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1

corporate level strategy is interested in what two questions

1. what business or businesses should the firm be in AND
2. How the firm should manage the different business units

2

Define corporate-level stategy

specific actions a firm takes to gain an advantage by selecting and managing a group of different businesses

3

value of corporate level strategy

determined by the degree to which the businesses in the portfolio are worth more under the management of the company than they would be under any other ownership
ex: GE is having to sell off some of there businesses in certain industries (involved in jet engines, locomotives, medical industries, appliances, lighting, turbines/power, etc)
-strategy: if GE was not in first or second place in an industry, they would sell/spin it off
-exemplifies that if you get too diversified, it gets difficult effectively manage all of your divisions

4

diversification

involves using expertise and knowledge gained in one business to diversify into a business where it can be used in a related way

5

decisions diversified companies often make

1. How should we enter other industries
-internal start up operations (building new business from scratch). Pro - clean slate. Con - start up costs will be high, uncertainty
-joint venture (forming a new corporate entity owned by two or more companies) (usually necessary for communist countries ie China, Russia). Pro - . Con -
-Acquisition (of established, troubled, or up and coming company). Pro - . Con - . (Ex: Walmart to acquire Humana)
2. how to develop investment priorities within the company
-give more money to business units that have potential for higher earnings (ex: Caterpillar - )
-make poor performing units increase ROE OR... make the decision to divest a business unit and focus resources elsewhere

6

Corporate Level Strategy Example - P & G

Ex. 1: Proctor & Gamble’s Diversification Strategy
Pre-2005: Product mix focused on women and baby care
2005: Acquired Gillette, which focused on consumer health care products geared toward men

Synergy created by combining Gillette’s toothbrush (Oral-B) and P&G’s toothpaste (Crest) businesses to create Pro-Health oral care product line
-Good for retailers (shelf space)
-Strategy had potential but was more difficult to create operational relatedness between the products
-----Comingle employees requiring actual physical re-location/talent exit
-----Different ways to make business decisions
-----Conflicting organizational cultures
-In 2007, Pro-Health overtook Colgate in market share

7

Levels of diversification

1.Low level of diversification
Single-business strategy
Dominant-business strategy
2. Moderate-to-high levels of diversification
Related constrained diversification strategy
Related linked diversification strategy
3. Very high levels of diversification
Unrelated diversification
**see ppt for diagram

8

low level business diversification

Single-business strategy
-Firm generates 95% or more of its sales revenue from its core business area
-Example (pre-2008): Wm. Wrigley Jr. Company—the world’s largest producer of chewing and bubble gums
------Post-2008  Acquired by Mars Inc.
------Pitfalls of single business strategy (CD’s, Checks)

Dominant-business strategy
-Firm generates 70-95% of total sales revenue within a single business area
-Example: UPS generated 74% of revenue from U.S. package delivery business; 17% from international package business; 9% from non-package business

9

Moderate-to-High Diversification

Related constrained diversification strategy
-< 70% of revenue comes from the dominant business
-There are DIRECT LINKS between the firm's businesses (e.g., share products, technology; marketing; and distribution linkages)
-Typically considered the best model and most profitable
-Example: Campbell’s (they do more than just soup [ie tomato juice V8, Prego, goldfish, etc.). Most of their products use one common ingredient - tomatoes AND are distributed in the same place - grocery store. Results in economies of scale)

Related linked diversification strategy
Mix between related and unrelated diversification
-Linked firms share fewer resources and assets among their businesses
-Interested in constantly adjusting the mix in their portfolio of businesses and how to manage the businesses
-Example: Rachel Ray


10

Very High Diversification

Unrelated diversification strategy
-Less than 70% of revenue comes from dominant business
-No relationships between businesses
-Often called conglomerates
-Example: Jarden Corporation, Berkshire Hathaway, Bicycle, Crock Pot

11

3 reasons firms diversify

1. Value-creating reasons
Economies of scope
Market power
Vertical Integration
Financial economies

2. Value-neutral reasons
Antitrust regulation
Tax laws
Low performance
Uncertain future cash flows
Risk reduction for firm
Tangible resources
Intangible resources

