1. Corporate Level Strategy©
Chapter Seven:
Corporate Level Strategy
Chapter Three:
The External Environment
Chapter Three:
The External Environment
Hitt, Ireland, Hoskission, Rowe & Sheppard
Strategic
Management
N o t e s
Competitiveness & Globalization

2. The Strategic Management Process
Ch. 1: Strat. Mgmt. & Com-petitiveness
Ch. 2: Strat. Mgmt . & Performance
Chapter 3:
The External Environment
Chapter 4:
The Internal Environment
Strategic Competitiveness
Strategic Mission & Strategic Intent
Strategic Objectives & Inputs
Chapter 11:
Corporate Governance
Ch. 12: Org. Structure & Controls
Chapter 13:
Strategic Leadership
Chapter 14:
Org. Renewal & Innovation
Strategy Implementation
Strategic
Actions
Chapter 5:
Bus.-Level Strategy
Chapter 6:
Competitive Dynamics
Chapter 7:
Corp.-Level Strategy
Chapter 8:
Acquisition & Restructuring
Chapter 9:
International Strategy
Chapter 10:
Cooperative Strategy
Strategy Formulation
Chapter 7:
Corp.-Level Strategy

3. Corporate Level Strategy
Knowledge Objectives
Define corporate-level strategy and discuss its importance to the diversified firm.
Describe the advantages & disadvantages of single- business strategies & dominant-business strategies.
Explain the primary reasons why firms move from single to more diversified corporate-level strategies.
Describe how related-diversified firms create value by sharing or transferring core competencies.
Explain the ways value can be created with an unrelated-diversification strategy.
Discuss incentives that encourage diversification & motives that encourage over-diversification.

4. Corporate Level Strategy
Concerns 2 key questions:
1. What businesses should the firm in?
2. How should the corporate office manage
the array of business units?
It addresses actions taken by a firm to gain a competitive advantage by
selecting & managing a group of businesses in several industries & product markets.
Corp. Level Strategy 11

5. Corporate Level Strategy
B O N U S
Corporate Level Strategy
What do we do now?
Ansoff’s Product /
Market Expansion
Grid & Diversification.
Current Products
New Products
1. Market Penetration Strategy
3. Product Development Strategy
Current Markets
2. Market Development Strategy
4. Diversification Strategy
New Markets
Corp. Level Strategy

6. Degrees of Diversification
Single-business
> 95% of revenues from a single business unit.
Low Levels of Diversification A
Dominant-business
Between 70% & 95% of revenues from a single business unit. B A
Moderate to High Levels of Diversification
< 70% of revenues from dominant business; bus.s share product, technological & distribution links.
Related constrained B A C A B C
Related linked (mixed)
< 70% of revenues from dominant business, only limited links exist.
Unrelated-Diversified
Business units not closely related.
High Levels of Diversification A B C
Degrees of Diversification 15

7. Reasons for Diversification
Improved use of Resources 
Motives to Enhance
Strategic
Competitiveness
Economies of Scope
Market Power
Financial Economies
Market Power
Other Incentives
Managerial
Motives
Reasons for Diversification 17

8. Market Power   Enhancing Competitiveness
B O N U S
Market Power
Enhancing Competitiveness
Market Power: the ability to impact market prices.
Vertical integration may aid Market Power by:
Vertical integration back into suppliers’ markets or complementary processes. 
M I N I N G
Cost reduction
Price reduction
Market share
Market power
S M E L T I N G
Vertical integration forward into buyers’ markets or complementary processes. 
R O L L I N G
Market Power 61

9. Improved use of Resources
Economies of Scope
Improved use of Resources 
Motives to Enhance
Strategic
Competitiveness
Economies of Scope
Market Power
Financial Economies
Economies of Scope
Other Incentives
Managerial
Motives
Economies of Scope 17

10. Economies of Scope Enhancing Competitiveness via:
Economies of Scope: savings from involvement
in a range of activities.
Share Activities a.
Done via related diversification strategies that:
Transfer Core Competencies b.
Economies of Scope 61

11. Economies of Scope Key Characteristics * * Sharing Activities a.
Sharing Activities can lower costs if it: *
Achieves economies of scale.
Boosts efficiency of utilization.
Speeds up the Learning Curve.
Examples: Products that share a raw material.
Sharing Activities can enhance differentiation if it:
Involves activities crucial to competitive advantage. *
Examples: Shared order processing may allow
discovery of features customers
value from a group of products.
Economies of Scope 29

12. Economies of Scope Assumptions * * * Sharing Activities a.
Strong sense of corporate identity. *
Clear corporate mission that emphasizes the importance of integrating business units. * *
Incentive system that rewards more than just business unit performance.
Economies of Scope * 36

13. Transferring Core Competencies
Economies of Scope
Transferring Core Competencies b.
Key Characteristics *
Exploits Interrelationships among divisions.
Start with Value Chain analysis.
Identify ability to transfer skills or expertise among similar value chains.
Exploit ability to share activities.
Two firms can share the same sales force, logistics network or distribution channels.
Economies of Scope 41

14. Economies of Scope Assumptions * * * Transferring Core Competencies b.
Transferring Core Competencies leads to competitive advantage only if similarities among business units meet the following conditions:
Activities involved in the businesses are similar enough that sharing expertise is meaningful. *
Transfer of skills involves activities which are important to competitive advantage. *
Skills transferred represent significant sources of competitive advantage for the receiving unit. *
Economies of Scope 44

