Chapter 6
Corporate-Level Strategy
CHAPTER OVERVIEW
LEARNING OBJECTIVES
LECTURE NOTES
6-1 LEVELS OF DIVERSIFICATION
6-1a Low Levels of Diversification
6-1b Moderate and High Levels of Diversification
6-4 UNRELATED DIVERSIFICATION
6-4a Efficient Internal Capital Market Allocation
6-4b Restructuring of Assets
6-5 VALUE-NEUTRAL DIVERSIFICATION: INCENTIVES AND RESOURCES
6-5a Incentives to Diversify
6-5b Resources and Diversification
INSTRUCTOR’S NOTES FOR MINDTAP
What Would You Do?
Video Quiz
Guided Case
You Make The Decision
Group Project
Chapter 6: Corporate-Level Strategy
CHAPTER OVERVIEW
Chapters 4 and 5 concentrated on business-level strategies used by firms competing in a
single industry or product market. This chapter focuses on corporate-level strategies used
by firms to diversify into several businesses or product markets. The primary reason a firm
seeks to become more diversified is to create additional value.
Economies of scope and market power are the main sources of value creation when the
firm uses a corporate-level strategy to achieve moderate to high levels of diversification.
The related diversification corporate-level strategy helps the firm create value by sharing
activities or transferring competencies between different businesses in the company’s
portfolio. Sharing activities usually involves sharing tangible resources between
businesses and is usually associated with the related constrained diversification corporate–
level strategy. Activity sharing is costly to implement and coordinate, may create unequal
benefits for the divisions involved in the sharing, and can lead to fewer managerial risk-
taking behaviors. Transferring core competencies is often associated with related linked
(or mixed related and unrelated) diversification, although firms pursuing both sharing
activities and transferring core competencies can also use the related linked strategy.
Chapter 6: Corporate-Level Strategy
LEARNING OBJECTIVES
1. Define corporate-level strategy and discuss its purpose.
2. Describe different levels of diversification achieved using different corporate-level
Lecture Notes
Chapter Introduction: Chapters 4 and 5 looked at strategy at the level of the business and
focused on the factors and approaches that can lead to competitive advantage and superior
performance. Chapter 6 takes this a step further by considering strategy at a higher level—
OPENING CASE
Amazon’s Successful Growth Through Its Corporate Diversification Strategy
This Opening Case recounts the evolution of Amazon through related diversification. This
strategy has allowed the company to grow from a retailer of books to a retailer of almost
Teaching Note
Explore the evolution of Amazon with students. Ask why this book seller’s initial
Chapter 6: Corporate-Level Strategy
1
Define corporate-level strategy and discuss its purpose.
Chapters 4 and 5 centered on selecting and implementing a business-level or competitive
strategy—actions a firm should take to compete in a single industry or product market—
and the actions and responses that affect the competitive dynamics of a single industry or
product market.
In contrast, when a firm diversifies by operating in several industries, corporate-level
A corporate-level strategy details actions taken to gain a competitive advantage through
the selection and management of a mix of businesses competing in several industries or
product markets. Primary concerns of corporate-level strategy are as follows:
• What businesses should the firm operate?
Teaching Note
Chapter 11 covers the unique organizational structure that is required by this strategy.
6-1 LEVELS OF DIVERSIFICATION
Diversified firms vary according to two factors:
• The level of diversification
• Connection or linkages between and among business units
Figure Note
Chapter 6: Corporate-Level Strategy
FIGURE 6.1
Levels and Types of Diversification
Figure 6.1 should be used as a reference point during your discussion of diversification
types. Direct students’ attention to the interunit linkages depicted on the right side of
Figure 6.1.
Levels and types of diversification defined in Figure 6.1 and discussed in more detail in
the next sections of this chapter are as follows:
Low levels of diversification:
Very high levels of diversification:
• Unrelated diversification
2
Describe different levels of diversification achieved using
different corporate-level strategies.
6-1a Low Levels of Diversification
Firms that follow single- or dominant-business strategies have low levels of
diversification. A single business is a firm where more than 95 percent of revenues is
generated by the dominant business.
Teaching Note
McIlhenny Company is an example of a single business firm. It has maintained its focus on
Chapter 6: Corporate-Level Strategy
A dominant business is a firm that generates between 70 and 95 percent of its sales within
a single business area.
Teaching Note
United Parcel Service (UPS) is an example of a dominant business firm because,
6-1b Moderate and High Levels of Diversification
A related diversified firm is one that earns at least 30 percent of its revenues from sources
outside the dominant business and whose units are related to each other (e.g., by the
sharing of resources and by product, technological, and distribution linkages).
Unrelated diversified (or highly diversified) firms do not share resources or linkages, as
illustrated in Figure 6.1. Firms that pursue unrelated diversification strategies—often
known as conglomerates—include United Technologies Corporation, Samsung, and
Textron.