3. Value-reducing reasons
Diversifying managerial employment risk
Increasing managerial compensation

12

Value creating reasons to diversify

Based a desire to develop resources that will enhance strategic competitiveness
Ok, but how?
Two main ways diversification strategies can create value
Operational relatedness: sharing activities between businesses
Ex: P&G’s paper towel business and baby diaper business both use paper products as inputs; the firm’s paper production plant produces inputs for both businesses
Corporate relatedness: transferring core competencies into business
Ex: Honda’s competence in engine design and manufacturing to motorcycles, lawnmowers, cars and trucks
Often achieved via transferring or hiring personnel with competencies

13

Operational and Corporate Relatedness Value

the values these create are referred to as
-Economies of scope
-market power
-financial economics

14

Economies of scope

(for related constrained and related-linked strategies)
Cost savings created by sharing its resources/capabilities or transferring core competencies of one businesses to another of its businesses

15

Market power

(for related constrained and related-linked strategies)
Exists when a firm sells its products above competitive levels and/or reduces the cost of its Value Chain activities below competitive levels
Influenced by a firm’s level of vertical integration

16

Financial Economics

(for unrelated diversification)
Cost savings realized via improved allocations of financial resources based on investments inside or outside the firm—2 main types
Efficient internal capital allocations can reduce risk of the firm’s portfolio
Restructuring of acquired assets

17

Value neutral reasons to diversify

External value-neutral reasons
-Antitrust Regulation and Tax Laws
-----Deregulation
-----Changing tax laws

Internal value-neutral reasons
-Low Performance
-Uncertain Future Cash Flows
-Firm Risk Reduction
-Resources and Diversification
-----Excess tangible resources like plant and equipment, sales force, etc.

18

value reducing reasons to diversify

Managerial Motives
-Diversifying managerial employment risk
-----If one business fails, the whole firm will stay intact
-Increasing managerial compensation
-----Larger firms are more complex
Generally mean larger compensation packages

19

International strategy

A strategy through which the firm sells its goods/services outside of its domestic market.

20

liability of foreigness

Difficulties firms face as they seek to manage complexities involved with international expansions/operations
Example: Disney suffered lawsuits in France because of HR policies when opened Disneyland Paris

21

International strategies examples

Ex. 1: Shanghai Automotive Industry Corp (SAIC)
One of China’s oldest auto companies; top 3 auto firms in China
Sells autos, tractors, motorcycles, trucks, offers car leasing/financing
To grow in Chinese markets pursued joint ventures with GM & VW
Ultimate Goal: Become one of the world’s top 10 auto companies
Note: All major auto firms compete in U.S. market
SAIC learned from JV and licensed technology; launched own branded vehicles
Now competing with GM and VW in China and wants to move in US
Ex. 2: Disney
1992, Disney moved into Europe with Euro Disney in Paris
Plagued with problems, called a “Eurodismal”
Disney suffered from liabilities of foreignness

22

four reasons firms pursue internationa lstrategies

1. increased market size - Help firms maintain growth objectives
Example: Pharmaceutical firms entering China; soft drinks

2. greater returns on major investments - Larger markets can help firms recoup investments more quickly

3. greater economies of scale and learning - Standardized manufacturing operations can easily capture scale economies
New learning opportunities are presented to firms

4. competitive advantage via location - Access to low-cost labor, energy, natural resources, supplies, customers
Example: GM’s expansion to Asia to access customers

23

2 types of intl strategies

1. business level intl strategy
2. coprorate level intl strategy

24

business level intl strategy

Generic strategies applied to business units competing internationally
-partially based on Porter's "Determinants of National Advantage"

25

corporate level intl strategy

-Focuses on the scope of a firm’s operations through product and geographic diversification
-Required when firm operates in multiple countries or regions
-Required when firm operates in multiple industries and countries/regions

26

Determinants of National Advantage

-factors of production
-demand conditions
-firm strategy, structure, and rivalry
-related and supporting industriesth

