M A N A G E M E N T M A N A G E M E N T 1 st E D I T I O N 1 st E D I T I O N Gulati | Mayo | Nohria Gulati | Mayo | Nohria Chapter 6 Chapter 6 CORPORATE-LEVEL CORPORATE-LEVEL STRATEGY STRATEGY ©South-Western, a part of Cengage Learning PowerPoint Presentation by Charlie Cook STRATEGICPERSPECTIVE

Learning Objectives Understand that corporate-level strategies include decisions regarding diversification, international expansion, and vertical integrationUnderstand 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 approachDescribe 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 expansionExplain 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 pathDescribe the process of vertical integration and the reasons why a firm would choose to pursue this path © South-Western, a part of Cengage Learning6–2

Developing a Corporate-Level Strategy © South-Western, a part of Cengage Learning6–3 The way a company seeks to create value through the configuration and coordination of multimarket activities The way a company seeks to create value through the configuration and coordination of multimarket activities Corporate- level strategy Occurs when a firm maximizes its resources to build a competitive advantage across its business units Corporate advantage

Corporate-Level Strategy Decisions © South-Western, a part of Cengage Learning6–4 Whether the firm should vertically integrate Motivation to pursue diversification strategies Diversification into international markets “Big Bets”

History of Diversification © South-Western, a part of Cengage Learning6–5 1900s Single-Core Business Focus Related (Horizontal) Diversification Acquisition of competitors 1950 Vertical Diversification Acquisition of suppliers Celler- Kefauver Act of 1950 Unrelated Diversification Opportunistic expansion Reagan Era Deregulation Reversal of Diversification Corporate raiders Institutional investor activism 1980s 2000s

Diversification Strategy © South-Western, a part of Cengage Learning6–6 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 market Single-product strategy Single-product strategy A firm pursues businesses that share a similar set of tangible and intangible resources Horizontal (related) diversification

Diversification Strategy © South-Western, a part of Cengage Learning6–7 A firm that manages several businesses with no connection Unrelated 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

General Reasons for Diversification Strategies © South-Western, a part of Cengage Learning6–8 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 Learning6–9 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

Related Diversification © South-Western, a part of Cengage Learning6–10 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

Reasons for Pursuing Related Diversification © South-Western, a part of Cengage Learning6–11 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:

Reasons for Pursuing Related Diversification © South-Western, a part of Cengage Learning6–12 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:

Unrelated Diversification © South-Western, a part of Cengage Learning6–13 Cost savings that a firm achieves through the distribution of capital among business units Financial economies By 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

Reasons for Pursuing Unrelated Diversification To reduce the overall risk of the business through the efficient distribution of capital between business unitsTo 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 timeTo 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 activitiesTo acquire undervalued assets and attempt to raise their value through specific restructuring activities © South-Western, a part of Cengage Learning6–14

International Diversification International strategyInternational 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 diversificationMotives for international diversification –Finding new markets –Achieving economies of scale –Taking advantage of certain local factors © South-Western, a part of Cengage Learning6–15

6–16 The test a manager can use to determine the viability of international diversificationThe test a manager can use to determine the viability of international diversification –Similar to the tests used to determine the viability of diversification ComponentsComponents –Better-off test –Ownership test Factor cost differences: Cost savings achieved by access to raw materials or other factors such as low cost laborFactor cost differences: Cost savings achieved by access to raw materials or other factors such as low cost labor International Scope Test

Vertical Integration © South-Western, a part of Cengage Learning6–17 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 uses Backward integration

Costs Associated with Vertical Integration © South-Western, a part of Cengage Learning6–18 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

Alternatives to Vertical Integration © South-Western, a part of Cengage Learning6–19 Allow a buyer to purchase a commodity at a specific price Spot contracts Contracting with a firm outside the corporation to perform certain tasks or functions that the corporation used to do on its own Outsourcing

OutsourcingOutsourcing AdvantagesAdvantages –Reduces the costs of the firm’s noncore value chain activities –Allows a firm to focus more on core functions in its value chain DisadvantagesDisadvantages –Outsourcing of too many activities may damage the firm’s internal core competencies and capabilities –Outsourcing may isolate a firm from its external market © South-Western, a part of Cengage Learning6–20

KEY TERMS © South-Western, a part of Cengage Learning6–21 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