Teaching Note
Many firms that have at one time pursued unrelated diversification strategies are
restructuring to focus on a less diversified mix of businesses, a move that may reflect:
Chapter 6: Corporate-Level Strategy
STRATEGIC FOCUS
Caterpillar Uses the Related Constrained Diversification Strategy
U.S.-based global leader Caterpillar classifies its many businesses into four main
categories: construction industries, energy and transportation, resource industries, and
Teaching Note
Ask students to explain why Caterpillar fits the profile of a company using a related
constrained diversification strategy. Using the revenue data provided in the text, show
3
Explain three primary reasons firms diversify.
6-2 REASONS FOR DIVERSIFICATION
Teaching Note
The content of this section generally is limited to a discussion of Table 6.1, which
provides some of the reasons that firms implement diversification strategies. The
Chapter 6: Corporate-Level Strategy
Firms may implement diversification strategies that are either value-neutral or result in
devaluation of the firm. They may attempt to diversify:
• To neutralize a competitor’s market power
Table Note
Table 6.1 presents reasons or motives for implementing diversification strategies which
are discussed in the following chapter sections.
TABLE 6.1
Reasons for Diversification
Firms follow diversification strategies for many reasons. These can be grouped into three
broad sets of motives:
Motives to create value:
• Economies of scope (related diversification) through activity sharing and the transfer of
core competencies
Motives that are value-neutral with respect to strategic competitiveness are used to:
• Avoid violations of antitrust regulations
Chapter 6: Corporate-Level Strategy
Managerial or value-reducing motives are used to:
• Diversify managerial employment risk
• Increase managerial compensation
Figure Note
As illustrated in Figure 6.2, firms seek to create value by sharing activities and
FIGURE 6.2
Value-Creating Diversification Strategies: Operational and Corporate Relatedness
Firms seek to create value from economies of scope through two basic kinds of
operational economies: sharing activities and transferring skills (corporate core
competencies). However, these levels will lead to different corporate strategies with
different advantages associated.
Resulting Strategy
Economies for Advantage
Vertical integration
Market power
relatedness
diseconomies of scope
Related linked
Economies of scope
6-3 VALUE-CREATING DIVERSIFICATION: RELATED
CONSTRAINED AND RELATED LINKED DIVERSIFICATION
Firms implement related diversification strategies in order to achieve and exploit
economies of scope and build a competitive advantage by building on existing resources,
capabilities, and core competencies.
Chapter 6: Corporate-Level Strategy
The difference between activity sharing and core competence sharing is based on how
different resources are used jointly to create economies of scope:
• To create economies of scope, tangible resources such as plant and equipment or other
A key to creating value through sharing essentially separate activities is to share know-how or
skills rather than physical or tangible resources.
6-3a Operational Relatedness: Sharing Activities
Because all of its businesses share product and technological and distribution linkages,
activity sharing is common among related constrained diversified firms, such as Proctor &
Gamble (P&G).
P&G’s paper towel and disposable diaper units can share many activities due to their
common characteristics:
• Each business uses paper products as a key input, so they are likely to share key facets of
procurement and inbound logistics, as well as primary manufacturing activities.
Activity sharing can also result in new risks since closer linkages between business units
create tighter interrelationships and/or interdependencies. For example, if two business
units share production facilities and sales in one unit’s products decline to the point that
revenues no longer cover the costs of shared production, then each business unit’s ability
to achieve strategic competitiveness may be adversely affected.
Chapter 6: Corporate-Level Strategy
• Acquiring firms in the same industry—a horizontal acquisition—where sharing of activities
4
Describe how firms can create value by using a related
diversification strategy.
6-3b Corporate Relatedness: Transferring of Core Competencies
Over time, most firms develop intangible resources that can become a foundation for
corporate-level core competencies that are competitively valuable. In diversified firms,
these core competencies generally are made up of managerial and technical knowledge,
experiences, and expertise.
The related linked diversification strategy helps firms create value in at least two ways.
• Any costs related to developing the competence have already been incurred.
Teaching Note
As an example, Philip Morris acquired Miller Brewing at a time when competition in
the brewing industry was focused on establishing efficient operations.
• Philip Morris used marketing competencies coming from the competitive cigarette
industry.
Chapter 6: Corporate-Level Strategy
Other firms have focused on transferring a variety of resources/capabilities across
businesses in their control.
• Virgin has transferred its marketing skills across travel, cosmetics, music, drinks, and other
retail businesses.
Firms can facilitate the transfer of competencies between or among business units by
moving key personnel into new management positions in the receiving unit. However,
research suggests that transferring expertise often does not lead to performance
improvement.
Teaching Note
It is good to help students understand the human dimensions of strategic decisions. For
example, expertise transfers may be difficult or costly because of the following:
6-3c Market Power
Firms may implement related diversification strategies in an attempt to gain market power.
