A slide about corporate level strategy and business profitability.

1. Corporate-Level Strategy
and Long-Run Profitability

2. Corporate-level strategy
A corporate level strategy is a multi-year and multi-tiered plan that outlines an
organization’s business goals. This strategy defines the organization’s direction in the
following years, such as expanding the business, increasing the profit margin, or wrapping
up business from a certain market segment. A corporate-level strategy affects a company's
finances, management, human resources, and where the products are sold. The purpose of
a corporate-level strategy is to maximize its profitability and maintain its financial success
in the future.
For three reasons, corporate level strategies can be applied to specific periods in a
business' existence:
Growth: To expand the business and increase profits.
Stability: To maintain currently active business operations.
Renewal: To revive an ailing business.

3. Importance of corporate-level strategy
1. The principal concern of corporate-level strategy is to identify the industry or industries a company
should participate in to maximize its long- run profitability. A company has several options when choosing
which industries to compete in.
2. A company can concentrate on only one industry and focus its activities on developing business-level
strategies to improve its competitive position in that industry.
3. Corporate strategy component refers to the decisions which concern the most efficient allocation of
human and capital resources in the context of stated goals and objectives. Resource allocation involves
planning, managing and assigning resources in a form that helps to reach a company’s strategic goals. In an
effort to maximize the value of the entire firm, leaders must determine how to allocate these resources to
the various businesses or business units to make the whole greater than the sum of the parts.
4. Prioritization or identifying strategic trade-offs is one of the most challenging aspects of corporate
strategy at its core. Since it’s not always possible to take advantage of all feasible opportunities, and
because business decisions almost always entail a degree of risk, companies need to take these factors into
account in arriving at the optimal strategic mix. It’s important for companies to balance the strategic trade-
offs between risk and return and ensure that the desired levels of risk management and return generation
are being pursued.

4. Benefit of a single industry strategy
•Concentrating on a single business allows a company to “stick to the knitting”—
that is, to focus on doing what it knows best and avoid entering new businesses it
knows little about and where it can create little value. Such strategy prevents
companies from becoming involved in multiple businesses that their managers do
not understand and where poor and uninformed decision making can result in huge
losses.
•The strategy a company adopts when it focuses its resources and capabilities on
competing successfully within a particular product market. A company to focus all
its managerial, financial, technological, and functional resources and capabilities on
developing strategies to strengthen its competitive position in just one business.
•This strategy is important in fast-growing industries that make strong demands on
a company’s resources and capabilities but also offer the prospect of substantial
long- term profits if a company can sustain its competitive advantage.

5. Horizontal Integration
Horizontal integration is the process of acquiring or merging with
industry competitors in an effort to achieve the competitive
advantages that come with large size or scale.
Acquisition
An acquisition occurs when one company uses its capital resources
(such as stock, debt, or cash) to purchase another company. Walt
Disney, Marvel, Grameen Phone, Petromax.
Merger
A merger is an agreement between two companies to pool their
resources in a combined operation.
Facebook and Instagram, Google and Android

6. Benefits and Costs of
Horizontal Integration
Managers who pursue horizontal integration have decided
that the best way to increase their company’s profitability is
to invest its capital to purchase the resources and assets of
industry competitors. Profitability increases when horizontal
integration results in four major benefits:
• Lowers operating costs,
• Increases product differentiation
• Reduces rivalry within an industry, and
• Increases a company’s bargaining power over suppliers and
buyers

7. Lower Operating Costs
• Achieving economies of scale is very important in industries that have high fixed costs,
because large- scale production allows a company to spread its fixed costs over a large
volume, which drives down average operating costs. In the telecommunications industry,
for example, the fixed costs of building an advanced Internet network are enormous, so
to make such an investment pay off, a company needs a large volume of customers.
• A company can also lower its operating costs when horizontal integration eliminates the
need for two sets of corporate head offices, two separate sales forces, and so on, such
that the costs of operating the combined company fall.

