1. STRATEGIC
ACTIONS:
STRATEGY
FORMULATION
Corporate-Level StrategyCorporate-Level Strategy

2. 6–3
The Role of DiversificationThe Role of Diversification
• Diversification strategies play a major role in theDiversification strategies play a major role in the
behavior of large firms.behavior of large firms.
• Product diversification concerns:Product diversification concerns:
 The scope of the industries and markets in which theThe scope of the industries and markets in which the
firm competes.firm competes.
 How managers buy, create and sell differentHow managers buy, create and sell different
businesses to match skills and strengths withbusinesses to match skills and strengths with
opportunities presented to the firm.opportunities presented to the firm.

3. 6–4
Two Strategy LevelsTwo Strategy Levels
• Business-level Strategy (Competitive)Business-level Strategy (Competitive)
 Each business unit in a diversified firm chooses aEach business unit in a diversified firm chooses a
business-level strategy as its means of competing inbusiness-level strategy as its means of competing in
individual product markets.individual product markets.
• Corporate-level Strategy (Companywide)Corporate-level Strategy (Companywide)
 Specifies actions taken by the firm to gain aSpecifies actions taken by the firm to gain a
competitive advantage by selecting and managing acompetitive advantage by selecting and managing a
group of different businesses competing in severalgroup of different businesses competing in several
industries and product markets.industries and product markets.

4. 6–5
Corporate-Level Strategy: Key QuestionsCorporate-Level Strategy: Key Questions
• Corporate-level Strategy’s ValueCorporate-level Strategy’s Value
 The degree to which the businesses in the portfolioThe degree to which the businesses in the portfolio
are worth more under the management of theare worth more under the management of the
company than they would be under other ownership.company than they would be under other ownership.
 What businesses shouldWhat businesses should
the firm be in?the firm be in?
 How should the corporateHow should the corporate
office manage theoffice manage the
group of businesses?group of businesses?
Business UnitsBusiness Units

5. 6–6
Levels of Diversification: Low LevelLevels of Diversification: Low Level
Dominant BusinessDominant Business
Between 70% and 95% ofBetween 70% and 95% of
revenue comes from a singlerevenue comes from a single
business.business.
AA
AA
BB
Single BusinessSingle Business
More than 95% of revenueMore than 95% of revenue
comes from a single business.comes from a single business.

6. 6–7
Levels of Diversification: Moderate to HighLevels of Diversification: Moderate to High
• Related ConstrainedRelated Constrained
 Less than 70% of revenueLess than 70% of revenue
comes from a singlecomes from a single
business and allbusiness and all
businesses sharebusinesses share
product, technologicalproduct, technological
and distribution linkages.and distribution linkages.
• Related Linked (mixedRelated Linked (mixed
related and unrelated)related and unrelated)
 Less than 70% of revenueLess than 70% of revenue
comes from the dominantcomes from the dominant
business, and there are onlybusiness, and there are only
limited links betweenlimited links between
businesses.businesses.
CC
AA
BBCC
AA
BB

7. 6–8
Levels of Diversification: Very High LevelsLevels of Diversification: Very High Levels
• Unrelated DiversificationUnrelated Diversification
 Less than 70% of revenue comes from the dominantLess than 70% of revenue comes from the dominant
business, and there are no common links betweenbusiness, and there are no common links between
businesses.businesses.
CCBB
AA

8. 6–11
High Low
Value-Creating Strategies of DiversificationValue-Creating Strategies of Diversification
Operational and Corporate Relatedness
Corporate Relatedness: Transferring Skills into
Businesses through Corporate Headquarters
Operational
Relatedness:
Sharing
Activities
between
Businesses
High
Low
Related ConstrainedRelated Constrained
DiversificationDiversification
Vertical IntegrationVertical Integration
(Market Power)(Market Power)
UnrelatedUnrelated
DiversificationDiversification
(Financial Economies)(Financial Economies)
Related LinkedRelated Linked
DiversificationDiversification
(Economies of Scope)(Economies of Scope)
Both Operational andBoth Operational and
Corporate RelatednessCorporate Relatedness
(Rare capability that creates(Rare capability that creates
diseconomies of scope)diseconomies of scope)

9. 6–13
Related DiversificationRelated Diversification
• Firm creates value by building upon orFirm creates value by building upon or
extending:extending:
 ResourcesResources
 CapabilitiesCapabilities
 Core competenciesCore competencies
• Economies of ScopeEconomies of Scope
 Cost savings that occur when a firm transfersCost savings that occur when a firm transfers
capabilities and competencies developed in one of itscapabilities and competencies developed in one of its
businesses to another of its businesses.businesses to another of its businesses.

