Final (Ch6 - ___) Flashcards
corporate level strategy is interested in what two questions
- what business or businesses should the firm be in AND
2. How the firm should manage the different business units
Define corporate-level stategy
specific actions a firm takes to gain an advantage by selecting and managing a group of different businesses
value of corporate level strategy
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
ex: GE is having to sell off some of there businesses in certain industries (involved in jet engines, locomotives, medical industries, appliances, lighting, turbines/power, etc)
- strategy: if GE was not in first or second place in an industry, they would sell/spin it off
- exemplifies that if you get too diversified, it gets difficult effectively manage all of your divisions
diversification
involves using expertise and knowledge gained in one business to diversify into a business where it can be used in a related way
decisions diversified companies often make
- How should we enter other industries
- internal start up operations (building new business from scratch). Pro - clean slate. Con - start up costs will be high, uncertainty
- joint venture (forming a new corporate entity owned by two or more companies) (usually necessary for communist countries ie China, Russia). Pro - . Con -
- Acquisition (of established, troubled, or up and coming company). Pro - . Con - . (Ex: Walmart to acquire Humana) - how to develop investment priorities within the company
- give more money to business units that have potential for higher earnings (ex: Caterpillar - )
- make poor performing units increase ROE OR… make the decision to divest a business unit and focus resources elsewhere
Corporate Level Strategy Example - P & G
Ex. 1: Proctor & Gamble’s Diversification Strategy
Pre-2005: Product mix focused on women and baby care
2005: Acquired Gillette, which focused on consumer health care products geared toward men
Synergy created by combining Gillette’s toothbrush (Oral-B) and P&G’s toothpaste (Crest) businesses to create Pro-Health oral care product line
- Good for retailers (shelf space)
- Strategy had potential but was more difficult to create operational relatedness between the products
- —-Comingle employees requiring actual physical re-location/talent exit
- —-Different ways to make business decisions
- —-Conflicting organizational cultures
- In 2007, Pro-Health overtook Colgate in market share
Levels of diversification
1.Low level of diversification Single-business strategy Dominant-business strategy 2. Moderate-to-high levels of diversification Related constrained diversification strategy Related linked diversification strategy 3. Very high levels of diversification Unrelated diversification **see ppt for diagram
low level business diversification
Single-business strategy
- Firm generates 95% or more of its sales revenue from its core business area
- Example (pre-2008): Wm. Wrigley Jr. Company—the world’s largest producer of chewing and bubble gums
- —–Post-2008 Acquired by Mars Inc.
- —–Pitfalls of single business strategy (CD’s, Checks)
Dominant-business strategy
- Firm generates 70-95% of total sales revenue within a single business area
- Example: UPS generated 74% of revenue from U.S. package delivery business; 17% from international package business; 9% from non-package business
Moderate-to-High Diversification
Related constrained diversification strategy
- < 70% of revenue comes from the dominant business
- There are DIRECT LINKS between the firm’s businesses (e.g., share products, technology; marketing; and distribution linkages)
- Typically considered the best model and most profitable
- Example: Campbell’s (they do more than just soup [ie tomato juice V8, Prego, goldfish, etc.). Most of their products use one common ingredient - tomatoes AND are distributed in the same place - grocery store. Results in economies of scale)
Related linked diversification strategy
Mix between related and unrelated diversification
-Linked firms share fewer resources and assets among their businesses
-Interested in constantly adjusting the mix in their portfolio of businesses and how to manage the businesses
-Example: Rachel Ray
Very High Diversification
Unrelated diversification strategy
- Less than 70% of revenue comes from dominant business
- No relationships between businesses
- Often called conglomerates
- Example: Jarden Corporation, Berkshire Hathaway, Bicycle, Crock Pot
3 reasons firms diversify
1. Value-creating reasons Economies of scope Market power Vertical Integration Financial economies
2. Value-neutral reasons Antitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Tangible resources Intangible resources
- Value-reducing reasons
Diversifying managerial employment risk
Increasing managerial compensation
Value creating reasons to diversify
Based a desire to develop resources that will enhance strategic competitiveness
Ok, but how?
Two main ways diversification strategies can create value
Operational relatedness: sharing activities between businesses
Ex: P&G’s paper towel business and baby diaper business both use paper products as inputs; the firm’s paper production plant produces inputs for both businesses
Corporate relatedness: transferring core competencies into business
Ex: Honda’s competence in engine design and manufacturing to motorcycles, lawnmowers, cars and trucks
Often achieved via transferring or hiring personnel with competencies
Operational and Corporate Relatedness Value
the values these create are referred to as
- Economies of scope
- market power
- financial economics
Economies of scope
(for related constrained and related-linked strategies)
Cost savings created by sharing its resources/capabilities or transferring core competencies of one businesses to another of its businesses
Market power
(for related constrained and related-linked strategies)
Exists when a firm sells its products above competitive levels and/or reduces the cost of its Value Chain activities below competitive levels
Influenced by a firm’s level of vertical integration
