Chapter 6: Corporate-Level Strategy

CHAPTER 6

CORPORATE-LEVEL STRATEGY

Learning Objectives

After reading this chapter, the student should be able to:

Understand that corporate-level strategies include decisions regarding diversification,

international expansion, and vertical integration.

Describe the differences 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.

Chapter Outline

Introduction

Diversification Strategy

o History of Diversification

o Types of Diversification Strategies

o Why Firms Pursue Diversification Strategies

o Related Diversification

o Unrelated Diversification

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Chapter 6: Corporate-Level Strategy

o The Diversification Test

o Results of Diversification

International Diversification

Motives for International Diversification

International Scope Test

Vertical Integration

Costs Associated with Vertical Integration

Alternatives to Vertical Integration

Summary

Self-Reflection: Strategizing for Growth

This self-reflection is designed to assess students understanding of how firms grow through
expanding the boundaries of the firm. The assessment focuses on students knowledge of how
firms develop growth strategies through organizational design, ownership choices, and the
leveraging of resources across multiple businesses.

Growth Strategy Self-Reflection Question

Understanding of why Understand why firm diversification is a growth strategy.

firms diversify (Q1)

Knowledge of the Explain the difference between related diversification and

different types of unrelated diversification. (Q2)
diversification
Comprehend how firms employ international diversification
as a growth strategy. (Q10)

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 Chapter 6: Corporate-Level Strategy

Knowledge of the Take the cost of entering of a new business into

diversification test consideration when analyzing growth plans. (Q3)

Recognize that the attractiveness of an industry should be

incorporated into the decision-making process when a firm is
considering diversifying. (Q4)

Conceptualize how a firm positions its strategy to achieve

synergies from its different businesses. (Q5)

Knowledge of vertical Understand the rationale for vertical integration. (Q6)

integration
Understand how franchising is an alternative to vertical
integration. (Q7)

Knowledge of alliances Understand the advantages and disadvantages of alliances

and outsourcing as a such as a growth strategy. (Q8)
strategy
Understand the rationale for why some firms implement
outsourcing as a growth strategy. (Q9)

Students that have 8 or more true answers understand the corporate strategy. Students that
have a score between 5 and 8 have some knowledge of corporate level strategy. A score of less
than 5 indicates that the student is not familiar with the rationale and different types of
corporate strategies.

Comprehensive Lecture Outline

I. Introduction. Corporate-level strategy is the set of strategic alternatives that an

organization chooses as it manages its operations simultaneously across several
industries and several markets. Corporate-level strategy includes decisions on how
many industries to compete across, whether to vertically integrate, whether to buy or
sell companies, and how to share resources across divisions. The ultimate goal of

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Chapter 6: Corporate-Level Strategy

developing a corporate-level strategy is to build a corporate advantage, which occurs

when a firm maximizes its resources to build a competitive advantage across its business
units.

A. Corporate-Level Strategy Choices

1. Scope. The markets and businesses the firm will compete in.

2. Organizational design. The manner in which activities of the firm will be

coordinated.

3. Ownership. The relationship and alignment of the firms business units.

The Leadership Development Journey

For this assignment, students are asked to reflect upon a time when they partnered with
another person to achieve a common goal. The assignment is designed to help students
understand that in some cases corporate-level strategies, such as alliances and joint
ventures, are similar to partnerships.

Students should analyze their examples of personal partnerships by providing a strategic

rationale for the partnership.

Identify the advantages and disadvantages of partnerships.

Examine if the partnership resulted in growth or the effective pooling of resources.

Explain how the partnership benefitted others.

For the final question in this assignment, students build a knowledge link between their
personal partnering relationships and how the lessons learned can be applied to the
management of a corporate-level strategy.

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 Chapter 6: Corporate-Level Strategy

Discussion Starter: Using the two examples of companies in the text, have students compare
and contrast General Electric's and Westinghouse's experiences with pursuing diversification
strategies. Is GEs successful implementation of corporate-level strategy an anomaly? Can
other firms achieve success through similar strategies?

