Corporate Level Strategies
The Role of Diversification
- Diversification strategies play a major role in the behaviour of large firms.
- Product diversification concerns
- the scope of the industries and markets in which the firm competes
- how managers buy, create and sell different businesses to match skills and strengths within opportunities presented to the firm.
Two Strategy Levels
Business-level Strategy
Each business unit in a diversified firm chooses a business-level strategy as its means of competing in its individual product markets
Corporate-level Strategy
Specifies actions taken by the firm to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets
Corporate level strategy Value
The degree to which the businesses in the portfolio are worth more under the management of the firm than they world be under other ownership
Levels of Diversification
Low Level
Single Business
95% or more revenue comes from a single business
Dominant Business
Between 70% and 95% of revenue comes from a single business
Moderate to High Level
Related Constrained
Less than 70% of revenue comes from the dominant business
All businesses share product, technological, and distribution linkages
Related Linked
Less than 70% of revenue comes from the dominant business
There are only limited links between businesses
Very high levels
Unrelated
Less than 70% of revenue comes from the dominant businesses
There are no common links between businesses
Economies of Scope
Cost savings that occur when a firm transfers capabilities and competencies developed in one of its businesses to another of its businesses.
Value is created from economies of scope through:
1. Operational Relatedness in sharing activities
- Created by sharing either a primary activity such as inventory delivery systems, or a support activity such as purchasing
- Activity sharing requires sharing strategic control over business units
- Activity sharing may create risk because business unit ties create links between outcomes.
2. Corporate relatedness in transferring skills
- Using complex sets of resources and capabilities to link different businesses through managerial and technological knowledge, experience and expertise.
- Eliminates resource duplication in the need to allocate resources for a second unit to develop a competence that already exists in another unit
- Provides intangible resources (resource intangibility) that are difficult for competitors to understand and imitate. (A transferred intangible resource gives the unit receiving it immediate competitive advantage over its rivals)
Related Diversification: Market Power
Market power exists when a firm can:
- sell its products above the existing competitive level
- reduce the costs of its primary and support activities below the competitive level
1. Multipoint competition
- Two or more diversified firms simultaneously compete in the same product areas or geographic markets
2. Vertical Integration
- Backward integration: a firm produces its own inputs
- Forward integration: a firm operates its own distribution system for delivering its outputs.
Unrelated Diversification
Financial Economies
- Cost savings realised through improved allocations of financial resources (based on investments inside and outside of the firm)
- Create value through two types of financial economies:
- Efficient internal capital allocations
- Purchase of other corporations and restructuring their assets
- Restructuring creates financial economies
- A firm creates value by buying and selling other firms assets in the external environment
External economies to Diversify
Anti-Trust Legislation
- Relaxation of antitrust enforcement results in more and larger horizontal mergers
- Early 2000’s: Antitrust concerns seem to be emerging and mergers are now more closely scrutinised
Tax Laws
- High tax rates on dividends cause a corporate shift from dividends to buying and building companies in high-performance industries
- 1986 tax reform bill: Reduced individual ordinary tax bill from 50 to 28%
- Created incentive for shareholders to prefer dividends to acquisition investments