How to Top Strategic Management

CHAPTER 6 – Corporate Level Strategy

* When a firm chooses to diversify its operations beyond a single industry and to operate businesses in several industries, it is pursuing a corporate-level strategy of diversification

Levels of diversification

1. Low levels of diversification

* Single business - > 95% of revenue comes from a single business

* Dominant business – Between 70 – 95% of revenue comes from a single business

2. Moderate to high levels of diversification

* Related constrained - < 70% of revenue comes from the dominant business and all businesses share product, technological and distribution linkages

* Related linked (mixed related and unrelated) - < 70% of revenue comes from the dominant business, and there are only limited links between businesses

3. Very high levels of diversification

* Unrelated - < 70% of revenue comes from the dominant business and there are no common links between businesses

Motives, incentives and resources for diversification

1. Economies of scope (related diversification) – sharing activities, transferring core competencies

2. Market power (related diversification) – blocking competitors through multi-point competition, vertical integration

3. Financial economies (unrelated diversification) – efficient internal capital allocation, business restructuring

4. Managerial motives – diversifying managerial employment risk, increasing managerial compensation

Value-creating strategies of diversification: Operational and corporate relatedness

Related diversification

* A strategy through which the firm intends to build upon or extend its existing resources, capabilities and core competencies in the pursuit of strategic competitiveness

* Such firms seek to exploit economies of scope between business units

* Economies of scope are cost savings attributed to transferring the capabilities and competencies developed in one business to a new...