II. Diversification Strategy. Occurs when 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. The ultimate goal of a diversification strategy
is for the whole (the combined companies) to be greater than the sum of the parts (the
individual business units).

A. History of Diversification

1. In the 1950s, the majority of Fortune 500 companies derived revenues

from a single core business. This singular focus began to shift during the
1950s and 1960s as a result of regulatory changes that inadvertently
promoted corporate diversification (the passing of the Celler-Kefauver
Act of 1950). This led many firms to diversify during the 1960s and 1970s.

2. The antitrust regulatory environment began to change dramatically

during Ronald Reagans presidency. The FTC began to evaluate mergers
based on factors that were different from those of previous decades,
making it easier for firms to expand horizontally from their core business,
essentially reversing the impact of the Celler-Kefauver Act. At the same
time, as legal barriers to takeovers fell and easy financing in the form of
junk bonds became available, investment firms pursuing hostile
takeovers emerged.

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Chapter 6: Corporate-Level Strategy

Throughout the 1980s, the diversification trend among firms largely

reversed itself as managers lost faith in the portfolio model and
corporate raiders divided up companies.

B. Types of Diversification Strategies

1. Single-product strategy. In this strategy, a firm focuses on one specific

product, typically in one market. Through this strategy, a firm attempts to
develop core competencies in a specific market, using its resources and
capabilities. It develops greater core competency, but suffers from more
cyclicality.

2. Related diversification. A firm that owns more than one business that
uses a similar set of tangible and intangible resources. Tries to use
resources to achieve economies of scope, which offers the potential for
sharingresources or transferring skills and core competencies between
business units.

3. Unrelated diversification. A firm that manages several businesses with

no connection. Tries to create value through financial economies,
distributing capital over many business units.

C. Why Firms Pursue Diversification Strategies

1. The opportunity to leverage core assets or skills between different

businesses to create synergy. Synergy is created when a firm generates
sustainable cost savings by combining duplicate activities or deploying
underutilized assets across multiple businesses.

2. The opportunity for growth and expansion, particularly as opportunities

for internal growth diminish.

3. The potential to manage or minimize risk. Based on the portfolio

management model, which states that by holding several different

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businesses, a manager will be able to spread the risks of one business

across the entire spectrum of businesses.

4. The potential for personal gain. This reason is based on the self-interests
and preferences of senior managers.

A Different View: Small Giants and Their Business Mojo

For this chapters A Different View, we recommend that the professor facilitate a discussion
regarding why some companies decide not to diversify. The professor can base the discussion
on the book Small Giants: Companies that Choose to Be Great Instead of Big, by Bo Burlingham.
Small Giants are companies that place a greater emphasis on vision and culture than on the
bottom line and growth. Small Giants measure their success by achieving their goals such as
workplace culture, customer service, and community contributions. After a discussion on Small
Giants, students can use the internet and research the ECCO company and another small
giant to learn more about their strategies.

D. Related Diversification. In most related diversification strategies, managers

attempt to create value through the sharing and transferring of resources and
skills among units:

1. Reasons for Pursuing Related Diversification. Transferring skills and

resources leads to competitive advantage if the similarities among
businesses meet the following three conditions.

a. The activities involved in the business are similar enough that

sharing expertise is meaningful.

b. The transfer of skills involves activities important to competitive

advantage.

c. The skills transferred represents a significant source of

competitive advantage for the receiving unit.

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Chapter 6: Corporate-Level Strategy

E. Unrelated Diversification. The ultimate goal of an unrelated diversification

strategy is to create some type of financial economies. Financial economies
involve cost savings that a firm achieves through the distribution of capital
among business units.

1. Reasons for Pursuing Unrelated Diversification

a. To reduce the overall risk of the business through the efficient

distribution of capital between business units.

b. To allow for the use of capital from a profitable division to sustain

a failing firm for a period of time.

c. To acquire undervalued assets and attempt to raise their value

through specific restructuring activities.

F. The Diversification Test

1. How Attractive Is the Industry? Is the industry profitable or capable of

being profitable? Attractive industries are often marked by high barriers
to entry, lack of substitutes, low intensity of competition, and low
supplier and buyer power.

