CORPORATE

LEVEL
STRATEGY

Farahnaz Ghasem Jahroodi , Nagarjun Venkata Subbarao

Table Of Content
Define corporative-level Strategy
Corporate-level Strategys 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 (contd)
Value Reducing Diversification
Diversification & Firm Performance

2001 : Beringer wine

2005 : Southcrop

Corporate-Level strategy
selecting and managing a
group of different
businesses competing in
different product markets
Firms competing in
single industry or
product market

Source:http://www.ceo2go.com

Corporate-level Strategys Value

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 Units

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

horizontal

Conglomerate

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
B

Levels of Diversification: Moderate to

High

Related Constrained
Less than 70% of revenue
comes from a single business
and all businesses share
product, technological and
distribution linkages.

Related Linked (mixed

related and unrelated)
Less than 70% of revenue
comes from the dominant
business, and there are only
limited links between
businesses.

A
B

A
C

C
68

Levels of Diversification: Very High

Levels
Unrelated Diversification

Less than 70% of revenue comes from the

dominant business, and there are no common
links between businesses.

A
B
69

Reason for Diversify

Value Creating

Value Neutral

Diversification

Diversification

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

Antitrust regulation
Tax laws
Low performance
Uncertain future cash
flows
Risk reduction for firm
Tangible resources
Intangible resources

Value
Reducing
Diversification

Diversifying managerial
employment risk
Increasing managerial
compensation

Value-Creating Strategies of
Diversification
High

Operational
Relatedness
Sharing
Activities
Low

Low

High

Corporate Relatedness
Transferring of Core
Competencies
Source:Strategic
Management Competitiveness & Globalization Book (11th Edition )
Source:

611

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 (contd)

Low Performance

Uncertain
Future Cash
Flows

Diversification may be defensive

strategy if:
Product line matures.
Product line is threatened.
Firm is small and is in mature or
maturing industry.

Internal Incentives to Diversify (contd)

Low
Performance
Uncertain
Future Cash
Flows

Synergy and
Firm Risk
Reduction

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.

Value Reducing Diversification:

Managerial Motives to Diversity

Diversification & Firm Performance

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

PERFORMANCE

Diversification & Firm Performance

Dominant
Business

Related
Constrained

LEVEL OF DIVERSIFICATION
Source:www.openlearningworld.com

Unrelated
Business

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

Don't put all your eggs in one basket