Corporate Strategy

MM 4311 Strategic Management

Fall 2019
Today’s Agenda

• Corporate-level strategy as a means for a firm’s

growth

• Vertical integration
• Backward vs. Forward

• Diversification
• Why does a firm diversify?
• Related vs. Unrelated diversification

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The concept of corporate strategy is quite
distinct from that of business strategy

Corporate Strategy Business Strategy

• Where to compete?
• Selecting the industries a firm
competes in
• Defining the scope of the firm
• Diversification
• Vertical Integration
• Divestments
• Managing multiple businesses
• Cross-business unit resource
allocation & coordination
• How to compete in an industry?
• Achieve competitive
advantage over rivals in a
specific market
• Defining the competitive
strategy
• Cost leadership
• Differentiation
• Integrated cost leadership /
differentiation

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Corporate Strategy

• Corporate-level strategy concerns the selection

and management of a mix of businesses
competing in several industries, product, or
geographical markets.
 In what product markets / businesses the firm
should compete
 How corporate headquarters should manage
those businesses

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 Different levels of strategies
In a multi-business firm, there are three different
levels of strategies:
Corporate Strategies:
(Where to compete?)

Business Strategies:
(How to compete?)
GE
GE GE GE GE GE
Health-
Additive Capital Aviation Digital Power
Care

Functional Strategies:
(How to implement?)

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Refocusing GE:
A Future of Clean-Tech and Health Care?
• Jeffrey Immelt appointed CEO of GE Sept. 7th 2001
• Environmental Change (e.g., 9/11 and Global Financial
Crises)
• GE’s stock price fell by 84%
• Lost AAA credit rating

• Refocus on green economy and health care industries

• Sold majority stake in NBC Universal to Comcast (2009-
2013)
• “Ecomagination”: solar energy, hybrid locomotives, fuel
cells…etc.
• “Healthymagination”: increase quality and access to
health care
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Refocusing GE:
A Future of Clean-Tech and Health Care?
• GE’s changing Product scope

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Refocusing GE:
A Future of Clean-Tech and Health Care?
• GE’s changing Geographical scope

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What is Corporate Strategy?

• Corporate strategy
• Corporate strategy is the way a company creates value
through the configuration and coordination of its
multi-market activities
• Quest for competitive advantage when competing in
multiple industries
• Example: Jeffrey Immelt’s initiative in clean-tech and health
care industries
• Corporate strategy concerns the scope of the firm
• Industry value chain
• Products and services
• Geography
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Three Directions in which a company can
grow
Growth Strategy: Expanding the number of products and services
offered or markets served, through either existing or new
businesses
Extension of
Vertical Integration industry value chain
• Forward
• Backward

New business
(product and service) Organizational
CoreGrowth
business
Horizontal Integration New geography
(Diversification)
• Unrelated International
diversification Expansion
• Technology-related
• Market-related

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Transaction Cost Economics

• Transaction cost economics

• Explains and predicts the scope of the firm
• "Market vs. Firms(hierarchy)" have differential costs

• Transaction costs
• Costs associated with economic exchanges
• Either in the firm OR in the markets
• Ex: negotiating and enforcing contracts

• Administrative costs
• Costs pertaining to organizing an exchange within a
hierarchy
• Ex: recruiting & training employees 10
Firms vs. Markets: Make or Buy
• Should a firm do things in-house (to make)? Or obtain
externally (to buy)?
• If Costin-house < Costmarket, then the firm should vertically
integrate
• Ex: Microsoft hires programmers to write code
in-house rather than contracting out
• Firms and markets have distinct advantages and disadvantages
(next slide)

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Firms vs. Markets: Make or Buy

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Do you think it was a good decision for Ford?
Example:
Why or Why not?Ford - Hertz

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Toyota & Car batteries

• World demand for lithium-ion batteries for cars

• Grow from $278 million in ‘09 to $25 billion in 2014

• Toyota wants to secure long-term supply of lithium

to power its hybrid cars

• Orocobre holds exploration rights to a large salt-

lake area
• Upfront investment to extract of lithium is very high

• Should Orocobre make the investment to supply

Toyota?
• To encourage investment, Toyota took an equity position

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Backward & Forward Vertical Integration
along an Industry Value Chain

