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Chapter 6: Corporate Level Strategy

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by

Aleia Bucci

on 13 September 2012

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Transcript of Chapter 6: Corporate Level Strategy

Corporate Level Strategy Corporate Level Strategy Select new strategic positions
Product markets and businesses to compete
How to manage those businesses
Diversification Creates aggregate returns that exceed what returns would be without the strategy

Contributes to strategic competitiveness & ability to earn above-average returns VALUE 1. Low Level
Single business
Dominant business
2. Moderate-High Level
Related constrained
Related linked
3. Very High Level
Unrelated Diversification Strategies: 95%+ sales revenue from core business
Low level of diversification
Can bring higher levels of risk for long-term viability Single Business 70% - 95% of sales revenue from core business
Low level of diversification
Can bring higher levels of risk for long-term viability Dominant Business < 70% of revenue comes from dominant business
Share primary activities between business units
Product, technology, distribution linkages
Create operational relatedness Related Constrained < 70% of revenue comes from dominant business
Only limited links between businesses
Transfer one or many core competencies between business units
Create corporate relatedness Related Linked < 70% of revenue comes from dominant business
No common links between businesses
Don't share operational or corporate activities
No effort to transfer core competencies Unrelated 1.Value creating


2.Value neutral


3.Value reducing Primary Reasons for Diversification: Economies of Scope


Market Power


Financial Economies Savings created through:

Operational relatedness
Sharing resources and capabilities
Corporate relatedness
Transferring core competencies from one business to another Strategies:
Related Constrained
Related Linked Exists when a firm:
Sells products above competitive level
Reduces costs below competitive level
Both

Created through:
Multipoint competition
Two+ diversified firms compete in the same product areas or geographic markets
Vertical integration
A company produces its own inputs or owns its own source of output distribution Strategies:
Related constrained
Related linked Cost savings through improved allocations of financial resources based on investments inside or outside the firm

Created when:
Efficient internal capital allocations reduces risk among the firm’s businesses
Firms buy, restructure and sell the restructured companies’ assets in the external market Strategies:
Unrelated Strategies:
All Incentive Examples:
External: antitrust regulations, tax laws
Internal: low performance, uncertain future
cash flows, synergies, risk reduction

Resource Examples:
Tangible: plant, equipment, sales force
Intangible: knowledge Motives:
Increased compensation
Reduced managerial employment risk Motives:
Incentives
Resources However, majority of top-level executives seek to avoid diversifying the firm in ways that destroy value Strategies:
All Conglomerate discount
Parent company = brand Example:
General Electric 98% of revenue from retail
2% of revenue from credit cards Example:
Target 73% from tobacco products
27% from wine products Example:
Altria Companies like Target may be less competitive because they lack business diversification Companies like Altria have a stable market with higher barriers of entry, therefore a low diversification may not be as risky Paper towel, napkin and disposable diaper businesses share paper products as a key input
P&G Paper Plant produces inputs
Share distribution and sales network Example:
P&G Core competency in ink printing
Transferred to high-end copiers Example:
HP Simultaneous Operational & Corporate Relatedness Leverage both shared activities and capabilities
Risky due to structural costs
Rare capability Example:
Disney Core competency: customer understanding
Shares distribution systems
Cross sells products in movies through parks business
Uses movie characters/themes for new rides Effective corporate level strategy: Operational Relatedness:
Sharing activities between businesses Corporate Relatedness:
Transferring core competencies into businesses Group Activity: Pick a company
Identify its level of diversification
What characteristics lead you to believe this?
Would this company benefit from further diversification or from becoming less diverse?
Briefly develop a strategy for the future
Should they move into related or unrelated fields?
What synergies should they seek?
How might the company create value? Past: customer comfort & convenience
"We bring good things to life"
Current: future-oriented vision, innovative product
"Imagination at work" Value Creating = Financial Economies
Efficient internal capital allocations
Capital market efficiencies
Portfolio concept that reduces risk
Restructuring of acquired assets
Full transcript