Strategic Management:
Concepts and Cases
Part II: Strategic Actions: Strategy Formulation
Chapter 6: Corporate-Level Strategy
1
The Strategic Management Process
2
Chapter 6: Corporate-Level Strategy
 Overview: Seven content areas







Define and discuss corporate-level strategy
Different levels of diversification (N=3)
Three primary reasons firms diversify
Value creation: related diversification strategy
Value creation: unrelated diversification strategy
Incentives and resources encouraging diversification
Mgmt motives encouraging firm overdiversification
3
Procter & Gamble’s Diversification Strategy
 Purpose of diversification: Use expertise and
knowledge gained in one business by diversifying
into a business where it can be used in a related way
Builds synergy(协同): value added by corporate office
adds up to more than the value if different businesses in
the portfolio were separate and independent
Exp. 1+1>2

 Procter & Gamble (P&G)
 Product mix: beauty products targeting women and baby
care products
 2005: Acquired Gillette (consumer health care products)
focused on masculine market(男性市场)
4
 Found: 1837
 Headquarter: Cincinnati, Ohio,
 Products:
Health Care , household articles , Child care articles
 Brands: over 300

technology centers: 28
 Patents: over 29，000
5
Question
Can you tell me some
brands of P&G?
6
Brand
7
Brand
8
Procter & Gamble’s Diversification Strategy
 Procter & Gamble (P&G) (Cont’d)
 Synergy created with combining toothbrush and
toothpaste（牙膏） businesses



Had to sell off product lines with Gillette acquisition, lost
some prospective market power
Good for retailers (shelf space)
Although strategy appeared to have potential, it was more
difficult to create actual operational relatedness between the
products
 Employees requiring actual physical re-location/talent exit
 Different ways to make business decisions
 Conflicting organizational cultures
9
Chapter 6: Corporate-Level Strategy
 Overview: Seven content areas







Define and discuss corporate-level strategy
Different levels of diversification
Three primary reasons firms diversify
Value creation: related diversification strategy
Value creation: unrelated diversification strategy
Incentives and resources encouraging diversification
Management motives encouraging firm
overdiversification
10
Introduction
 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 than they would be under
any other ownership

Product diversification (PD): primary form of corporate-level
strategy
11
Chapter 6: Corporate-Level Strategy
 Overview: Seven content areas







Define and discuss corporate-level strategy
Different levels of diversification (N=3)
Three primary reasons firms diversify
Value creation: related diversification strategy
Value creation: unrelated diversification strategy
Incentives and resources encouraging diversification
Mgmt motives encouraging firm overdiversification
12
Levels of Diversification (N=3)
 1. Low Levels

Single Business Strategy


Corporate-level strategy in which the firm generates 95% or
more of its sales revenue from its core business area
Dominant Business Diversification Strategy

Corporate-level strategy whereby firm generates 70-95% of total
sales revenue within a single business area
13
Levels of Diversification (N=3)
(Cont’d)
 2. Moderate to High Levels


Related Constrained Diversification Strategy

Less than 70% of revenue comes from the dominant business

Direct links (I.e., share products, technology and distribution
linkages) between the firm's businesses
Related Linked Diversification Strategy (Mixed related
and unrelated)

Less than 70% of revenue comes from the dominant business

Mixed: Linked firms sharing fewer resources and assets among
their businesses (compared with related constrained, above),
concentrating on the transfer of knowledge and competencies
14
among the businesses
UNI-President
15
16
Levels of Diversification (N=3 )
(Cont’d)
 3. Very High Levels: Unrelated

Less than 70% of revenue comes from dominant business

No relationships between businesses
Hutchison Whampoa Limited(和记黄埔有限公司)

Five core businesses:
Ports and related services, telecommunication, property
and hotels, retail and manufacturing, energy and
infrastructure.
17
Levels and Types of Diversification
18
Discussion
In your opinion, which
type of diversification is more
difficult? why?
19
Reasons for Diversification
P153
 A number of reasons exist for diversification
including