Source: Rothaermel (2013) 15

Example: HTC in the smartphone industry

Source: Rothaermel (2013) 16

Benefits of Vertical Integration

• Market power
• Entry barriers
• Down-stream price maintenance
• Up-stream power over prices
• Securing critical supplies
• Lowering costs (efficiency)
• Improving quality
• Facilitating scheduling and planning
• Facilitating investments in specialized assets
• Ex: HTC started as OEM and expanded to fully integrated

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Risks of Vertical Integration

• Increasing costs
• Internal suppliers lose incentives to compete

• Reducing quality
• Single captured customer can slow experience effects

• Reducing flexibility
• Slow to respond to changes in technology or demand

• Increasing the potential for legal repercussions

• FTC carefully reviewed Pepsi plans to buy bottlers

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Corporate Diversification

• Expanding beyond a single market

• Types of Diversification
• Related Diversification: market or technology
• Unrelated Diversification

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Related Diversification
• Its main reason is economies of scope
• Cost savings by sharing activities or transferring core
competencies

• Operational relatedness: Sharing activities, facilities,

services, or processes among businesses can lower costs
• Achieve economies of scale and increase capacity utilization

• Corporate relatedness: Transferring core competencies can

create value
• Eliminate the need to allocate resources to develop competencies
in a second business
• Usually difficult for competitors to understand and imitate

• It is important to understand business inter-relationships,

value chains, and drivers for competitive advantage
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P&G – Market related diversification

What are potential advantages that P&G would have over

its’ rivals through the high level of its market related
diversification?

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But pursuing related diversification is not
easy…
• Often synergies are not realized as planned…
• Foster’s related diversification into the
wine business
 Foster’s foresaw more growth prospects
with wine than beer, so it acquired
Beringer Wine Estates in 2001 and
Southcorp in 2005.
 To create synergy between beer and
wine businesses, Foster’s used one
marketing/sales group for both.
 Do you think this related diversification
would be a good strategy? Why or why
not?
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Honda – Technology related diversification
Evolution of Honda Motor Company

Now
2000s
1980s
1960s
1940s
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Unrelated Diversification

• In unrelated diversification, a firm applies an

investor’s logic:

• Efficient internal capital allocations: Its headquarter

distributes capital to its businesses to create value for
the overall firm

• Reducing risk among the firm’s businesses by

developing a portfolio of businesses with different risk
profiles

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Unrelated diversification and BCG Matrix

High Cell 1: Stars Cell 2: Question Marks

Industry
Growth Rate

Low Cell 3: Cash Cows Cell 4: Dogs

High Low
Relative Market Share
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Unrelated diversification and BCG Matrix

High Cell 1: Stars Cell 2: Question Marks

Industry
Growth Rate

Low Cell 3: Cash Cows Cell 4: Dogs

High Low
Relative Market Share
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Efficiency of unrelated diversification
• However, unrelated diversification is widely believed to be
inefficient. Why?
• A short interview with Sir Mark Weinberg, the president of
St. James’s Place Capital
 He was a director of BAT (British American Tobacco) that
implemented an unrelated diversification strategy

• Thinking in terms of “the risks of diversification strategy”

 What are the motives for BAT’s diversification?
 What are differences of the diversification strategies between
BAT and insurance companies?
 Do you agree with his arguments? Do you consider risk
minimization to be not a valid rationale for implementing an
unrelated diversification strategy?
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Why do companies diversify?

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Why do companies diversify?
• Value-Creating Motives
• Economies of scope
• Sharing activities & utilizing excess capacity (operational relatedness)
• Transferring core competencies (corporate relatedness)
• Spreading the risk
• Increasing market power by blocking competitors through
multipoint competition

• Value-Neutral Motives
• Poor economic performance in current businesses
• Tax laws, Antitrust regulation

• Value-Reducing Motives (Agency hazards)

• Diversifying managerial employment risk
• Increasing management compensation
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Diversification and Performance
Research shows there is a curvilinear relationship between
diversification and firm performance
Performance

Single Business Related Unrelated

Level of Diversification
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