8. Increase Product Differentiation
By allowing a company to combine the product lines of merged
companies in order to offer customers a wider range of
products that can be bundled together able to increase product
differentiation.
Product bundling involves offering customers the opportunity to
buy a complete range of products they need at a single,
combined price. This increases the value that customers see in a
company’s product line, because (1) they often obtain a price
discount by purchasing products as a set and (2) they get used
to dealing with just one company. For this reason, a company
may obtain a competitive advantage from increased product
differentiation. For example: Apple and Nike

9. Reduced Industry Rivalry
Horizontal integration can help to reduce industry rivalry in two ways.
• First, acquiring or merging with a competitor helps to eliminate excess capacity in an
industry, often triggers price wars. By taking excess capacity out of an industry, horizontal
integration creates a more benign environment in which prices might stabilize or even
increase.
• Secondly, by reducing the number of competitors in an industry, horizontal integration
often makes it easier to use tacit price coordination between rivals. In general, the larger
the number of competitors in an industry, the more difficult it is to establish an informal
pricing agreement, such as price leadership by a dominant firm, which reduces the
chances that a price war will erupt. Horizontal integration makes it easier for rivals to
coordinate their actions because it increases industry concentration and creates an
oligopoly.

10. Increased
Bargaining
Power
A final reason for a company to use horizontal integration
• is to achieve more bargaining power over suppliers or
buyers, which strengthens its competitive position and
increases its profitability at their expense.
• By using horizontal integration to consolidate its
industry, a company becomes a much larger buyer of a
supplier’s product; it can use this buying power as
leverage to bargain down the price it pays for inputs,
and this also lowers its costs.
• Company that acquires its competitors controls a
greater percentage of an industry’s final product or
output, and so buyers become more dependent on it.
Other things being equal, the company now has more
power to raise prices and profits, because customers
have less choice of suppliers from whom to buy. When a
company has greater ability to raise prices to buyers or
to bargain down the price it pays for inputs, it has
increased market power.

11. Vertical Integration
Vertical integration is a strategy that allows a company to streamline its operations by taking
direct ownership of various stages of its production process rather than relying on external
contractors or suppliers. A strategy in which a company expands its operations either backward
into industries that produce inputs for its core products (backward vertical integration) or
forward into industries that use, distribute, or sell its products (forward vertical integration). To
enter a new industry, a company may establish its own operations and create the set of value
chain functions it needs to compete effectively in this industry.
Zara
Zara is a Spanish clothing and accessory company that has over one thousand stores
worldwide. Not only does it own its own retail stores and distribution, but the vast majority of
its clothes are sourced inhouse. Zara is vertically integrated with both the manufacturers and
designs of its goods. Whilst other stores rely on independent designers and manufacturers,
they are left at their mercy. By contrast, Zara is able to adapt to new trends much quicker than
its competitors. It has also led to improved efficiency in stock management ,something that is
crucially important in fashion design.

12. Backward Integration
Backward Integration: A company that chooses backward integration moves the ownership
control of its products to a point earlier in the supply chain or the production process. This
form of vertical integration is aptly named as a company often strives to acquire a raw
material distributor or provider towards the beginning of a supply chain. The companies
towards the start of the supply chain are often specialized in their distinct step in the
process. For example: a wood distributor to a furniture manufacturer. In an attempt to
streamline processes, the furniture manufacturer would try to bring the wood sourcing in-
house.
Ikea
Ikea is known as a flat-pack retailer that sells mostly wooden furniture, but also other
fixtures and fittings. It is the last in the supply chain as it directly sells to the final consumer.
In 2015, Ikea made a huge step in ensuring complete vertical integration by purchasing a
Romanian forest. The company added to this by purchasing forestland in Alabama in 2018
,aligning the companies aim to create a sustainable supply chain. Not only does it now
control much of the raw material production, but it also controls the manufacturing
process through its subsidiary ,Swedwood, which was renamed in 2013 to Ikea Industry

13. Forward Integration
A company that decides on Forward Integration expands by gaining
control of the distribution process and sale of its finished products.
A clothing manufacturer can sell its finished products to a middleman,
who then sells them in smaller batches to individual retailers. If the
clothing manufacturer were to experience forward vertical integration,
the manufacturer would join a retailer and be able to open its own
stores. The company would aim to bring in more money per product,
assuming it can operate its retail efficiently.

