Corporate level strategy

1. BUSINESS STRATEGY AND ENTERPRISE
Chapter 6: Corporate Level Strategy
CHRISTIAN HAMONANGAN
NIM: 29113025
Program Magister Administration Business
School of Business and Management
INSTITUT TEKNOLOGI BANDUNG
2014

2. CORPORATE LEVEL STRATEGY CHRISTIAN HAMONANGAN -29113025
YOUNG PROFESIONAL B
2
C H A P T E R 6
Corporate Level Strategy
Business-level Strategy
 An integrated and coordinated set of commitments and actions the firm uses to gain competitive advantage by exploiting core competencies in specific product markets
Corporate-level Strategy
 Specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets
 Expected to help firm earn above-average returns
 Value ultimately determined by degree to which “the businesses in the portfolio are worth more under the management of the company then they would be under any other ownership”
Corporate-level strategy concerns:
 The scope of the markets and industries the firm competes in
 How the firm manages their portfolio of businesses
 Mode of entry into new businesses
 Internal development, acquisitions/merger, joint venture/strategic alliance
 Level and type of diversification
 Capturing synergies between business units
 Allocating corporate resources
Corporate-level strategy is also concerned with:
 Capturing economies of scope or synergies between business units (Related)
 Capturing financial synergies (Unrelated)

3. CORPORATE LEVEL STRATEGY CHRISTIAN HAMONANGAN -29113025
YOUNG PROFESIONAL B
3
picture 1. Levels and Types of Diversification
Moderate and High Levels of Diversification
A firm generating more than 30 percent of its revenue outside a dominant business and whose businesses are related to each other in some manner uses a related diversification corporate level strategy. The diversified company with a portfolio of businesses that have only a few links between them is called a mixed related and unrelated firm and is using the related linked diversification strategy (see picture 1).
Value-Creating Diversification: Related Strategies
 Purpose: Gain market power relative to competitors
 Related diversification wants to develop and exploit economies of scope between its businesses
o Economies of scope: Cost savings firm creates by successfully sharing some of its resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses
 Composed of „related‟ diversification strategies including Operational and Corporate relatedness
Operational Relatedness: Sharing activities
 Can gain economies of scope
 Share primary or support activities (in value chain)

4. CORPORATE LEVEL STRATEGY CHRISTIAN HAMONANGAN -29113025
YOUNG PROFESIONAL B
4
o Risky as ties create links between outcomes
 Related constrained diversified firms share activities in order to create value
 Not easy, often synergies not realized as planned
Corporate Relatedness: Core competency transfer
 Complex sets of resources and capabilities linking different businesses through managerial and technological knowledge, experience and expertise
 Two sources of value creation
o Core competence can be developed in one business unit and transferred to other business units at no additional cost
o Intangible resources difficult for competitors to understand and imitate, so immediate competitive advantage over competition can be achieved through transfer of corporate-level core competence
 Use related-linked diversification strategy
Market Power
 Exists when a firm is able to sell its products above the existing competitive level or to reduce costs of primary and support activities below the competitive level, or both.
 Can come from increasing scale or size
Market power can also be created through:
 Multipoint Competition
o Exists when 2 or more diversified firms simultaneously compete in the same product or geographic markets.
 Vertical Integration
o Exists when a company produces its own inputs (backward integration) or owns its own source of output distribution (forward integration)
Value-Neutral Diversification: Incentives and Resources
Value-Neutral Incentives to Diversify
 Antitrust Regulation and Tax Laws
 Low Performance
 Uncertain Future Cash Flows

5. CORPORATE LEVEL STRATEGY CHRISTIAN HAMONANGAN -29113025
YOUNG PROFESIONAL B
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 Synergy and Firm Risk Reduction
 Tangible and Intangible Resources and Diversification
Value-Reducing Diversification: Managerial Motives to Diversify
Top-level executives may diversify in order to diversity their own employment risk and to increase their own compensation, as long as profitability does not suffer excessively
 Diversification adds benefits to top-level managers but not shareholders
 This strategy may be held in check by governance mechanisms or concerns for one‟s reputation
picture 2. Summary Model of the Relationship between Diversification and Firm Performance