10. 6–14
Related Diversification: Economies of ScopeRelated Diversification: Economies of Scope
• Value is created from economies of scopeValue is created from economies of scope
through:through:
 Operational relatedness in sharing activitiesOperational relatedness in sharing activities
 Corporate relatedness in transferring skills orCorporate relatedness in transferring skills or
corporate core competencies among units.corporate core competencies among units.
• The difference between sharing activities andThe difference between sharing activities and
transferring competencies is based on how thetransferring competencies is based on how the
resources are jointly used to create economiesresources are jointly used to create economies
of scope.of scope.

11. 6–15
Sharing ActivitiesSharing Activities
• Operational RelatednessOperational Relatedness
 Created by sharing either a primary activity such asCreated by sharing either a primary activity such as
inventory delivery systems, or a support activity suchinventory delivery systems, or a support activity such
as purchasing.as purchasing.
 Activity sharing requires sharing strategic control overActivity sharing requires sharing strategic control over
business units.business units.
 Activity sharing may create risk because business-Activity sharing may create risk because business-
unit ties create links between outcomes.unit ties create links between outcomes.

12. 6–16
Transferring Corporate CompetenciesTransferring Corporate Competencies
• Corporate RelatednessCorporate Relatedness
 Using complex sets of resources and capabilities toUsing complex sets of resources and capabilities to
link different businesses through managerial andlink different businesses through managerial and
technological knowledge, experience, and expertise.technological knowledge, experience, and expertise.

13. 6–17
Corporate RelatednessCorporate Relatedness
• Creates value in two ways:Creates value in two ways:
 Eliminates resource duplication in the need to allocateEliminates resource duplication in the need to allocate
resources for a second unit to develop a competenceresources for a second unit to develop a competence
that already exists in another unit.that already exists in another unit.
 Provides intangible resources (resource intangibility)Provides intangible resources (resource intangibility)
that are difficult for competitors to understand andthat are difficult for competitors to understand and
imitate.imitate.
• A transferred intangible resource gives the unit receiving it anA transferred intangible resource gives the unit receiving it an
immediate competitive advantage over its rivals.immediate competitive advantage over its rivals.

14. 6–18
Related Diversification: Market PowerRelated Diversification: Market Power
• Market power exists when a firm can:Market power exists when a firm can:
 Sell its products above the existing competitive levelSell its products above the existing competitive level
and/orand/or
 Reduce the costs of its primary and support activitiesReduce the costs of its primary and support activities
below the competitive level.below the competitive level.

15. 6–19
Related Diversification: Market PowerRelated Diversification: Market Power
(cont’d)(cont’d)
• Multipoint CompetitionMultipoint Competition
 Two or more diversified firms simultaneously competeTwo or more diversified firms simultaneously compete
in the same product areas or geographic markets.in the same product areas or geographic markets.
• Vertical IntegrationVertical Integration
 Backward integrationBackward integration—a firm produces its own inputs.—a firm produces its own inputs.
 Forward integrationForward integration—a firm operates its own—a firm operates its own
distribution system for delivering its outputs.distribution system for delivering its outputs.

16. 6–20
Related Diversification: ComplexityRelated Diversification: Complexity
• Simultaneous Operational Relatedness andSimultaneous Operational Relatedness and
Corporate RelatednessCorporate Relatedness
 Involves managing two sources of knowledgeInvolves managing two sources of knowledge
simultaneously:simultaneously:
• Operational forms of economies of scopeOperational forms of economies of scope
• Corporate forms of economies of scopeCorporate forms of economies of scope
 Many such efforts often fail because ofMany such efforts often fail because of
implementation difficulties.implementation difficulties.

17. 6–21
Unrelated DiversificationUnrelated Diversification
• Financial EconomiesFinancial Economies
 Are cost savings realized through improvedAre cost savings realized through improved
allocations of financial resources.allocations of financial resources.
• Based on investments inside or outside the firmBased on investments inside or outside the firm
 Create value through two types of financialCreate value through two types of financial
economies:economies:
• Efficient internal capital allocationsEfficient internal capital allocations
• Purchase of other corporations and the restructuring theirPurchase of other corporations and the restructuring their
assetsassets

18. 6–22
Unrelated Diversification (cont’d)Unrelated Diversification (cont’d)
• Efficient Internal Capital Market AllocationEfficient Internal Capital Market Allocation
 Corporate office distributes capital to businessCorporate office distributes capital to business
divisions to create value for overall company.divisions to create value for overall company.
• Corporate office gains access to information about thoseCorporate office gains access to information about those
businesses’ actual and prospective performance.businesses’ actual and prospective performance.
 Conglomerates have a fairly short life cycle becauseConglomerates have a fairly short life cycle because
financial economies are more easily duplicated byfinancial economies are more easily duplicated by
competitors than are gains from operational andcompetitors than are gains from operational and
corporate relatedness.corporate relatedness.