14. Balanced Integration
A balanced integration is a vertical integration approach in which a company
aims to merge with companies both before it and after it along the supply
chain. A company must be "the middleman” and manufacture a good to
engage in a balanced integration, as it must both source a raw material as
well as work with retailers to delivery the final product. For example:
Consider the supply chain process for Coca-Cola where raw materials are
sourced, the beverage is concocted, and bottled drinks are distributed for
sale. Should Coca-Cola choose to merge with both its raw material providers
as well as retailers who will sell the product, Coca-Cola is engaging in
balanced integration.

15. Examples of vertical integration
To enter a new industry, a company may establish its own operations and create the set of value chain
functions it needs to compete effectively in this industry.

16. • Swiss Cheese
https://www.youtube.com/watch?v=1a7f9wzOfWk&ab_channel=FoodI
nsider

17. Arguments for Vertical Integration
• Building Barriers to Entry: By vertically integrating backward to gain control over
the source of critical inputs or by vertically integrating forward to gain control
over distribution channels, a company can build barriers to new entry into its
industry. To the extent that this strategy is effective, it limits competition in the
company’s industry, thereby enabling the company to charge a higher price and
make greater profits than it could otherwise.
• Protecting Product Quality: By protecting product quality, vertical integration
enables a company to become a differentiated player in its core business
• Transaction costs are lower throughout the supply chain:
With a high level of vertical integration, brands can reduce the transaction costs
that occur throughout their supply chain. This is done through the power to
leverage the size and scope of the supply chain when dealing with suppliers and
vendors that are not part of the integrated process.
• Increase a brand’s local market share: Because an organization controls more of
its supply chain, it can influence specific benefits that a local demographic may
need. This allows the organization to obtain a larger market share because they
can create a value proposition that is better than what the competition offers.

18. Arguments Against Vertical Integration
Reduces flexibility:
Brands that work with several vendors or contractors have a certain flexibility that vertical integration normally does not provide. Businesses
that have integrated vertically may have a few choices with their supply chain, but a business that uses third parties can make changes
whenever they wish without maintenance costs within their infrastructure.
Technological change:
Another problem is that when technology is changing rapidly, a strategy of vertical integration often ties a company into old, obsolescent, high-
cost technology. In general, because a company has to develop value chain functions in each industry stage in which it operates, any significant
changes in the environment of each industry, such as major changes in technology, can put its investment at risk. The more industries in which
a company operates, the more risk it incurs.
Expensive investment:
Capital is required to make a vertical integration effort possible. Even if the integration occurs through partnerships, an investment into specific
patents, processes, or proprietary data is often required as part of the deal. New forward or backward vertical integration efforts may require
building new facilities, hiring new staff, and understanding new processes that are unfamiliar to the corporation.
Increase complexity:
Vertical integration requires companies to get involved in new aspects of the supply chain where they are usually unfamiliar. If you are in the
retail sector and sell shirts, you know how to present that product to the customer in the most effective way. If you were asked to create that
shirt from scratch, you would struggle to produce it. You would even need to source the raw fabrics. When fully integrated, vertical integration
saves time and money, but it isn’t a simple process to get there.

19. Outsourcing
Outsourcing is the practice of hiring another party outside of the organisation to
perform services or produce products that were originally performed within the
organisation.
The different types of outsourcing include:
• Professional outsourcing: contracts are offered to individual specialists to manage
multiple small tasks without having to outsource the whole function.
• IT outsourcing: employing outside service providers to efficiently provide IT-
related business processes and infrastructure solutions for organisation
outcomes.
• Manufacturing outsourcing: When the production process is undertaken by
another organisation that specialises in manufacturing that product.
• Process-specific outsourcing: When an organisation contracts a provider for a
specialist service that may be niche.
• Operational outsourcing: When an organisation hires other contractors to handle
specialised work operations. This can be for their HR, accounting, data analysis,
and administrative functions.

