DEVELOPING

CORPORATE STRATEGY
Prepared by Merkulov Nikita
(Y240712)
 CORPORATE STRATEGY
Corporate strategy must address issues related to
decisions about entering or exiting an industry.
Specifically, effective corporate strategies must answer
three interrelated questions:

• In which business arenas should our company compete?

• How can we, as a corporate parent, add value to our various
lines of business?
• How will diversification or our entry into a new industry help
us compete in our other businesses?
 SYNERGY
Synergy occurs when the
combined benefits of a
firm's activities in two or
more arenas are more than
the simple sum of those
benefits alone. Thus,
although fundamentally
related to each other
through the common goal of
achieving competitive
advantage, business
strategy and corporate
 DIVERSIFICATION
Diversification
refers to the
degree to which
a firm conducts
business in
more than one
arena.
DIVERSIFICATION IN THE US
In the United States, the first form of organizational
diversification was probably vertical integration.
This term refers to diversification into upstream
and/or downstream industries.

Soon after, the conglomerate model emerged.

Conglomerates are corporations consisting of many
companies in different businesses or industries.
 DIVERSIFICATION IN THE US
The US
corporation ITT's
portfolio
managed to
accommodate
telephones,
donuts, hotels,
and insurance.
The figure
depicts
a brief history of
the
 PORTFOLIO PLANNING
One of the most popular management tools in that era
was portfolio planning – the practice of mapping
diversified businesses or products based on their relative
strengths and market attractiveness.

Portfolio planning was initially intended to help managers

evaluate the diversified firm and achieve a balanced
portfolio of large, stable businesses and high growth ones,
such that resources could be channeled to fuel growth.
PORTFOLIO PLANNING
The starting point
in the portfolio
planning
process required
the firm to analyze
businesses in terms
of their market
share and growth
prospects.

The figure on the

left shows a
PORTFOLIO PLANNING: DRAWBACKS
Several aspects of the portfolio planning approach have been debunked:
1) It provides no fundamental competitive logic for which businesses
should be entered and which should be maintained.
2) The sources of synergies among businesses — beyond the generation
and usage of cash — are not recognized.
3) There is no accounting for the VRINE-based resources and capabilities
that allow a firm to be successful in one business, but perhaps not
another.

Overly simplistic tools like this lead to questionable diversification moves

such as a telecommunication company entering the hotel industry simply
because the growth opportunities are attractive.
ECONOMIC LOGIC OF DIVERSIFICATION
Expanding the firm's scope — whether the addition of new
vertical, horizontal, complementary, or geographic arenas —
doesn't necessarily create value for shareholders. Strategists
need to understand the sources of potential value creation
from diversification, and they need to know how to determine
whether a firm can leverage those sources.

Two concepts are critical in evaluating opportunities for

diversification and value creation: economies of scope and
revenue-enhancement. Collectively, these are often referred
 ECONOMY OF SCOPE
Economy of scope is the condition under which
lower total average costs result from sharing
resources to produce more than one product or
service.

The concept of economies of scope can be

represented
by the following formula:
 REVENUE ENHANCEMENT
Revenue enhancement exists when total sales
are greater if two products are sold and distributed
within one company than when they are owned by
separate companies.

The concept of revenue enhancement can be

represented
by the following formula:
DIVERSIFICATION: DRAWBACKS
Economy-of-scope savings generally result when a firm uses
common resources across business units. Whenever a
common resource can be used across more than one business
unit, the company has the potential to generate economies of
scope.

Revenue enhancement synergy may result from a variety of

tactics, such as bundling products that were previously sold
separately, sharing complementary knowledge in the interest
of new-product innovation, or increasing shared distribution
DIVERSIFICATION: RELATED AND UNRELATED
Two things increase a firm's level of diversification:
1) the number of separate businesses it operates;
2) the degree of relatedness of those businesses.

Relatedness is typically assessed by how similar the

underlying industries are. The most diversified firms are those
that own lots of businesses in very disparate industries; this is
known as unrelated diversification.
Firms that own many businesses clustered in a few industries
are pursuing what is known as related diversification. Both
 STRATEGIC SIMILARITY
A firm’s strategy affects the way in which managers view the
firm's competitive activities and make critical resource
allocation decisions. In general, it is easier to manage a firm
that does not require dissimilar strategies across business
units. This is known as strategic similarity.

If the strategies of its businesses are similar, a firm's

managers can respond more quickly and effectively to
strategic issues. Conversely, when strategies differ
significantly, managers will generally be slower and less
TYPES OF DIVERSIFICATION

Diversification Dimensions

Vertical Horizontal Geographical

 VERTICAL SCOPE
Sometimes a firm expands its vertical scope out of
economic necessity. Perhaps it must protect its supply of a
critical input, or perhaps firms in the industry that supply
certain inputs are reluctant to invest sufficiently to satisfy
the unique or heavy needs of a single buyer.

Increased vertical scope has certain pitfalls: even though

an adjacent segment is profitable, it doesn't follow that it’s
a good area for a firm to enter.
 HORIZONTAL SCOPE
A firm increases its horizontal scope in one of two ways:
1) By moving from an industry market segment into
another segment.
2) By moving from one industry into another.

Horizontal scope is attractive because it offers these

opportunities:
1) The firm can reduce costs by exploiting possible
economies of scope.
 GEOGRAPHICAL SCOPE
A firm typically increases geographic scope by moving
into new geographic arenas without altering its business
model. In its early growth period, for instance, a company
may simply move into new locations in the same country.

More often, however, increased geographic scope has

come to mean internationalization — entering new
markets in other parts of the world.
STRATEGIES FOR ENTERING NEW BUSINESSES

If a firm is contemplating diversification, it

can opt for these methods:
1) Focusing on a niche
2) Using a revolutionary strategy
3) Leveraging existing resources
4) Combining the aforementioned
strategies
COMPETITIVE ADVANTAGE
Competitive advantage at the
corporate level is a function of
the fit among arenas, resources,
and organizational systems,
structures, and processes. When
these are connected in a
coherent fashion,
the corporation is more likely
to achieve its long-term
objectives.
DIVERSIFICATION VS. CONCENTRATION
Is diversification ultimately better than concentration? The table below
outlines pros and cons of both strategies:

Diversification Concentration
• Reduces risk • Higher potential returns
+ • Smoother returns • Greater control
• Protection against uncertainty • Efficient capital use

• Lower upside potential • Higher risk

—
• Can lead to mediocrity • Requires expertise

At the end of the day, it is up to companies themselves whether they

should diversify or concentrate. Diversification is better for safety and
consistency while concentration is better for outsized gains.
 DEVELOPING
CORPORATE STRATEGY
Prepared by Merkulov Nikita
(Y240712)