Chapter 5 Review: Factors affecting the

likelihood of competitive response . . .

The factor listed below increases decreases
the likelihood of
competitive response

• poor competitive intelligence

• first mover incentives
• strategic action required
• corporate arrogance
• high emotional/ego involvement
• actor is reputable/credible

Copyright © 2004 South-Western. All rights reserved. 6–1

 The Strategic
Management
Process

Figure 1.1
Copyright © 2004 South-Western. All rights reserved. 6–2
 Chapter 6: Corporate-Level Strategies
• Corporate-level strategies;
advantages and disadvantages of each
- single business
- dominant business
- vertical integration
- related diversification
(activity sharing and skill transfer)
- unrelated diversification
(capital reallocation; restructuring)
• Core business
Copyright © 2004 South-Western. All rights reserved. 6–3
 Corporate-level strategy encompasses the
entire organization;
Business-level strategy is at the
____________ level

PepsiCo

Soft Drinks Frito-Lay Tropicana

Copyright © 2004 South-Western. All rights reserved. 6–4

Two Strategy Levels
• Business-level Strategy (Competitive)
 Each business unit in a diversified firm chooses
a business-level strategy as its means of
competing in individual product markets
• Corporate-level Strategy (Companywide)
 Specifies actions taken by the firm to gain a
competitive advantage by selecting and
managing a group of different businesses
competing in several industries and product
markets

Copyright © 2004 South-Western. All rights reserved. 6–5

Corporate-Level Strategy: Key Questions
• Corporate-level Strategy’s Value
 The degree to which the businesses in the
portfolio are worth more under the management
of the company than they would be under other
ownership
 What businesses should
the firm be in?
 How should the corporate
office manage the
group of businesses?

Business Units
Copyright © 2004 South-Western. All rights reserved. 6–6
 Some Corporate-Level Strategy Questions:
• McDonald’s -
Chipotle Grill? C-stores? hotel? rec center?
• Ebay -
purchase of Skype internet phone provider?
• John Deere & Company -
wholesale landscaping business?
• Ford Motor Company -
Hertz Rent-A-Car?
• New York Times -
ownership of papermills?
Copyright © 2004 South-Western. All rights reserved. 6–7
 “few corporate-level strategies actually
create value . . . “ - pg. 170

Yet again,
strategy formulation might be easier than
strategy implementation!

Synergies (where the whole is greater than

the sum of the parts) are easier to
conceptualize than to actually realize.

Copyright © 2004 South-Western. All rights reserved. 6–8

 Levels and Types of Diversification

Figure 6.1
SOURCE: Adapted from R. P. Rumelt, 1974, Strategy, Structure and Economic Performance, Boston: Harvard Business School.
Copyright © 2004 South-Western. All rights reserved. 6–9
 Common evolution pattern of
corporate-level strategies
• Single business
• Dominant business
• Vertical integration
• Vertical integration with by-products
diversification
• Related-constrained diversification
• Related-linked diversification
• Unrelated diversification
• Related-constrained diversification
Copyright © 2004 South-Western. All rights reserved. 6–10
 Single- and Dominant- Business Strategy
Advantages Disadvantages
(Why move away from
these strategies toward
diversification?)

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 Vertical Integration Strategy

When a firm produces its own inputs =

__________________ integration

When a firm owns its own means of

distribution = ________________ integration

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 Forward and Backward Vertical Integration
Forward vertical integration

supplies manufacturing distribution retail

Backward vertical integration

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 Vertical Integration Strategy
Advantages/ Disadvantages/Hazards
Reasons for Use

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 Alternatives to Vertical Integration?

Copyright © 2004 South-Western. All rights reserved. 6–15

 Diversification Strategy =
participation in >1 industry (segment),
structuring into separate divisions,
with no single division contributing
>70% of sales revenue
Johnson & Johnson

Consumer Products Pharmaceuticals Devices and Diagnostics

18% of sales; 47% of sales; 35% of sales;
13% of operating profit 61% of operating profit 26% of operating profit

Copyright © 2004 South-Western. All rights reserved. 6–16

 Diversification Strategy
Advantages Disadvantages/Pitfalls

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Strategic Motives for Diversification
To Enhance Strategic Competitiveness:
• Economies of scope (related diversification)
Sharing activities
Transferring core competencies
• Market power (related diversification)
Blocking competitors through multipoint competition
(Vertical integration)
• Financial economies (unrelated diversification)
Efficient internal capital allocation
Business restructuring

