2. 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 explain the reasons why a firm would choose to pursue this path
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3. Developing a Corporate-Level Strategy
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
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4. Corporate-Level Strategy Choices
Scope
The markets and businesses the firm will compete in
Organizational design
The manner in which activities of that the firm will be coordinated
Ownership
The relationship between business units
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5. Corporate-Level Strategy Decisions
Motivation to pursue diversification strategies
“Big Bets”
Diversification into international markets
Whether the firm should vertically integrate
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6. History of Diversification
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
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7. Diversification Strategy
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
A firm pursues businesses that share a similar set of tangible and intangible resources
Horizontal (related) diversification
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8. Diversification Strategy
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
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9. General Reasons for Diversification Strategies
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?
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10. 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
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11. Related Diversification
Creating value through sharing and transferring of resources and skills
Sharing sales forces, advertising expenses, distribution channels for similar products
Exploiting closely related technologies or research and development activities
Transferring operational knowledge or processes
Leveraging a firm’s strong brand name and reputation across multiple product lines
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12. Reasons for Pursuing Related Diversification
The activities involved in the business are similar enough that sharing expertise is meaningful
Transferring skills leads to competitive advantage when:
The transfer of skills involves activities important to competitive advantage
The skills transferred represent a significant source of competitive advantage for the receiving unit
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13. Reasons for Pursuing Related Diversification
Sharing of resources allows the firm to spread fixed costs across its business units
Sharing of resources leads to competitive advantage when:
Sharing of internal functions among units creates economies of scope
Sharing of intangible resources results in the transfer of internal value for business units
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14. Unrelated Diversification
A firm that manages several businesses with no reasonable connection
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
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15. 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
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16. Figure 6.4 - The Diversification Test
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17. Figure 6.5 - Impact of Diversification on Firms’ Performance
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18. 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
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19. International Scope Test
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
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20. Figure 6.8 - International Scope Test
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21. Vertical Integration Forward integration Backward integration
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
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22. Costs Associated with Vertical Integration
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
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23. Figure 6.10 - Backward and Forward Integration
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24. Figure 6.11 - Advantages and Disadvantages of Vertical Integration
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25. Alternatives to Vertical Integration
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
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26. Outsourcing Advantages Disadvantages
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
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27. KEY TERMS
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
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