2. What Is the Cost of Entry? How costly is it to enter the new industry?
The cost of entering an industry cannot exceed the benefits management
expects to derive from competing in the industry.

3. Will the Business Be Better Off? Will the new industry provide the firm
with a competitive advantage? Does the presence of the corporation
improve the total competitive advantage of business units above and
beyond what they could achieve on their own?

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G. Results of Diversification

According to one key study, a firms performance increases as it shifts from

single-business strategies to related diversification, but performance decreases
as firms change from related diversification to unrelated diversification.

Teaching Tip: Use the Walt Disney case to illustrate Disney's use of diversification to create
corporate advantage in class discussion. Use Figure 6.6 Diversification of Disney in your
discussion.

Case In Point: Walt Disney

1. What is Disneys core competency? How did Disney align its core competency into its
different businesses?

Disneys core competency is animated entertainment. The firm has leveraged this core
competency into films, music, television shows, amusement parks, hotels, retail stores,
and Broadway plays.

2. Map out Disneys vertical-integration strategy. How did it create a corporate advantage?

Students should refer to Figure 5.10 and map out how Disney has vertically integrated.
Students should share examples of backward integration (the control of inputs to the
production process) such as Disney characters, and share examples of forward integration
(the control of outputs or distribution channels for main products) such as Disney hotels.
For Disney, vertical integration creates a corporate advantage by increasing its revenues
and allowing different divisions to share resources and transfer skills.

3. In recent years, what key investments did Disney make to expand its corporate
advantage?

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Chapter 6: Corporate-Level Strategy

In recent years, Disney has expanded its theme parks, invested in retail stores, created
Broadway productions, acquired a television network, and developed new movie
production companies.

4. What future investments do you recommend to Disneys portfolio of businesses over the
next five years?

For this question, students should recommend a business investment for Disneys
corporate portfolio and provide a rationale based on the Diversification Test illustrated in
Figure 5.4.

III. International Diversification. Firms may seek to diversify internationally to expand the
market for their products or to gain certain resources for inputs into their value chain.

A. Motives for International Diversification

1. Finding new markets

2. Achieving economies of scale

3. Taking advantage of location and local resource factors

B. International Scope Test

1. Better off Test. Will a global presence improve the firms competitive
advantage over and above what it could achieve on its own?

2. Ownership Test. Does owning a global business unit provide the best
alternative to sustaining or achieving a competitive advantage?

Teaching Tip: Use the CEMEX case to illustrate the international diversification strategy in
class discussion. Use Figure 6.9 Countries in Which CEMEX Competes in your discussion.

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Case In Point: CEMEX: Reducing Risk Through Diversification

For firms in the cement industry, why is international diversification a viable strategy? For the
cement industry, international diversification is a viable strategy because it is difficult to
transport cement over large distances without it spoiling.

1. What was the rationale for CEMEXs international-diversification strategy?

CEMEX decided to pursue an international diversification strategy in its core cement

business as a solution to the cyclical nature of its other businesses (petrochemicals,
mining, and tourism).

2. How was CEMEXs international-diversification strategy executed?

The strategy was executed through a market-entry mode because of the cost associated
with building a cement plant from scratch.

3. For CEMEX, how has international diversification resulted in a competitive advantage?

This strategy has resulted in a competitive advantage because CEMEX has managed to
reduce the cyclical nature of its cash flow and maintained a competitive advantage in the
markets in which the firm operates.

IV. Vertical Integration. Occurs when one corporation owns business units that make
inputs for other business units in the same corporation.

Forward integration. Occurs when a firm owns or controls the customers or distribution
channels for its main products.

Backward integration. Occurs when a firm owns or controls the inputs it uses.

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Chapter 6: Corporate-Level Strategy

Extra Example: See the article "A Bargain-Priced Hatch", Neil, Dan, Wall Street Journal
(Online) [New York, N.Y] 31 Dec 2011. An article on how Hyundai Motors is using vertical
integration to its advantage.