Table 6.1a

Copyright © 2004 South-Western. All rights reserved. 6–18

Incentives and Resources for Diversification
Incentives and Resources with Neutral
Effects on Strategic Competitiveness
• Antitrust regulation
• Tax laws
• Low performance
• Uncertain future cash flows
• Risk reduction for firm
• Tangible resources
• Intangible resources
So - these are not the best reasons to diversify!
Table 6.1b

Copyright © 2004 South-Western. All rights reserved. 6–19

Managerial Motives for Diversification
Managerial Motives (Value Reduction)

• Diversifying managerial employment risk

• Increasing managerial compensation

“managerial opportunism” (Chapter 10)

Table 6.1c

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The Curvilinear Relationship between
Diversification and Performance

Figure 6.3
Copyright © 2004 South-Western. All rights reserved. 6–21
Related Diversification

• Firm creates value by building upon or

extending its:

 Resources
 Capabilities
 Core competencies

Copyright © 2004 South-Western. All rights reserved. 6–22

Best resource/capabilities for diversification
are typically found in a firm’s core business:
“Core business”
represents the business unit or division
containing the firm’s most developed skills;
often can be identified by
• high proportion of firm’s profit
• high proportion of a firm’s assets
• original business of the firm
• division serving primary target markets

Copyright © 2004 South-Western. All rights reserved. 6–23

Related Diversification - Economies of Scope

• Value is created by extending important

resources/capabilities/core competencies
through:

 Operational relatedness in sharing activities -

value chain activities are shared among units

 Corporate relatedness in transferring skills -

competencies are transferred across units

Copyright © 2004 South-Western. All rights reserved. 6–24

 In related diversification:
implementation to realize synergies -
Example of PepsiCo
Shared Activities Skill Transfer
(operational relatedness) (corporate relatedness)

• distribution • product development

• sales • brand development
• market research • brand excitement

Copyright © 2004 South-Western. All rights reserved. 6–25

 Activity sharing and skill transfer . .
• can create efficiencies (especially activity
sharing)

• can provide competitive advantages that are

valuable, rare, and difficult to imitate due to
complexity and combining tangible and
intangible resources

• can fail due to implementation

complications - managed interactions
across business units are required
Copyright © 2004 South-Western. All rights reserved. 6–26
 Advice for sharing activities
or transferring skills
Since sharing activities and transferring skills
adds management complications,
only select those that are
competitively meaningful, with strong
potential to add competitive advantage,
or it generally isn’t going to be
worth the trouble!

Copyright © 2004 South-Western. All rights reserved. 6–27

Unrelated Diversification
• Financial Economies
 Are cost savings realized through improved
allocation of financial resources
 Create value through two types of financial
economies:
 Efficient internal capital allocation
 Purchasing other corporations and
restructuring their assets

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Unrelated Diversification -
Efficient Internal Capital Market Allocation
 Acquire sound, attractive autonomous
companies that need growth capital
 Corporate office distributes capital from low
growth divisions to high growth divisions to
create value for overall company
 Operation like an “internal capital market”
 Corporate office gains proprietary access to
information about those businesses’ actual
and prospective performance

Copyright © 2004 South-Western. All rights reserved. 6–29

 Otter Tail Corporation - partial view

Otter Tail Corporation

Electricity Manufacturing Health Services

30% of sales revenue; 26% of sales revenue; 13% of sales revenue;
75% of net income 16% of net income 7% of net income

Copyright © 2004 South-Western. All rights reserved. 6–30

Unrelated Diversification: Restructuring
• Restructuring creates financial economies
 A firm creates value by buying and selling other
firms’ assets in the external market
 The idea is basically, “buy low, sell high”
 “The corporate fixer-upper” - buy
underperforming firms or units, fix the problems,
and sell for a higher price

Copyright © 2004 South-Western. All rights reserved. 6–31

 Unrelated Diversification -
Implementation Considerations
• Can be considered easier to implement than
related diversification

• No required commonalities and/or

interactions between units

• Each unit is basically “stand-alone”, and

operates independently of the other units,
except for centralized resource allocation

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 Unrelated Diversification:
Performance Reputation

• “diversifiction”

• “diworseification”

• the conglomerate discount

• conclusion = unrelated diversification

generally produces poor performance
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