Chapter 6: Corporate-Level Strategy
These changes in federal tax laws that affected individual tax rates for dividends and
capital gains (with the former decreasing and the latter increasing) have created an
incentive for shareholders to favor reduced levels of diversification (after 1986) unless
funded by tax-deductible debt.
Low Performance
When firms are able to earn above-average or superior returns in a single business, they
have little incentive to diversify. However, low performance may provide an incentive for
diversification as a low-performing firm may become more risk seeking in an effort to
improve overall firm performance.
Figure Note
The relationship between level of performance and diversification (for firms that
already have diversified) is illustrated in Figure 6.3.
FIGURE 6.3
The Curvilinear Relationship between Diversification and Performance
As Figure 6.3 illustrates, firms exhibiting low performance in their dominant businesses
often implement related constrained diversification strategies that, to a certain point, result
in increased performance.
Chapter 6: Corporate-Level Strategy
Teaching Note
DaimlerChrysler had to deal with the challenges that were created partly by its failed
diversification efforts. The firm faced the task of reversing this strategy, which started
Uncertain Future Cash Flows
Firms also may implement diversification strategies when their products reach maturity (in
the product life cycle) or are threatened by external factors that the firm cannot overcome.
Thus, firms may view diversification as a survival strategy.
Synergy and Firm Risk Reduction
As you will recall from the discussion earlier in this chapter, firms that diversify in pursuit
of economies of scope take advantage of linkages between primary value-creating
activities to realize synergy from sharing.
Chapter 6: Corporate-Level Strategy
To eliminate this risk, firms may:
• Operate in more certain environments to reduce the level of technological change and
However, these decisions could lead firms:
Research suggests that a firm using a related diversification strategy is more careful in
bidding for new businesses, whereas a firm pursuing an unrelated diversification strategy
6-5b Resources and Diversification
In addition to having incentives to diversify, a firm also must possess the correct mix of
resources—tangible, intangible, or financial—that makes diversification feasible.
The excess capacity of tangible resources may be used to justify diversification, especially
when the firm sees opportunities for activity sharing. However, value creation may be
possible only in related diversification. Remember, using tangible resources also creates
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7
Describe motives that can encourage managers to over
diversify a firm.
6-6 VALUE-REDUCING DIVERSIFICATION: MANAGERIAL
MOTIVES TO DIVERSIFY
Some managers may be motivated to diversify their firms even if there are no incentives,
and a lack of resources can constrain inclinations toward diversification. Managers’
motives for diversification include the following:
Teaching Note
Advise students that corporate governance is covered in much greater detail in Chapter
10. The discussion in this chapter is introductory in nature.
If properly structured and used, governance structures—such as the firm’s board of
directors, performance monitoring, executive compensation limits, and the market for
corporate control—may provide the means to exert control over managers’ tendencies to
over diversify because of self-interest motives.
Chapter 6: Corporate-Level Strategy
In spite of the preceding comments, most managers take positive strategic actions (such as
those related to diversification) that result in overall firm profitability and contribute to the
strategic competitiveness of the firm.
One signal that the firm may be over diversified is when operating diversified businesses
reduces, rather than improves, the overall performance of the firm.
Figure Note
Two factors appearing in Figure 6.4 are discussed in greater detail in future chapters:
and firm performance.
FIGURE 6.4
Summary Model of the Relationship between Diversification and Firm Performance
As shown in Figure 6.4, a firm’s diversification strategy is determined by several
interrelated factors such as the following:
• Value-creating influences (economies of scope, market power, financial economics)
The relationship between diversification strategy and firm performance is moderated by:
• Capital market intervention and the market for managerial talent with which the
diversification strategy is implemented
Chapter 6: Corporate-Level Strategy
ANSWERS TO REVIEW QUESTIONS
1. What is corporate-level strategy and why is it important?
Corporate-level strategies are strategies that detail actions taken to gain a competitive
advantage through the selection and management of a mix of businesses competing in
2. What are the different levels of diversification firms can pursue by using different
corporate-level strategies?
