Corporate Level Strategy

Corporate and Business Strategy:

Difference in Key Focus Areas
Corporate Strategy

• The decisions & actions taken to gain & sustain

competitive advantage in several industries and
markets simultaneously
• Addresses where to compete along three dimensions:
• Products and services (Corporate Diversification)
• Industry value chain (Vertical Integration vs Outsourcing vs
Alliances )
• Geography (regional, national, or global markets)
• Performance Evaluation
• How well Corporate HQ is allocating resources vis-à-vis
Capital Market?
Diversification
Diversification

• Increase in:
• The variety of products / services a firm offers, or
• The markets / geographic regions in which it competes
• Can be targeted towards:
• Products
• Geography
• Product-Market
DIVERSIFYING INTO MULTIPLE
BUSINESSES
• Strategic Fit (Synergy) Opportunities
(Economies of Scope):
• Transferring specialized expertise, technological
know-how, or other resources and capabilities from
one business’s value chain to another’s.
• Cost sharing between businesses by combining
their related value chain activities into a single
operation.
• Exploiting common use of a well-known brand
name.
• Sharing other resources (besides brands) that
support corresponding value chain activities across
businesses.
Corporate Diversification and Firm
Performance
• Does corporate diversification indeed lead to superior
performance?
• High and low levels of diversification = lower performance
• Moderate levels of diversification = higher firm performance
Levels and Types of Diversification
(Rummelt)
BUILDING SHAREHOLDER VALUE
VIA UNRELATED DIVERSIFICATION

Using an Unrelated Diversification

Strategy to Pursue Value

Acquiring and
Astute Corporate Cross-Business
Restructuring
Parenting by Allocation of Financial
Undervalued
Management Resources
Companies
MISGUIDED REASONS FOR PURSUING
UNRELATED DIVERSIFICATION

Poor Rationales for

Unrelated Diversification

Seeking a reduction Pursuing rapid

or continuous Pursuing personal
of business
growth for its own managerial motives
investment risk
sake

8–10
Value Creation in
Diversification
Value-Creating Diversification Strategies:
Operational and Corporate Relatedness
Operational Relatedness

Supply
Chain
Activities
R&D and Manufacturing-
Technology Related
Activities Activities

Potential
Cross-Business Fits

Sales and Marketing Distribution-

Activities Related
Activities

Customer Service
Activities

8–13
 Synergy from Operational
Relatedness
Sales Synergy Operational Synergy Investment Synergy

Common Higher utilization of Joint use of plant,

distribution facilities , personnel, common raw
channel, sales spreading of material
administration, overhead, advantage inventories,
warehousing of common learning transfer of R&D
curve, large lot from one product
purchasing to another
Value-Creating Diversification Strategies:
Operational and Corporate Relatedness
Corporate Relatedness
Internalization Benefits
• Internal Capital Market
• Mix of net Cash generating and net Cash consuming
businesses
• Lesser dependence on Capital Markets

• Internal Labor Market

• Better information about employees for cross-
organizational hiring
• Reputational benefits
Corporate Parenting
Strategic Similarity in Corporate
Management Tasks
Corporate Parenting Style
Potential for Corporate Parenting
Advantage
Test for Diversification
• Attractiveness Test: The industries chosen for
diversification must be structurally attractive or
capable of being attractive
• The Cost of Entry test: The cost of entry must not
capitalize all future profits
• The better off test: Either the new unit must gain
advantage from its link with corporation or vice
versa
• Parenting Test: The Corporate parent must be able
to add value to the business
8–23
Portfolio Planning: Boston Consulting
Group (BCG) Growth-share Matrix
GE McKinsey Planning Matrix
 GE McKinsey Planning Matrix
Industry attractiveness
• market size
• market growth rate
• market profitability (return
on sales over three years)
• Cyclicality
• inflation recovery (potential
to increase productivity and
product prices), and
• international potential (ratio
of foreign to domestic sales).
Business unit competitive
advantage
• market share
• return on sales relative to
competitors, and
• relative position with
regard to quality,
technology,
manufacturing,distribution
, marketing, and cost
Assessment using Financial Data
• Estimate segment wise net profit:
• (Operating Profit-Overheads* % of Sales)
• Estimating segment wise equity invested
• Total Networth*% of Sales
• Estimated Segment wise ROE
• Net Profit of the Segment/Equity in the segment
• Compare return generated on equity (R) and growth
rate of capital invested (g), and cost of capital (K)
• Best Performing Business: ROE>K
• Average Performing Business: ROE>= g but <=K
• Worst Performing Business: ROE<g
Thank You