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
- Value creating diversification
- Value Neutral Diversification
- 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
Start here