• Market power exists when a firm is able to sell its products at prices above the existing
competitive level, decrease the costs of its primary activities below the competitive level,
or both.
Chapter 6: Corporate-Level Strategy
Firms also might gain market power by following a vertical integration strategy, which
Vertical integration enables a firm to increase market power by:
• Developing the ability to save on its operations
Establishing a market price would result in high search and transaction costs, so firms seek
to vertically integrate rather than remain separate businesses.
Teaching Note
As an example of vertical integration, CVS, a Walgreen’s competitor, recently merged
Like other strategies that create value and aid in achieving strategic competitiveness,
vertical integration may not be the perfect answer because of risks and costs that
accompany it.
• Outside suppliers may be able to provide inputs at a lower cost (and, possibly also of a
higher quality).
Chapter 6: Corporate-Level Strategy
Many manufacturing firms no longer pursue vertical integration. In fact, deintegration is
the focus of most manufacturing firms, such as Intel and Dell, and even among large
automobile companies, such as Ford and General Motors, as they develop independent
6-3d Simultaneous Operational Relatedness and Corporate Relatedness
As Figure 6.2 suggests, some firms simultaneously seek operational and corporate
relatedness to create economies of scope. Because simultaneously managing two sources
of knowledge is very difficult, such efforts often fail, creating diseconomies of scope.
A Bit of Disney History: A Mini-Case
By using operational relatedness and corporate relatedness, Disney made $3 billion
on the 150 products that it marketed with its movie, The Lion King. Sony’s Men in
Chapter 6: Corporate-Level Strategy
5
Explain the two ways value can be created with an unrelated
diversification strategy.
6-4 UNRELATED DIVERSIFICATION
Firms implementing unrelated diversification strategies hope to create value by realizing
6-4a Efficient Internal Capital Market Allocation
Although capital generally is efficiently distributed in a market economy through the
capital markets, large diversified firms may be able to distribute capital more efficiently to
divisions and thus create value for the overall organization. This generally is possible
because:
One implication of increased access to information is that the internal capital market may
be able to allocate resources between investment opportunities more accurately (and at
more adequate levels) than the external capital market. There are several reasons for this.
• Information disclosed to capital markets through annual reports may not fully disclose
negative information, reporting only positive prospects while meeting all regulatory
disclosure requirements.
Chapter 6: Corporate-Level Strategy
16
Other advantages of internal capital markets are as follows:
• Corrective actions may be more efficiently structured and underperforming management
can be more effectively disciplined through the internal capital market than through
Research suggests that in efficient capital markets, the unrelated diversification strategy
may be discounted. Stock markets have applied what some have called a “conglomerate
discount” which is reflected in the valuation of diversified manufacturing conglomerates
at 20 percent less, on average, than the value of the sum of their parts.
STRATEGIC FOCUS
Berkshire Hathaway and SoftBank Use Similar Unrelated Strategies
Two firms—U.S.-based Berkshire Hathaway and Japan-based SoftBank—are using the
unrelated strategy. Berkshire Hathaway has both dominant ownership positions and
Teaching Note
Ask students to explain how Berkshire Hathaway and SoftBank fit the profile of an
organization using the unrelated strategy. In what ways does this strategy create value
for the organization? For consumers?
Chapter 6: Corporate-Level Strategy
6-4b Restructuring of Assets
A restructuring approach to creating value in an unrelated diversified firm involves the
buying and selling of other companies (and their assets) in the external market.
Tyco International: A Question of Ethics
Under former CEO Dennis L. Kozlowski, Tyco International, Ltd. excelled at
exploiting financial economies through restructuring. Tyco focused on two types of
acquisitions: platform, which represented new bases for future acquisitions, and add-
Success in implementing unrelated diversification strategies usually requires that firms:
• Focus on firms in mature, low-technology industries
6-5 VALUE-NEUTRAL DIVERSIFICATION: INCENTIVES
AND RESOURCES
As mentioned earlier, not all firms diversify to increase the value of the overall firm.
Firms sometimes implement diversification to prevent their value from decreasing.
Chapter 6: Corporate-Level Strategy
6-5a Incentives to Diversify
Antitrust Regulation and Tax Laws
In the 1960s and 1970s, government policies—in the form of antitrust enforcement and
tax laws—provided U.S. firms with incentives to diversify their mix of businesses.
Because of these policies, the vast majority of mergers during the period represented
unrelated diversification. They were classified as conglomerate mergers.
business].
At the same time, investment bankers aggressively promoted merger and acquisition activity
to the extent that many acquisitions were classified as unfriendly or hostile takeovers.
Firms that had diversified (in an unrelated fashion) in the 1960s and 1970s began to
implement strategies to refocus their firms, and an era of restructuring began.
When firms generate more cash than they are able to profitably reinvest in the firm’s
primary activities, the excess funds, or “free cash flows,” should be returned to