Expert answer:Strategic Management Journals

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chapter_6_corporate_level_strategy.docx

ch_6_in_class_slides_v2.pptx

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SMJ#6
Chapter 6 Corporate-level strategy
− What is the difference between business level and corporate level strategies?
Chapter 4 discusses the generic business-level strategy of cost-leadership and
differentiation by discussing a firm’s target market and core competencies that can
support each business-level strategy. The business-level strategies focus on a single
product market, while the corporate level strategies focus on multiple lines of
business/product markets. Hence, the discussion of corporate-level strategy centers on
the notion of diversification.
The extent of corporate diversification is classified based on 1) the number of product
markets served by the firm as well as 2) whether the product markets are related
businesses. In Figure 6.1, the levels of diversification are classified into a low level of
diversification, including a single business and dominant business, a moderate to high level
of diversification, including related constrained and related linked diversification, as well
as a very high level of diversification, which contains only unrelated diversification (Hitt et
al., 2017, p, 176).
In the textbook, the concept of related diversification is not clearly defined, but implied
in Figure 6.2 in which operational relatedness, sharing value-chain activities among
businesses, and corporate relatedness, transferring core competences, are used to
explain the levels of diversification. At the high level of diversification, the business
units in a corporation have a low level of operational relatedness and corporate
relatedness. In the opening case, the Walt Disney Company is used as an example of
related diversification. Does the company have operational relatedness, corporate
relatedness, or both? How is the related diversification contributing to its firm
performance?
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SMJ#6
− When is corporate-level diversification strategy bad for business?
The synergy created through related diversification improves the firm performance
mainly through establishing economies of scope. Economies of scope refers to the “cost
savings a firm creates by successfully sharing 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” (Hitt et al., 2017, p. 180). The economies of scope
contribute to a company’s market power in multipoint competition (i.e. in multiple
product market or geographic areas) as well as vertical integration, when “a company
produces its own inputs (backward integration) or owns its own source of output
distribution (forward integration)” (Hitt et al., 2017, p. 183).
Unrelated diversification can also create value and contribute to firm performance
through financial economies. Financial economies are “cost savings realized through
improved allocations of financial resources based on investment inside or outside the
firm” (Hitt et al., 2017, p. 185). The financial economies can be achieved either through
internal efficient capital allocation by investing in the project with the highest growth
potential or through restructuring acquired businesses and selling the restructured
assets. Given the GE company’s widely diversified business units, was it successful in
creating values? Why or why not?
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If a firm’s diversification strategy doesn’t lead to economies of scope or financial
economies, the firm performance suffers. There are several reasons for firms to engage
in diversification beyond the motive to be profitable, such as the change of tax laws and
C-suit’s self-centered managerial incentives (Hitt et al., 2017, p. 188-194).
Reference: Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2017). Strategic management cases:
competitiveness and globalization. Cengage Learning.
CHAPTER 6
CORPORATE-LEVEL STRATEGY
MGT431 Spring, 2018
“Engineered by Amazon, Fire tablets are high performance
tablets designed for entertainment at an affordable price.”
1.Define corporate-level strategy and discuss its purpose.
WHAT
HAPPENED TO
KINDLE FIRE?
2.Describe how firms can create value by using a related
diversification strategy.
3.Explain the two ways value can be created with an unrelated
diversification strategy.
4.Discuss the incentives and resources that encourage diversification.
5.Describe motives that can encourage managers to over diversify
a firm.
THE ROLE OF DIVERSIFICATION
• Business-level Strategy
(Competitive)
– as its means of competing
in its individual product
market.
• Corporate-level Strategy
(Companywide)
– Specifies actions taken by
the firm to gain a
competitive advantage by
selecting and managing
different businesses
competing in different
product markets.
Corporate-level Strategy’s Value
 The degree to which the businesses in the portfolio
are worth more under the management of the firm
than they would be under other ownership.
 What businesses should
the firm be in?
 How should the corporate
office manage the
group of businesses?
LEVELS OF DIVERSIFICATION
WHEN IS DIVERSIFICATION
GOOD FOR BUSINESS?
Related diversification
 Economies of scope
 Market Power
 Blocking new entrants
 Vertical integration
Unrelated diversification
 Financial Economies
 Efficient internal capital allocations
 Purchase of other corporations and the restructuring their assets
VALUE CREATING DIVERSIFICATION
Economies of Scope
What are various ways for
Disney to create values for
its customers based on its
related diversification?
DISNEY DIVERSIFICATION
External
• Anti-trust laws; Tax laws
Internal
• Low performance
• Uncertain future cash flows
• Managerial motives to diversify
• Employment risk reduction
• Desire for increased compensation
• Build personal performance reputation
WHEN IS
DIVERSIFICATION
BAD FOR
BUSINESS?
GENERAL ELECTRIC COMPANY (GE) STOCK IS SO
DIVERSIFIED, IT HURTS
“Rather than using its vast resources as assets, management somehow found a way to
make them de facto liabilities. General Electric committed several direct errors while
incurring opportunity costs. At the same time, those that kept believing that the
energy/manufacturing/utility/aviation/technology/healthcare/whatever company
would come through with a jab from anywhere were badly let down.
The final nail in the coffin was the competition. Somehow, Honeywell International Inc.
(NYSE:HON) and Koninklijke Philips NV (ADR) (NYSE:PHG) managed to keep things
on the up and up. Both are looking at double-digit returns on a year-to-date basis. In
a perfectly inversed contrast, GE stock is down 19% year-to-date.”
CURTAIL BAD DIVERSIFICATION
Ch. 8 Cooperative strategies
Ch. 9 Corporate governance
Ch. 10 International strategy
Ch. 11 Organizational structure and
control
HOMEWORK
1. SMJ6
2. SAP Team Milestone 4 internal analysis due March 14 (Wednesday)


Wednesday prepare Value chain activities
Friday prepare financial statement analysis
3. Current Event Business Case Analysis Presentation (20 points) Sign-up
Week 9: March 12&14; Week 10: March 19&21, Week 11: March 26&28, Week
12: April 2&4

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