Corporate level strategy

Diversification

play a major role in the behavior of large firms.

The 2 strategy levels

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 with opportunities presented to the firm.

Business-level strategy

Each business unit in a diversified firm chooses its own as its means of competing in its individual product markets.

Corporate-level strategy (company-wide)

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’s value

degree to which the businesses in the portfolio are worth more under the corporate HQ management than otherwise
(parenting advantage)

What businesses should the firm be in?

How should the corporate office manage the group of businesses?

Center of gravity

The upstream stages add value by reducing the variety of raw materials found on the earth's surface to a few standard commodities. The purpose is to produce flexible, predictable raw materials and intermediate product from which an increasing variety of downstream products are made.

The down stream stages add value through producing a variety of products to meet varying customer needs. The downstream value is added through advertising, product positioning, marketing channels, and R&D.

The upstream and downstream companies face diff problems.

he mid-set of upstream managers is geared toward standardization and efficiency.

downstream managers try to customize and tailor output to diverse customer needs. They want to target particular sets of end users.

Mintzberg typology of diversification Strategic Choices (for Core Business)

Differentiation can be in

price, commodity, image, service, quality, design

Scope can be

unsegmented, segmented, niche, customization

Growth can be

market elaboration, product development, geographical expansion, market consolidation, market skimming, expansion by take-over or internal growth

Extending the Core Business (Diversification)

Vertical integration - across supply chain eg. from woodlands to paper

By-product diversification - using by-products eg. pulp & paper machinery

Crystalline diversification - rapidly increasing end-products from core competencies

Related diversification - related and same center of gravity

Center of gravity is position on a scale of upstream to downstream of a company

Linked diversification - related but different centre of gravity

Unrelated diversification - self explanatory

Reconceiving the Core (Restructuring and Consolidation)

Business redefinition

Timex redefines watches as inexpensive, utilitarian; IKEA knock-down kits redefine furniture retailing; Amazon.com redefines book selling

core relocation

Business recombination:

bundling and unbundling (Coke restructures bottlers)

upstream, downstream, shift in function, theme or core competence (Nokia shift from forest products to telecom)

Downsize

harvest, shrink, divest, liquidate, retrench

Resources and diversification: Firm must have both

Incentives to diversify

Resources required to create value through diversification

tangible resources

financial resources highly flexible and associated with greater extent of diversification

physical resources (plant & equipment) less flexible & usually associated with related diversification

intangible resources

may offer the basis for more lasting value creation through diversification

Strategic competitiveness is improved when the level of diversification is appropriate for the level of available resources.

Value creation is determined more by appropriate use of resources than by incentives to diversify.

Reasons for firm diversification

See Exhibit 1 in Appendix for more details

  1. Value creating diversification
  1. Value Neutral Diversification
  1. Value reducing diversification

Levels of diversification

Exhibit 2 in Appendix for lvls of diversification

Relationship between diversification and firm performance - Exhibit 3 Appendix

ways to create value through economies of scope

Sharing activities: Operational relatedness

by sharing either a primary activity such as inventory delivery systems, or a support activity such as purchasing.

requires sharing strategic control over business units.

may create risk because business-unit ties create links between outcomes.

Transferring corporate competencies: Corporate relatedness

Using complex sets of resources and capabilities to link different businesses through managerial and technological knowledge, experience, and expertise.

Exhibit 4, Appendix for Value creating diversification strategies

Exhibit 5 in Appendix - Curve linear relationship between diversification and performance

Related diversification

Firms create value by building upon or extending:

resources

capabilities

core competencies

Economies of scope

Cost savings or value creation that occurs when a firm transfers capabilities and competencies developed in one of its businesses to another of its businesses.

Generally cost savings arise from

operational relatedness in sharing activities, but operational relatedness can also create value

Generally value is created from

corporate relatedness in transferring skills or corporate core competencies among units and between units and HQ,but corporate relatedness can also slash costs

The difference between sharing activities and transferring competencies is based on how resources are jointly used to create economies of scope.

Corporate relatedness

Creates value by

eliminates resource duplication

provides intangible resources

Related diversification strategy can lead to 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.

Multipoint competition

Two or more diversified firms simultaneously compete in the same product areas or geographic markets.

Vertical integration

Backward integration — a firm produces its own inputs.

Forward integration — a firm operates its own distribution system for delivering its outputs.

Simultaneous operational relatedness and corporate relatedness

Involves managing two sources of knowledge simultaneously
(operation and corporate economies of scope)

Many such efforts often fail because of implementation difficulties.

Unrelated diversification may create value through

Financial economies

Cost savings realized through improved allocations of financial resources.

through

Efficient internal capital allocations

Purchase of other corporations and restructuring the assets

Corporate office distributes capital to business divisions to create value for overall company. (It knows their actual and potential performance)

In developed countries, financial economies are more easily duplicated by competitors than are gains from operational and corporate relatedness.

Resource allocation decisions may become complex, so success often requires:

focus on mature, low-technology businesses.

focus on businesses less reliant on a client orientation.

Why diversify

Internal Incentives eg synergy benefits , uncertain future cash flows, risk reduction

External (institution-based) Incentives eg. anti-trust laws, tax laws.
Exhibit 6 for specifics

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