M A N A G E M E N T 1st E D I T I O N

Gulati | Mayo | Nohria

Chapter 6

CORPORATE-LEVEL STRATEGY

©South-Western, a part of Cengage Learning PowerPoint Presentation by Charlie Cook

STRATEGICPERSPECTIVE

© South-Western, a part of Cengage Learning

Learning Objectives

• Understand that corporate-level strategies include decisions regarding diversification, international expansion, and vertical integration

• Describe the difference between related and unrelated diversification and outline the advantages and disadvantages of each approach

• Explain the reasons why firms decide to diversify through international expansion

• Describe the process of vertical integration and the reasons why a firm would choose to pursue this path

6–2

© South-Western, a part of Cengage Learning

Developing a Corporate-Level Strategy

6–3

The way a company seeks to create value through the configuration and coordination of multimarketactivities

Corporate-level strategy

Occurs when a firm maximizes its resources to build a competitive advantage across its business units

Corporate advantage

© South-Western, a part of Cengage Learning

Corporate-Level Strategy Decisions

6–4

Whether the firm should vertically integrate

Motivation to pursue diversification strategies

Diversification into international markets“Big Bets”

© South-Western, a part of Cengage Learning

History of Diversification

6–5

1900s

Single-Core Business Focus

Related (Horizontal) DiversificationAcquisition of competitors

1950

Vertical DiversificationAcquisition of suppliers

Celler- Kefauver

Act of 1950

Unrelated DiversificationOpportunistic expansion

1960-1970

Reagan Era Deregulation

Reversal of DiversificationCorporate raidersInstitutional investor activism

1980s 2000s

© South-Western, a part of Cengage Learning

Diversification Strategy

6–6

A strategy in which a firm engages in several different businesses that may or may not be related in an attempt to create more value than if the businesses existed as stand-alone entities

A firm focuses on one specific product, typically in one marketSingle-product

strategy

A firm pursues businesses that share a similar set of tangible and intangible resources

Horizontal (related)

diversification

© South-Western, a part of Cengage Learning

Diversification Strategy

6–7

A firm that manages several businesses with no connectionUnrelated

diversification

Exists when the costs of operating two or more businesses or producing two or more products with the same corporate structure is less than the costs of operating the businesses independently or producing each product separately

Economies of scope

© South-Western, a part of Cengage Learning

General Reasons for Diversification Strategies

6–8

The opportunity to leverage core assets or skills between different businesses

The opportunity for growth

The potential to manage or minimize risk

The potential for personal gain

Why diversify?

© South-Western, a part of Cengage Learning 6–9

General Reasons for Diversification Strategies

Synergy: Created when a firm generates sustainable cost savings by combining duplicate activities or deploying underutilized assets across multiple businesses

© South-Western, a part of Cengage Learning

Related Diversification

6–10

Leveraging a firm’s strong brand name and reputation across multiple product lines

Exploiting closely related technologies or research and development activities

Creating value through sharing and transferring of resources and skills

Sharing sales forces, advertising expenses, distribution channels for similar products

Transferring operational knowledge or processes

© South-Western, a part of Cengage Learning

Reasons for Pursuing Related Diversification

6–11

The skills transferred represent a significant source of competitive advantage for the receiving unit

The activities involved in the business are similar enough that sharing expertise is meaningful

The transfer of skills involves activities important to competitive advantage

Transferring skills leads to competitive advantage

when:

© South-Western, a part of Cengage Learning

Reasons for Pursuing Related Diversification

6–12

Sharing of intangible resources results in the transfer of internal value for business units

Sharing of resources allows the firm to spread fixed costs across its business units

Sharing of internal functions among units creates economies of scope

Sharing of resources leads to competitive

advantage when:

© South-Western, a part of Cengage Learning

Unrelated Diversification

6–13

Cost savings that a firm achieves through the distribution of capital among business units

Financial economiesBy efficiently allocating capital among units

By purchasing a business and restructuring its assets with the goal of selling it back into the marketplace at a higher price

A firm that manages several businesses with no reasonable connection

© South-Western, a part of Cengage Learning

Reasons for Pursuing Unrelated Diversification

• To reduce the overall risk of the business through the efficient distribution of capital between business units

• To allow for the use of capital from a profitable division to sustain a failing firm for a period of time

• To acquire undervalued assets and attempt to raise their value through specific restructuring activities

6–14

© South-Western, a part of Cengage Learning

International Diversification

• International strategy– A strategy a firm uses to conduct operations outside

its home market by selling products and services or conducting activities through the use of international resources to create a value chain

• Motives for international diversification– Finding new markets– Achieving economies of scale– Taking advantage of certain local factors

6–15

© South-Western, a part of Cengage Learning 6–16

• The test a manager can use to determine the viability of international diversification– Similar to the tests used to determine the viability of

diversification

• Components– Better-off test– Ownership test

• Factor cost differences: Cost savings achieved by access to raw materials or other factors such as low cost labor

International Scope Test

© South-Western, a part of Cengage Learning

Vertical Integration

6–17

Occurs when one corporation owns business units that make inputs for other business units in the same corporation

Occurs when a firm owns or controls the customers or distribution channels for its main products

Forward integration

Occurs when a firm owns or controls the inputs it usesBackward integration

© South-Western, a part of Cengage Learning

Costs Associated with Vertical Integration

6–18

The costs of coordinating activities between business units

Administrative costs

Costs to obtain products or services from a contractor or supplier as well as the costs associated with writing and administering the contracts for these products and services

Transaction costs

© South-Western, a part of Cengage Learning

Alternatives to Vertical Integration

6–19

Allow a buyer to purchase a commodity at a specific priceSpot contracts

Contracting with a firm outside the corporation to perform certain tasks or functions that the corporation used to do on its own

Outsourcing

© South-Western, a part of Cengage Learning

Outsourcing

• Advantages

– Reduces the costs of the firm’s noncore value chain activities

– Allows a firm to focus more on core functions in its value chain

• Disadvantages

– Outsourcing of too many activities may damage the firm’s internal core competencies and capabilities

– Outsourcing may isolate a firm from its external market

6–20

© South-Western, a part of Cengage Learning

KEY TERMS

6–21

Administrative costs

Backward integration

Corporate advantage

Diversification

Economies of scope

Factor cost differences

Financial economies

Forward integration

Horizontal diversification

Market power

Outsourcing

Related diversification

Single-product strategy

Spot contracts

Synergy

Transaction costs

Unrelated diversification

Vertical integration