Value-creating




Operational relatedness: sharing activities between
businesses
Corporate relatedness: transferring core competencies
into business
Value-neutral
Value-reducing
20
Value-Creating Diversification Strategies:
Operational and Corporate Relatedness
21
Chapter 6: Corporate-Level Strategy
 Overview: Seven content areas







Define and discuss corporate-level strategy
Different levels of diversification (N=3)
Three primary reasons firms diversify
Value creation: related diversification strategy
Value creation: unrelated diversification strategy
Incentives and resources encouraging diversification
Mgmt motives encouraging firm overdiversification
22
Value-Creating Diversification (VCD):
Related Strategies
 Purpose: Gain market power relative to
competitors
 Related diversification wants to develop and exploit
economies of scope between its businesses

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
 VCD: Composed of ‘related’ diversification
strategies including Operational and Corporate
relatedness
23
24
25
26
Value-Creating Diversification (VCD):
Related Strategies
(Cont’d)
 1. Operational Relatedness: Sharing activities
 Can gain economies of scope
 Share primary or support activities (in value chain)
 Risky as ties create links between outcomes
 Related constrained share activities in order to create
value
 Not easy, often synergies（协同） not realized as
planned
27
28
Question
What kind of activities and
resources can be shared by
businesses of Microsoft?
29
Value-Creating Diversification (VCD):
Related Strategies
(Cont’d)
 2. 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



Expense incurred in first business and knowledge transfer
reduces resource allocation for second business
Intangible resources difficult for competitors to understand and
imitate, so immediate competitive advantage over competition
Use related-linked diversification strategy
30
Value-Creating Diversification (VCD):
Related Strategies
(Cont’d)
 Market Power


Exists when a firm is able to sell its products above the
existing competitive level, to reduce costs of primary and
support activities below the competitive level, or both.
Multimarket (or Multipoint) Competition(多点竞争)
Exists when 2 or more diversified firms simultaneously compete
in the same product or geographic markets.
虚拟一体化


Related diversification strategy may include

Vertical Integration（纵向一体化）YOUNGOR

Virtual integration （虚拟一体化）-DELL
31
Multimarket (or Multipoint) Competition
Business:
Business:
real estate,
investment, import &
export, construction
materials, furniture,
nonferrous metals
(有色金属)
real estate,
investment,
import & export,
home appliance,
supermarket chains.
32
Value-Creating Diversification (VCD):
Unrelated Strategies
 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（重组） 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
33
Danone
34
Rankings of Danone
35
Chapter 6: Corporate-Level Strategy
 Overview: Seven content areas







Define and discuss corporate-level strategy
Different levels of diversification
Three primary reasons firms diversify
Value creation using related diversification strategy
Value creation using unrelated diversification
strategy
Incentives and resources encouraging
diversification
Mgmt motives encouraging firm overdiversification
36
Value-Neutral Diversification:
Incentives and Resources
 Incentives to Diversify





Antitrust Regulation and Tax Laws
Low Performance
Uncertain Future Cash Flows
Synergy and Firm Risk Reduction
Resources and Diversification
37
The Curvilinear Relationship between
Diversification and Performance
38
Question
Why firms that are more
broadly diversified may have
lower performance?
39
Chapter 6: Corporate-Level Strategy
 Overview: Seven content areas







Define and discuss corporate-level strategy
Different levels of diversification
Three primary reasons firms diversify
Value creation using related diversification strategy
Value creation using unrelated diversification
strategy
Incentives and resources encouraging diversification
Mgmt motives encouraging firm overdiversification
40
Value-Reducing Diversification:
Managerial Motives to Diversify
 Top-level executives may diversify in order to
diversity their own employment risk, 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
41
Summary Model of the Relationship Between
Diversification and Firm Performance
P167
42
Case Analysis
43
Case Analysis
44
Case Analysis
45
Case Analysis
46
Task 1
1、Topic for next time:
What are the advantages of
diversification?
2、 Read the book P149-153
47
Task 2
Translate the 1-2 paragraphs on
page 152-153 of “Reasons for
Diversification”.
48