Low levels of diversification: Single- and dominant-business firms represent those for
which at least 95 percent and 70 percent of total sales, respectively, come from a single
Moderate to high levels of diversification: A firm that generates more than 30 percent of
its revenue outside a dominant business and that has businesses that are somehow related
uses a related diversification corporate-level strategy. When the links between the
Chapter 6: Corporate-Level Strategy
3. What are three reasons firms choose to diversify their operations?
Firms may choose to move from a single- or dominant-business position to a more
diversified position for three general reasons. First (value-creating), they do this to
4. How do firms create value when using a related diversification strategy?
Activity sharing and transferring core competencies are used to obtain economies of
scope while pursuing a related diversification strategy because cost savings are attributed
Chapter 6: Corporate-Level Strategy
5. What are the two ways to obtain financial economies when using an unrelated
diversification strategy?
Two ways to obtain financial economies when pursuing an unrelated diversification
strategy are establishing an efficient internal capital market and restructuring the assets of
6. What incentives and resources encourage diversification?
Incentives that encourage diversification include antitrust regulation, tax laws, low firm
7. What motives might encourage managers to over diversify their firm?
Managers might be encouraged to push a firm toward a more diversified position to
reduce the risk of job loss by diversifying employment risk (so long as profitability does
Chapter 6: Corporate-Level Strategy
MINI CASE
Walt Disney Company Corporate Strategy
Note: To prepare students for class discussion and to introduce them to the
fundamentals of the Strategic Management process, each chapter Mini-Case is
The Walt Disney Company has pursued a related diversification strategy by capitalizing
on the synergies among its movies, TV shows, media distribution channels, theme parks,
and consumer products. Disney’s strategy is successful because its corporate strategy,
compared to its business-level strategy, adds value across its set of businesses above what
Teaching Note
Allow students to brainstorm several examples of links across Disney businesses, such
as movies based on theme park rides and retail products based on film characters. Why
is this strategy successful in creating value?
Answers to Case Discussion Questions
1. What corporate diversification strategy is being pursued by Disney? What evidence do
you have that supports your position?
Although the case does not provide an exact breakdown of Disney’s revenues, it appears
2. How does the corporate office create a parental advantage, which is difficult to duplicate
by its more focused competitors?
Disney’s knowledge of its customers, content creation, retail marketing power, and
Chapter 6: Corporate-Level Strategy
3. What are synergies and economies of scope and how do they work at Disney to lower its
overall costs?
When a diversified organization has synergy or economies of scope across its business
4. Given the diversification approach that Disney uses, what are some things they can do to
deal further with the trend toward cord-cutting and competition from large streaming and
content producers such as Netflix, Amazon, and other content producers?
Disney has both the resources and capabilities to compete directly with streaming content
ADDITIONAL QUESTIONS AND EXERCISES
The following questions and exercises can be presented for in-class discussion or assigned as
homework.
Application Discussion Questions
1. There is a curvilinear relationship between diversification and performance. Ask students
how this relationship can be modified so that the negative relationship between
performance and diversification is reduced and the downward curve has less slope or
begins at a higher level of diversification.
Chapter 6: Corporate-Level Strategy
29
4. One rationale for pursuing related diversification is to obtain market power. In the United
States, however, too much market power may result in a challenge by the U.S. Justice
Ethics Questions
1. Propose the following statement: “Those managing an unrelated diversified firm face far
more difficult ethical challenges than do those managing a dominant-business firm.”
INSTRUCTOR’S NOTES FOR MINDTAP
Cengage offers additional online activities, assessments and resources inside MindTap,
Course Level Resource: Cornerstone to Capstone Diagnostic- features short quizzes in
the key business areas of: Finance, Marketing, Accounting, Management and Economics.
Averaging between 7-9 questions per topical area, these quizzes are designed to help
students review content from courses offered earlier in the business curriculum, so they
are prepared to succeed in the Strategic Management course.