20. https://www.youtube.com/watch?v=liZ0WEEsuz4&t=18s&ab_c
hannel=WIREDUK

21. Diversification
Diversification is a corporate strategy to enter into a new products
or product lines, new services or new markets, involving
substantially different skills, technology and knowledge. It is the
process of entering one or more industries that are distinct or
different from a company’s core or original industry, in order to find
ways to use its distinctive competencies to increase the value of
products in those industries to customers. Disney is a diversified
global entertainment company that operates theme parks, resorts,
broadcast networks, and streams TV shows and movies.
https://www.youtube.com/watch?v=q0rOzzmpwP4&ab_channel=Sa
rfarazUddin

22. Creating Value Through Diversification
Superior Internal Governance: The term internal governance
refers to the manner in which the top executives of a company
manage (or “govern”) its business units, divisions, and
functions. In a diversified company, effective or superior
governance revolves around how well top managers can
develop strategies that improve the competitive positioning of
its business units in the industries where they compete.
Diversification creates value when top managers operate the
company’s different business units so effectively that they
perform better than they would if they were separate and
independent companies.

23. How top-level management creating value
through diversification?
• First, they organize the different business units of the company into self- contained divisions each of which
operates separately. For example, GE has over 300 self- contained divisions, including light bulbs, turbines, NBC,
and so on.
• Second, these divisions tend to be managed by corporate executives in a highly decentralized fashion. Corporate
executives do not get involved in the day- to-day operations of each division. Instead, they set challenging financial
goals for each division, probe the general managers of each division about their strategy for attaining these goals,
monitor divisional performance, and hold divisional managers accountable for that performance.
• Third, corporate managers are careful to link their internal monitoring and control mechanisms to incentive pay
systems that reward divisional personnel for attaining, and especially for surpassing, performance goals. Although
this may sound easy to do, in practice it requires highly skilled corporate executives to pull it off.
• By approaching an acquisition and restructuring strategy, which involves corporate managers acquiring inefficient
and poorly managed enterprises and then creating value by installing their superior internal governance in these
acquired companies and restructuring their operations systems to improve their performance. This strategy can be
considered as diversification because the acquired company does not have to be in the same industry as the
acquiring company.

24. Transferring Competencies
A second way for a company to create value from diversification is to transfer its existing
distinctive competencies in one or more value creation functions (for example,
manufacturing, marketing, materials management, and R&D) to other industries. Top
managers seek out companies in new industries where they believe they can apply these
competencies to create value and increase profitability.
For example, they may use the superior skills in one or more of their company’s value
creation functions to improve the competitive position of the new business unit.
Alternatively, corporate managers may decide to acquire a company in a different industry
because they believe the acquired company possesses superior skills that can improve the
efficiency of their existing value creation activities.

25. Economies of Scope
Economies of scope can reduce the total operating costs when two or more business units can share
resources or capabilities such as manufacturing facilities, distribution channels, advertising
campaigns, and R&D costs.
Each business unit that shares a common resource has to pay less to operate a particular functional
activity. This resource sharing has given both business units a cost advantage that has enabled them
to undercut the prices of their less diversified competitors.
Like competency transfers, diversification to realize economies of scope is possible only if there is a
real opportunity for sharing the skills and services of one or more of the value-creation functions
between a company’s existing and new business units. Each business unit that shares a common
resource has to pay less to operate a particular functional activity. For example: Procter & Gamble’s
disposable diaper and paper towel businesses offer one of the best examples of the successful
realization of economies of scope. These businesses share the costs of procuring certain raw
materials (such as paper) and of developing the technology for new products and processes. In
addition, a joint sales force sells both products to supermarkets, and both products.

26. Types of diversification
One issue that a diversifying company must resolve is whether to diversify into to- tally new
businesses and industries or into those that are related to its existing business because their value
chains share something in common. The choices it makes determine whether a company pursues
related diversification and/or unrelated diversification.
Related Diversification :Related diversification occurs when a firm moves into a new industry that
has important similarities with the firm's existing industry or industries. Because films and television
are both aspects of entertainment, Disney's purchase of ABC is an example of related
diversification. The strategy of operating a business unit in a new industry that is related to a
company’s existing business units through some commonality in their value chains.
Unrelated Diversification :Unrelated Diversification is diversifying into new industries, such as
Amazon entering the grocery store business named Amazon Fresh. Geographic Diversification ,
operating in various geographic markets, which is the corporate strategy of Starbucks, Pizza Hut ,
and KFC. The strategy of operating a business unit in a new industry that has no value chain
connection with a company’s existing business units