A. Costs Associated with Vertical Integration. To understand why a firm should

vertically integrate, we must understand the difference between transaction and
administrative costs. Administrative costs refer to the costs a firm incurs to
coordinate activities between business units. Transaction costs are costs
associated with obtaining a product or service from a contractor or supplier.

1. Advantages

a. Potential cost reductions in production

b. Improved coordination and quality control

c. Protection of proprietary technology or processes

d. Reduction in marketing costs (captive market)

Potential in 2. Disadvantages

a. Higher administrative costs for internal coordination

b. Potential for obsolescence in technology or processes

c. Tendency for complacency and lack of efficiency

d. Lack of strategic flexibilityharder to change course

B. Alternatives to Vertical Integration

1. Short-term contracts, sometimes referred to as spot contracts, involve a

firms commitment to buy a commodity product at a specific price.

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2. In outsourcing, a firm contracts with an entity outside the corporation to

perform certain tasks or functions that the corporation used to do on its
own.

Extra Example: See the article "TCS to Boost U.S. Outsourcing Staff", Thoppil, Dhanya Ann.
Wall Street Journal (Online) [New York, N.Y] 15 June 2011. Tata Consultancy Services Ltd.
expects to hire more than 1,200 Americans this fiscal year through March 2012 in an effort to
diversify its talent pool as well as counter anti-outsourcing sentiment in the U.S.

Teaching Tip: Use the Zara: A Vertically Integrated Apparel Maker case to illustrate vertical
integration in class discussion.

Discussion Topics

1. Compare and contrast business-level and corporate-level strategies. How do these

strategies complement each other? What leadership skills are most needed for executing
each approach?

2. At what point in its lifecycle should a firm consider the development and execution of a
corporate-level strategy?

3. What role should the government have in regulating or overseeing the way in which firms
pursue diversification strategies? In todays business environment, do you believe that the
level of regulation of corporate-level strategies is too much, too little, or about right?

4. What are the advantages and disadvantages of related and unrelated diversification
strategies? How should a firm consider which diversification path to follow?

5. Why have firms found it so hard to reap the potential benefits of diversification? What
could a firm do to increase its chances of reaping the benefits of diversification?

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Chapter 6: Corporate-Level Strategy

6. Why have large family-based conglomerates like the Tata Group in India been successful
with unrelated diversification? What aspects of the context in emerging markets are
conducive to the pursuit of unrelated diversification?

7. Why do firms pursue international diversification? What risks do firms face when they
diversify on an international level? How can these risks be mitigated?

8. When does vertical integration make sense for an organization?

9. How do companies derive the most value from pursuing vertical integration?

10. Outsourcing has become an increasingly popular alternative to vertical integration. What
are the costs and benefits of outsourcing?

Assignments

Management Research

For this series of management research questions, students should conduct research and apply
theories from the textbook to answer the questions in the text. Students should consider 1) a
firm that employs a diversification strategy; 2) a firm that employs a vertical-integration
strategy; and 3) a firm that employs an international-diversification strategy.

1. Find a firm that employs a diversification strategy and list the different industries in
which it competes. Use the diversification test to decide whether this company should
be in those different industries. Use the Internet and public filings such as annual
reports and 10-Ks to gather this information.

2. Find a firm that employs a vertical-integration strategy and list the stages of production
that make it vertically integrated. Use the vertical-integration test to decide whether
this company should be vertically integrated or whether it should contract with an
outside firm to fulfill certain aspects of its production process. Use the Internet and
public filings such as Annual Reports and 10-Ks to gather this information.

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3. Find a firm that employs an international-diversification strategy and list the regions in
which the firm competes. Use the international-diversification test to decide if this
company should be competing internationally. Use the Internet and public filings such
as Annual Reports and 10-Ks to gather this information.

In the Field

For this, In the Field assignment students should facilitate a brainstorming session with a local
business that historically has not pursued a corporate-level strategy. As part of the
brainstorming session, students can discuss the questions from the text.

What are the firms options for a diversification strategy?

For each diversification strategy proposed, what are the pros and cons?

Are there opportunities for the firm to vertically integrate?

Does the firm have any alliance partners? If so, what are the benefits of those
partnerships?

Has the firm considered international diversification? Why or why not?

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