19. 6–23
Unrelated Diversification: RestructuringUnrelated Diversification: Restructuring
• Restructuring creates financial economiesRestructuring creates financial economies
 A firm creates value by buying and selling other firms’A firm creates value by buying and selling other firms’
assets in the external market.assets in the external market.
• Resource allocation decisions may becomeResource allocation decisions may become
complex, so success often requires:complex, so success often requires:
 Focus on mature, low-technology businesses.Focus on mature, low-technology businesses.
 Focus on businesses not reliant on a clientFocus on businesses not reliant on a client
orientation.orientation.

20. 6–24
External Incentives to DiversifyExternal Incentives to Diversify
• Antitrust laws in 1960s and 1970sAntitrust laws in 1960s and 1970s
discouraged mergers that createddiscouraged mergers that created
increased market power (vertical orincreased market power (vertical or
horizontal integration.horizontal integration.
• Mergers in the 1960s and 1970s thusMergers in the 1960s and 1970s thus
tended to be unrelated.tended to be unrelated.
• Relaxation of antitrust enforcementRelaxation of antitrust enforcement
results in more and larger horizontalresults in more and larger horizontal
mergers.mergers.
• Early 2000: antitrust concerns seem toEarly 2000: antitrust concerns seem to
be emerging and mergers now morebe emerging and mergers now more
closely scrutinized.closely scrutinized.
Anti-trustAnti-trust
LegislationLegislation

21. 6–25
External Incentives to Diversify (cont’d)External Incentives to Diversify (cont’d)
• High tax rates on dividends cause aHigh tax rates on dividends cause a
corporate shift from dividends tocorporate shift from dividends to
buying and building companies in high-buying and building companies in high-
performance industries.performance industries.
• 1986 Tax Reform Act1986 Tax Reform Act
 Reduced individual ordinary income taxReduced individual ordinary income tax
rate from 50 to 28 percent.rate from 50 to 28 percent.
 Treated capital gains as ordinaryTreated capital gains as ordinary
income.income.
 Thus created incentive for shareholdersThus created incentive for shareholders
to prefer dividends to acquisitionto prefer dividends to acquisition
investments.investments.
Anti-trustAnti-trust
LegislationLegislation
Tax LawsTax Laws

22. 6–26
Internal Incentives to DiversifyInternal Incentives to Diversify
• High performance eliminates theHigh performance eliminates the
need for greater diversification.need for greater diversification.
• Low performance acts asLow performance acts as
incentive for diversification.incentive for diversification.
• Firms plagued by poorFirms plagued by poor
performance often take higherperformance often take higher
risks (diversification is risky).risks (diversification is risky).
LowLow
PerformancePerformance

23. 6–28
Internal Incentives to Diversify (cont’d)Internal Incentives to Diversify (cont’d)
• Diversification may beDiversification may be
defensive strategy if:defensive strategy if:
 Product line matures.Product line matures.
 Product line is threatened.Product line is threatened.
 Firm is small and is in matureFirm is small and is in mature
or maturing industry.or maturing industry.
LowLow
PerformancePerformance
UncertainUncertain
Future CashFuture Cash
FlowsFlows

24. 6–29
Internal Incentives to Diversify (cont’d)Internal Incentives to Diversify (cont’d)
• Synergy exists when the value createdSynergy exists when the value created
by businesses working togetherby businesses working together
exceedsexceeds the value created by themthe value created by them
working independentlyworking independently
• …… but synergy creates jointbut synergy creates joint
interdependence between businessinterdependence between business
units.units.
• A firm may become risk averse andA firm may become risk averse and
constrain its level of activity sharing.constrain its level of activity sharing.
• A firm may reduce level of technologicalA firm may reduce level of technological
change by operating in more certainchange by operating in more certain
environments.environments.
LowLow
PerformancePerformance
UncertainUncertain
Future CashFuture Cash
FlowsFlows
Synergy andSynergy and
RiskRisk
ReductionReduction

25. 6–31
FIGUREFIGURE 6.46.4
Summary Model of theSummary Model of the
Relationship betweenRelationship between
Firm Performance andFirm Performance and
DiversificationDiversification
Source: R. E. Hoskisson & M. A. Hitt, 1990,
Antecedents and performance outcomes of
diversification: A review and critique of theoretical
perspectives, Journal of Management, 16: 498.