a strategic analysis of an organisation in the Transport industry.

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MGT30005 Strategic Planning in Dynamic Environment

Corporate-level Strategy

CRICOS 00111D TOID 3059

Introduction

This session will address the following issues:

• Understand the nature of corporate-level strategy

and be able to identify and explain various types of

corporate strategies

• Identify the conditions under which diversification

creates value for shareholders

• Related diversification and unrelated diversification

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Case study: Marks & Spencer

• Corporate strategy poses questions for companies like Marks &

Spencer, one of the oldest clothing retailers in the world. Having

been in business and reached such a massive scale, the types of

choices an organisation such as this makes become larger in scale

as well. Organisations must consider questions of scope, such as

which markets they wish to compete in, and how diverse to make

the range of products or services they offer. They must also think

about the appropriate corporate structure that will best enable them

to function within their markets of choice.

• How do you think a clothing retailer

might approach decisions of market

penetration and diversification?

Definition

• Corporate-level strategy is about how and

where a company, as a whole, competes.

• There are two key questions to address:

1. In what product markets and

businesses should the firm compete?

2. How should corporate headquarters

manage those businesses?

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Purposes of Corporate-level Strategy

• Three purposes of this strategy include:

– Corporate parenting: The corporate parent is

expected to grow the overall organisation by

creating value for its individual businesses

– Business portfolios: Organisations need to

decide what new businesses should be added

to the portfolio

– Portfolio matrices: There is a need to

approach this in a rational and systematic

manner

Different aspects of corporate-level strategy

• Many aspects influence corporate-level strategy including: – Product scope (diversification) - How specialised

should the company be in terms of the range of products?

– Geographical scope (multinationality) - What is the optimal geographical spread of activities?

– Vertical scope (vertical integration) - What range of vertically linked activities should the company encompass?

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Different types of corporate-level strategy

Fig. 8.1

Setting Direction

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Diversification strategy

• Diversification strategy refers to a company’s decision to expand its operations by adding new products and services, markets, or stages of production to the existing business

• The purpose of diversification is to allow the company to enter lines of business that are different from current operations

• There are two types of diversification: related and unrelated diversifications

Related diversification • When more than 30% of a firm’s sales

volume is outside its dominant business

and its businesses are related, it is

classified as related diversification.

• transfer core competencies and

capabilities to different portfolios.

• Examples

– Qantas

– Apple

–BHP Billiton

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Unrelated Diversification

• Less than 70% of revenue comes from the

dominant business, and there are no

common links between businesses.

• cannot transfer core competencies and

capabilities to different portfolios but

finance resources

• Example

– Virgin

– General Electric

– Wesfarmers

Drivers of diversification

Diversification has been driven by three major goals:

• Growth

• widening the company’s range of potential investment

• Risk reduction

• cash flows of different businesses

• Profitability

• The attractiveness test.

• The cost-of-entry test.

• The better-off test

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Diversification and market power

• Diversification can increase a company’s

market power

• The following four mechanisms are

particularly important:

• Predatory pricing

• Bundling

• Reciprocal dealing

• Mutual forbearance

LEVELS AND

TYPES OF

DIVERSIFICATI

ON

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Single business strategy

Corporate-level strategy in which the firm generates 95 per cent or more of its sales revenue from its core business area

• Example: Wrigley – Wm. Wrigley Jr. Company, the world’s largest producer of chewing

and bubble gums, historically used a single-business strategy while operating in few product markets.

– In 2005, Wrigley employed the dominant-business strategy when it acquired the confectionary assets of Kraft Foods Inc., including Life Savers and Altoids.

– In 2008, Wrigley was acquired by Mars, a privately held global confectionary company.

Dominant business diversification strategy

Corporate-level strategy whereby firm generates 70–95 per cent of total sales revenue within a single business area •Example: United Parcel Service (UPS)

LOW LEVELS OF DIVERSIFICATION

Related constrained diversification strategy

• Less than 70 per cent of revenue comes from the

dominant business.

• There are direct links (i.e. shared products,

technology and distribution linkages) between the

firm’s businesses.

• Examples: Proctor & Gamble

MODERATE TO HIGH LEVELS OF

DIVERSIFICATION

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Quiz

The scope of corporate level strategy refers

to:

a. Vertical, geographical, and product scope

b. Common concepts used in micro-economics

c. Concepts used in the Porter's five forces

model of competition

d. Different activities related to the risk they

entail

REASONS FOR DIVERSIFICATION

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VALUE-CREATING DIVERSIFICATION: RELATED DIVERSIFICATION

Sharing Activities

(Operational Relatedness)

Transferring Core

Competencies (Corporate

Relatedness)

Creation of

Economies of Scope

VALUE-CREATING DIVERSIFICATION: UNRELATED DIVERSIFICATION

Unrelated diversification creates value through two types of financial economies:

• cost savings realised through improved allocations of financial resources based on investments inside or outside firm

– efficient internal capital market allocation

• the restructuring of acquired assets.

– Firm A buys firm B and restructures assets so it can operate more profitably and then A sells B for a profit in the external market.

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Incentives to diversify

VALUE-NEUTRAL DIVERSIFICATION: INCENTIVES AND RESOURCES

External Incentives Internal Incentives

Antitrust regulations Low Performance

Tax laws Uncertain Future Cash Flows

Synergy & Firm Risk Reduction

VALUE-REDUCING DIVERSIFICATION

MANAGERIAL MOTIVES TO DIVERSITY

Top-level executives may diversify in order to diversity their own employment risk, as long as profitability does not suffer excessively.

• Diversification adds benefits for top-level managers but not shareholders.

• This strategy may be held in check by governance mechanisms or concerns for one’s reputation.

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THE CURVILINEAR RELATIONSHIP

BETWEEN DIVERSIFICATION

AND PERFORMANCE

https://www.youtube.com/watch?v=3jTyZl25Llo

INTERNAL INCENTIVES TO DIVERSITY

Low performance

Low performance is an

incentive for diversification

as corporations chase

profitable firms (or divest

poor performers).

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INTERNAL INCENTIVES TO DIVERSITY

Diversification may be a

defensive strategy if:

• the product line matures

• the product line is threatened

• the firm is small and is in a

mature or maturing industry.

Low performance

Uncertain future cash

flows

INTERNAL INCENTIVES TO DIVERSITY

Low performance

Uncertain future cash

flows

Synergy and risk reduction

• Synergy exists when the value created by

businesses working together exceeds the

value created by them working

independently.

• However, synergy creates joint

interdependence between business units.

• A firm may reduce the level of

technological change by operating in more

certain environments, resulting in more

related types of diversification.

• A firm may become risk averse, constrain

its level of activity sharing and forgo

potential benefits of synergy, resulting in

more unrelated types of diversification.

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Quiz

Distinguishing related and unrelated businesses

within a firm requires:

a. Establishing whether the businesses fall within

the same 2-digit SIC code

b. Whether the businesses share common

customers or common technologies

c. Whether the businesses have the potential to

share common resources and capabilities

d. All of the above

Case: Woolworths Mobile

• Smartphones are only as smart as the

network they’re on. That’s why Woolworths

Mobile uses parts of Telstra's 4G and 3G

network, covering over 23 million

Australians. That's an incredible 1.59

million square kilometres of coverage.

• Is it a case of diversification?