Ex: Milan = fashion capital of world
-tailors, materials, etc.
-many italians care about how they look so demand to be fashionable and look good is high
-
-

27

three corporate level strategies

1. global
2. multidomestic
3. transnational

28

Global Corporate Strategy

Firm offers standardized products across country markets with decision mostly dictated by the home office
-products are standardized, made the same across the world
Example: Nike; eBay (initially in China and Japan)

29

Multidomestic Corporate Strategy

Decisions are mostly decentralized to the business unit in each country, allowing the unit to tailor products to the local market
Example: Fast food; eBay (as a joint venture with Tom Online, Inc.), KFC (in America they sell fried chicken but in China they offer a different taste to cater to different place), Oreo in America is sweeter than oreos in China

30

Transnational Corporate Strategy

Firm seeks both global efficiency and local responsiveness
Difficult to use because of conflicting goals
Example: P&G uses global product business units and multidomestic market development organizations to appeal to different tastes

31

5 main modes of Intl Entry and Competition

From easiest to hardest

Exporting
Licensing
Strategic Alliances
Acquisitions
New Wholly-Owned Subsidiary (“Greenfield Venture”)

32

licensing

Allows a foreign company to purchase the right to manufacture and sell a firm’s products within host country or set of countries
Good for tactical moves and early market entry
Example: Disney (US) licensed characters to LEGO (Denmark) to launch product line in US in 2010

Pros
Firm authorizes another firm to manufacture and sell its products
Licensing firm is paid a royalty on each unit produced and sold
Licensee takes risks in manufacturing investments
Least risky and costly way to enter a foreign market

Cons
Licensing firm loses control over product quality and distribution
Relatively low profit potential
A significant risk is that licensor learns technology and competes when license expires



ex: Universities use licensing fees so when other businesses manufacture UD clothing, they have to pay a fee to Dayton

33

Exporting

Many firms begin int’l expansion via exporting goods/services to other countries
Good for early-market entry and for small businesses

Pros
Common way to enter new int’l markets
No need to establish operations in other countries
Establish distribution channels through contractual relationships with host countries

Cons
May have high transportation costs
May encounter high import tariffs
May have less control on marketing & distribution
Difficult to customize products

34

Strategic alliances

Two or more firms develop a relationship to share their unique resources and capabilities to create an competitive advantage in an int’l location
Good in uncertain situations; for tactical moves; early market entry
Example: Sony (Japan) and Ericsson (Sweden) created Sony Ericsson

Pros
Firms to share risks and resources to expand into int’l ventures
Most involve a foreign company with a new product or technology and a host company with access to distribution or knowledge of local customs, norms or politics



Cons
May experience difficulties in merging disparate cultures
May not understand the strategic intent of partners or experience divergent goals

35

Acquisitions

Cross-border acquisitions
Good for securing stronger presence in int’l markets
Example: 1999, Wal-Mart entered the UK by acquiring ASDA

Pros
Most rapid international expansion
Quick access to a new market


Cons
Can be very costly
Legal and regulatory requirements may present barriers to foreign ownership
Usually require complex and costly negotiations
Potentially disparate corporate cultures

36

New wholly owned subsidiary

Creation of a new venture, called a greenfield venture
Good for securing stronger presence in int’l markets
Example: 2007, FedEx opened Hangzhou subsidiary in China

Pros
Achieves greatest degree of control (e.g., full control)
Potentially most profitable, if successful
Maintain control over technology, marketing and distribution
Cons
Most costly and complex of entry alternatives
May need expertise and knowledge that is relevant to host country
May require hiring host country nationals or consultants at high cost
Must build/acquire manufacturing facilities, distribution networks, marketing strategies

37

major risks in Intl Environments

1. Political/Legal Forces
Government instability - Greece, Venezuela
Conflict or war
Government regulations
Conflicting and diverse legal authorities
Potential nationalization of private assets
Government corruption
Changes in government policies

2. Economic Forces
Differences and fluctuations in currency values
Investment losses due to political risks