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corporate_level_strategy_110617.pptx

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Corporate Level Strategy
CORPORATE–LEVEL STRATEGY:
ANSWERS THE QUESTION:
WHAT BUSINESSES SHOULD A FIRM
COMPETE IN?
TWO KEY ISSUES
1. In what product markets and businesses
should the firm compete?
2. How should corporate headquarters manage
those businesses?
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
¦ Corporate-level strategies help companies select new
strategic positions that are expected to increase the firm’s
value
¦ Firms can pursue defensive or offensive strategies that
realize growth, and may have different strategic intents
Key Definitions
¦ MARKET DEVELOPMENT – moving into different geographic
markets
¦ PRODUCT DEVELOPMENT – developing new products and/or
significantly improving on existing products
¦ HORIZONTAL INTEGRATION – acquisition of competitors;
horizontal movement at the same point in the value chain
¦ VERTICAL INTEGRATION – becoming your own supplier or
distributor through acquisition; vertical movement up or
down the value chain
VERTICAL INTEGRATION
Becoming your own supplier or distributor through
acquisition; vertical movement up or down the value
chain
HORIZONTAL INTEGRATION
Acquisition of competitors; horizontal movement at the same point in the value chain
CORPORATE-LEVEL STRATEGY’S VALUE
• Corporate-level strategy’s value is ultimately
determined by the degree to which “the
businesses in the portfolio are worth more
under the management of the company than
they would be under any other ownership”
• A corporate-level strategy is expected to help
the firm earn above-average returns by
creating value
Diversification
¦ Growing into new business areas either related (similar to
existing business) or unrelated (different from existing
business); allows a firm to create value by productively
using excess resources
¦ The diversified firm operates in several different and
unique product markets and likely in several businesses;
it forms two types of strategies: corporate-level (or
company-wide) and business-level (or competitive)
¦ For the diversified corporation, a business-level strategy
must be selected for each one of its businesses
Ansoff Product/Market Matrix
RELATED
DIVERSIFICATION
UNRELATED
DIVERSIFICATION
•ECONOMIES OF
SCOPE
•FINANCIAL
ECONOMIES
Levels of Diversification
OPERATIONAL RELATEDNESS:
SHARING ACTIVITIES
¦ Can gain economies of scope
¦ Share primary or support activities (in value chain), e.g., a primary
activity such as inventory delivery systems, or a support
activity such as purchasing
¦ Risky as ties create links between outcomes
¦ Related constrained share activities in order to create value
¦ Not easy, often synergies not realized as planned
UNRELATED DIVERSIFICATION
Creates value through two types of
FINANCIAL ECONOMIES
¦ Cost savings realized through improved
allocations of financial resources based on
investments inside or outside firm
•
Efficient internal capital market allocation
¦ Restructuring of acquired assets
•
Firm A buys firm B and restructures assets so it can
operate more profitably, then A sells B for a profit in
the external market
EXTERNAL INCENTIVES TO DIVERSIFY
• Antitrust laws in 1960s and 1970s discouraged mergers that created
increased market power (vertical or horizontal integration)
• Mergers in the 1960s and 1970s thus tended to be unrelated
(conglomerate)
• 1980s: Relaxation of antitrust enforcement results in more and larger
horizontal mergers
• Late 1990s: Industry-specific deregulation spurred increased merger
activity in banking, telecommunications, oil and gas, and electric
utilities
• Early 2000s: Antitrust concerns seem to be emerging and mergers are
more closely scrutinized
EXTERNAL INCENTIVES TO DIVERSIFY
(CONT’D)
• High tax rates on dividends cause a corporate shift from dividends to
buying and building companies in high-performance industries
• 1986 Tax Reform Act
? Reduced individual ordinary income tax rate from 50 to 28 percent
? Treated capital gains as ordinary income
? Created incentive for shareholders to prefer dividends to acquisition
investments, as the 1986 Tax Reform Act diminished some of the
corporate tax advantages of diversification
Tax Laws
INTERNAL INCENTIVES TO DIVERSIFY
• High performance eliminates the
need for greater diversification
• Low performance acts as
incentive for diversification
• Firms plagued by poor
performance often take higher
risks (diversification is risky)
INTERNAL INCENTIVES TO
DIVERSIFY (CONT’D)
• Diversification may be defensive
strategy if the:
? Product line matures
? Product line is threatened
? Firm is small and is in a mature or
maturing industry
Uncertain
Future Cash
Flows
INTERNAL
INCENTIVES TO
DIVERSIFY (CONT’D)
• Synergy exists when the value created
by businesses working together
exceeds the value created by them
working independently
• … But synergy creates joint
interdependence between business
units
• A firm may reduce the level of
technological change by operating in
more certain environments—resulting
in more related types of diversification
• A firm may become risk averse,
constrain its level of activity sharing,
and forgo potential benefits of
synergy—resulting in more unrelated
types of diversification

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