Corporate-Level Strategy (Chapter 6)

Question 1

What is corporate-level strategy?

Answer 1

A 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.

• The value of corporate-level strategy is 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 firm can create a corporate advantage when its businesses work together in a synergistic way.
• Synergy exists when the value created by business units working together exceeds the value that those same units create working independently.

Example: Disney Corporate Portfolio of Businesses

Question 2

What is the relationship between diversification and performance?

Answer 2

Just understand illustration for this slide

Question 3

What does value-creating diversification allow?

Answer 3

1. Develop and exploit economies of scope among businesses through horizontal diversification (Bell’s phone, Internet, TV & Mobile phones use joint marketing, billing, distribution, brand)
2. Pursue multipoint competition by diversifying horizontally: Two or more diversified firms simultaneously compete in the same product or geographic markets. (Videotron vs. Bell)
3. Gain market power through vertical integration (Delta Airlines buying an oil refinery)
4. Create value through financial economies (increased borrowing power and preferential interest rates from financial institutions)
5. Reduce risk of local economic uncertainties through geographic diversification and create corporate synergies by capitalizing on local advantages. (CEMEX)

Question 4

What is a value-neutral or value-reducing diversification?

Answer 4

Creates a multibusiness company that is just a sum of its parts and nothing more (i.e. little or no added value from managing these businesses under the same roof). Such companies are known as conglomerates (Google Alphabet, Tata Group).

Question 5

What causes companies to diversify in value-reducing or value-neutral ways?

Answer 5

• Poor performance in existing business(es)
  → diversification neither solves problems in existing business(es) nor do these firms possess resources and capabilities to succeed in new areas.
• Uncertain future cash flows due to external conditions entice firms to diversify to reduce risk
  → resulting high upfront investment, neutralizing expected cost savings, with zero-sum results in the long-term
• Wrongly estimating potential synergies and firms’ capabilities to achieve them
• Diversifying to copy competitors, benchmarking against them, without proper analysis of own capabilities
• Top level executives’ desire to reduce their own employment risk, pursue their personal ambitious goals or increase their compensation

Question 6

Discuss Amazon’s diversification

Answer 6

Only read this slide