Chapter Level Resources:
• What Would You Do Video
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30
• MindTap Reader (eBook)
• Assignments:
o Multiple Choice Quiz
Course Level Case Resources:
• Text Cases (Readings)
• Group Case Activities (Group Case Assignments)
• Supplemental Cases (Readings)
ADDITIONAL INFORMATION FOR SELECT MINDTAP RESOURCES:
Chapter 6: Corporate-Level Strategy
WHAT WOULD YOU DO? STARBUCKS
This exercise introduces students to strategic decisions as they are made in the real world.
Students should come to class prepared to discuss this exercise, and why they chose the
answer they did. All answers are graded as correct – the point of the exercise is to engage
your student’s interest.
Students watch a brief video about how Starbucks bought La Boulange and are asked what
they would do to get the maximum return on their investment over the next three years?
VIDEO QUIZ: STARBUCKS
The media quiz offers additional opportunities for students to apply the concepts in the
chapter to a real-world scenario as it is described in news reports.
Title: Starbucks
RT: 2:30
Topic Key: International strategy, Business-level strategy, Corporate-level strategy,
National advantage
Starbucks built a top international brand by offering coffee-related drinks. However, it has
Suggested Discussion Questions and Answers
• By purchasing La Boulange what competitive advantage, does Starbucks hope to gain?
In implementing a corporate-level strategy, Starbucks redefines its business model
Chapter 6: Corporate-Level Strategy
• How does Starbucks’ current market power increase its chances for success in
expanding its product offerings to include bakery items?
Starbucks’ premium brand enables it to charge higher prices for its beverage
• Starbucks’ previous attempts to include food in its product offerings have met with
mediocre results. Currently, only one-third of customers buy food products at
Starbucks. How does using vertical integration increase Starbucks’ financial risk by
buying and operating its own bakery supplier?
Chapter 6: Corporate-Level Strategy
GUIDED CASE: WALT DISNEY CORPORATION
This auto-graded activity asks students to read the short end-of-chapter case on the Walt
Disney Corporation, and answer questions in the areas of Analysis, Strategy, and
Implementation & Performance.
The Walt Disney Company has pursued a related diversification strategy by capitalizing
on the synergies among its movies, TV shows, media distribution channels, theme parks,
In answering the Guided Case Questions, students will review these concepts:
• Related diversification
YOU MAKE THE DECISION: LOCKHEED MARTIN
You Make the Decision branching exercises are real-world activities that allow each
student to work through challenges by choosing from different decision-making options.
These exercises provide students with the opportunity to practice strategic management in
a business scenario utilizing company case studies. Students are placed in the role of a
Chapter 6: Corporate-Level Strategy
Students will choose among competing strategies for developing an international
diversification strategy as Lockheed Martin’s primary customer, the U.S. government,
Students will review these concepts:
• Related and unrelated diversification in value creation
The ideal path that earns a perfect score is the following:
• Choose a related diversification strategy.
• Final: Entering into a collaborative arrangement with Virgin Galactic was an excellent
plan. The other firm has established competencies in many of the areas required to be
successful that you do not have, such as customer service and marketing. By sharing
activities across your firm, you are increasing the chances of Lockheed Martin’s
success of a venture in the private sector for space tourism.
GROUP PROJECT: REVOLUTION OR EVOLUTION:
STRATEGIZING TO GAIN COMPETITIVE ADVANTAGE
The introduction to this chapter defines corporate-level strategy as “actions a firm takes to
Chapter 6: Corporate-Level Strategy
corporate-level strategy for a publicly traded firm and determine how this strategy
increases the company’s value.
Students will be asked to:
• Select an established publicly traded firm.
corporate-level strategy, different levels of diversification, and one background story.
Students will form a research consultancy, providing large firms with background on
corporate-level strategies and recommendations for strategy for their firms. In this group
project, students will have the opportunity to practice valuable strategic management
skills, including research management, strategic thinking, and team building.