Corporate Strategy

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Chapter 6 Corporate-Level Strategy

Colorado State University Copyright © 2004 South-Western All rights reserved.

R. Dennis Middlemist

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Knowledge Objectives
• Studying this chapter should provide you with the strategic management knowledge needed to: Define corporate-level strategy and discuss its importance to the diversified firm. Describe the advantages and disadvantages of single- and dominant- business strategies. Explain three primary reasons why firms move from singleand dominant-business strategies to more diversified strategies. Describe how related diversified firms create value by sharing or transferring core competencies.

Copyright © 2004 South-Western. All rights reserved.

6–2

Knowledge Objectives (cont’d)
• Studying this chapter should provide you with the strategic management knowledge needed to: Explain the two ways value can be created with an unrelated diversification strategy. Discuss the incentives and resources that encourage diversification. Describe motives that can encourage managers to overdiversify a firm.

Copyright © 2004 South-Western. All rights reserved.

6–3

The Strategic Management Process

Figure 1.1
Copyright © 2004 South-Western. All rights reserved. 6–4

The Role of Diversification
• Diversification strategies play a major role in the behavior of large firms • Product diversification concerns: The scope of the industries and markets in which the firm competes How managers buy, create and sell different businesses to match skills and strengths with opportunities presented to the firm

Copyright © 2004 South-Western. All rights reserved.

6–5

Two Strategy Levels
• Business-level Strategy (Competitive)
Each business unit in a diversified firm chooses a business-level strategy as its means of competing in individual product markets

• Corporate-level Strategy (Companywide)
Specifies actions taken by the firm to gain a competitive advantage by selecting and managing a group of different businesses competing in several industries and product markets Copyright © 2004 South-Western. All rights reserved. 6–6

Corporate-Level Strategy: Key Questions
• Corporate-level Strategy’s Value
The degree to which the businesses in the portfolio are worth more under the management of the company than they would be under other ownership What businesses should the firm be in? How should the corporate office manage the group of businesses? Business Units

Copyright © 2004 South-Western. All rights reserved. 6–7

Levels and Types of Diversification

Figure 6.1
SOURCE: Adapted from R. P. Rumelt, 1974, Strategy, Structure and Economic Performance, Boston: Harvard Business School.

Copyright © 2004 South-Western. All rights reserved.

6–8

Diversifying to Enhance Competitiveness
• Related Diversification
Economies of scope Sharing activities Transferring core competencies Market power Vertical integration

• Unrelated Diversification
Financial economies Efficient internal capital allocation Business restructuring Copyright © 2004 South-Western. All rights reserved. 6–9

Reasons for Diversification
• Incentives and Resources with Neutral Effects on Strategic Competitiveness: Antitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Tangible resources Intangible resources Copyright © 2004 South-Western. All rights reserved. 6–10

Reasons for Diversification (cont’d)
• Managerial Motives (Value Reduction)
Diversifying managerial employment risk Increasing managerial compensation

Copyright © 2004 South-Western. All rights reserved.

6–11

Strategic Motives for Diversification
To Enhance Strategic Competitiveness:
• Economies of scope (related diversification) Sharing activities Transferring core competencies • Market power (related diversification) Blocking competitors through multipoint competition Vertical integration • Financial economies (unrelated...
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