15. Improved use of Resources
Financial Economies
Improved use of Resources 
Motives to Enhance
Strategic
Competitiveness
Economies of Scope
Market Power
Financial Economies
Other Incentives
Financial Economies
Managerial
Motives
Financial Economies 17

16. Financial Economies Enhancing Competitiveness via:
Efficiencies to be gained from lower borrowing costs or correction of market failures.
Done by unrelated diversification strategies for:
Efficient Internal Capital Market Allocation 1.
Restructuring 2.
Financial Economies 61

17. Efficient Internal Capital Market Allocation
Financial Economies 1.
Efficient Internal Capital Market Allocation
Key Characteristics
Firms using this strategy often diversify by acquisition:
Acquire sound, attractive companies;
Acquired units are autonomous;
Acquiring corporation supplies needed capital.
Portfolio mgr.s transfer resources between units &
Add professional mgmt. & control to sub-units;
Sub-unit managers’ compensation based on unit results.
Financial Economies 51

18. Efficient Internal Capital Market Allocation
Financial Economies 1.
Efficient Internal Capital Market Allocation
Main Characteristic
Like The BCG Matrix
Market Growth
High
Low ?
Divest
Select
Portfolio managers transfer resources from units that generate cash to those with high growth potential & substantial cash needs.
Invest
Kill
Market Share
Low
High
Financial Economies 51

19. Efficient Internal Capital Market Allocation
Financial Economies 1.
Efficient Internal Capital Market Allocation
Assumptions
Managers have more detailed knowledge of firm relative to outside investors.
Firm needn’t risk competitive edge by disclosing sensitive competitive information to investors.
Firm can reduce risk by allocating resources among diversified businesses;
Although shareholders can generally diversify more economically on their own.
Financial Economies 54

20. Financial Economies Restructuring 2. Key Characteristics
Seek out undeveloped, sick or
threatened organizations or industries.
Parent firm (acquirer) intervenes & frequently:
- Changes sub-unit management team;
- Shifts strategy / Infuses firm with new technology;
- Enhances discipline by changing control systems;
- Divests part of firm;
- Makes other acquisitions to achieve critical mass.
Often sells unit after making one-time changes since parent no longer adds value to ongoing operations.
Financial Economies 58

21. Financial Economies Assumptions
Restructuring 2.
Assumptions
Requires keen management insight in selecting firms with depressed values or unforeseen potential.
Must do more than restructure companies.
Need to initiate restructuring of industries to create a more attractive environment.
Financial Economies 60

22. Value Reducing Diversification
N e u t r a l
The Prime Directive prohibits me from helping you.
Improved use of Resources 
N e u t r a l
The Prime Directive prohibits me from helping you.
Incentives & Resources with Neutral Effects of Strategic Competitiveness
Other Incentives
Anti-Competition Regulation
Managerial
Motives
Tax Laws
Low Performance
Firm Risk Reduction
Uncertain Future Cash Flows
Value Reducing Diversification 17

23. Other Incentives to Diversify
External Incentives
Relaxing Anti-Trust rules for allows more related mergers.
Internal Incentives
Poor performance may lead some firms to diversify
to attempt to achieve better returns in new industries.
Managers may have incentives to diversify to raise
their compensation & reduce employment risk.
(Effective governance mechanisms may restrict such abuses.)
Diversifying to
balance uncertain
future cash flows.
Time yrs. +
Cash
Flow -
Over the Bus. cycle
Time wks. +
Cash
Flow -
Seasonal Cash Flow
Diversifying to reduce risk.
Other Divers. Incentives 61

24. Improved use of Resources
Other Incentives to Diversify
Improved use of Resources
Other Incentives 
Managerial Motives
that Cause
Value Reduction
Managerial
Motives
Diversifying employment risk
Increased Managerial Pay
Other Divers. Incentives 17

25. Managerial Motivations to Diversify
Other Incentives to Diversify
Managerial Motivations to Diversify
External Incentives
Diversifying Employment Risk
Executives insuring they still have a job if one of the company’s lines of business goes down.
Increasing Managerial Compensation
Executives maximizing their wages by laying claim to the difficulties in running a larger company.
Other Divers. Incentives 61

26. Diversification & Firm Performance
Dominant
Business
Unrelated
Related
Constrained
Level of Diversification
Performance & the Model 67

27. Full Model of the Firm Performance / Diversification Relationship
Improved use of Resources
Capital Market Intervention & Market for Managerial Talent
Firm
Performance
Other Incentives
Diversification
Strategy
Internal
Governance
Strategy
Implementation
Managerial
Motives
Performance & the Model 19

28. The Strategic Management Process
Ch. 1: Strat. Mgmt. & Com-petitiveness
Ch. 2: Strat. Mgmt . & Performance
Chapter 3:
The External Environment
Chapter 4:
The Internal Environment
Strategic Competitiveness
Strategic Mission & Strategic Intent
Strategic Objectives & Inputs
Chapter 11:
Corporate Governance
Ch. 12: Org. Structure & Controls
Chapter 13:
Strategic Leadership
Chapter 14:
Org. Renewal & Innovation
Strategy Implementation
Strategic
Actions
Chapter 5:
Bus.-Level Strategy
Chapter 6:
Competitive Dynamics
Chapter 7:
Corp.-Level Strategy
Chapter 8:
Acquisition & Restructuring
Chapter 9:
International Strategy
Chapter 10:
Cooperative Strategy
Strategy Formulation
Chapter 7:
Corp.-Level Strategy