy if:
Uncertain Product line matures
Future Cash
Flows Product line is threatened

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Internal Incentives to Diversify
Low  Synergy exists when the value created
Performance by businesses working together
exceeds the value created by them
Uncertain working independently
Future Cash  … but synergy creates joint
Flows interdependence between business
units
Synergy and
 A firm may become risk averse and
Risk
constrain its level of activity sharing
Reduction
 A firm may reduce level of technological
change by operating in more certain
environments
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 Value Reducing Diversification:
Managerial Motives
Top-level executives may diversify in order to diversify their
own employment risk, as long as profitability does not suffer
excessively
• Diversification adds benefits to top-level managers but
not shareholders in many cases
• This strategy may be held in check by governance
mechanisms or concerns for one’s reputation

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The Curvilinear Relationship between
Diversification and Performance

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 Possible Reasons for the
Declining Benefits of Diversification
• Diseconomies of over-diversification
– Costs to coordinate highly diversified businesses outweighs benefits
from diversification
– To achieve synergy among highly diversified businesses becomes
complicated causally
– Managing highly diversified businesses is over the capacity of
managers

• Highly diversified firms create confusion about their

identities among audiences (e.g., customers and investors)

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 Recap
• Corporate-level strategy
• Related diversification
– Benefits and costs
• Unrelated diversification
– Benefits and costs
• Relationship between diversification and performance
• External and internal incentives to diversify

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