Corporate Level Strategy:

Creating Value through

Diversification
Corporate Strategy
• Corporate strategy involves decisions relating to the choice of
businesses, allocation of resources among different businesses,
transferring skills and capabilities from one set of businesses to
others.
• Corporate strategy is concerned with two basic issues:
• What businesses should a firm compete in?
• How can these businesses be coordinated and managed so that they create
“Synergy.”
• Synergy means that the whole is greater than the sum of its parts. In
organisational terms, synergy means that as separate departments
within an organisation co-operate and interact, they become more
productive than if each were to act in isolation.
• Synergy can take place in one of the forms:
• Shared Know-how
• Coordinated Strategies
• Shared Tangible Resources
• Economies of Scale or Scope
• Pooled Negotiating Power:
Expansion Strategies
• Growth strategies are the most widely pursued corporate strategies.
Companies that do business in expanding industries must grow to
survive. A company can grow internally by expanding its operations or
it can grow externally through mergers, acquisitions, joint ventures or
strategic alliances.
• Categories of Growth Strategies: Growth strategies can be divided
into three broad categories:
1. Intensive Strategies
2. Integration Strategies
3. Diversification Strategies
Intensive/Concentration Strategies
• Without moving outside the organisation’s current range of products or
services, it may be possible to attract customers by intensive advertising,
and by realigning the product and market options available to the
organisation. These strategies are generally referred to as intensification or
concentration strategies.
• There are three important intensive strategies:
• Market penetration: Market penetration seeks to increase market share
for existing products in the existing markets through greater marketing
efforts.
• Market Development: Market development seeks to increase market share
by selling the present products in new markets.
• Product Development: Product development seeks to increase the market
share by developing new or improved products for present markets.
Integrative Strategies
• Integration basically means combining activities relating to the
present activity of a firm. Such a combination can be done on the
basis of the industry value chain.
• A firm can pursue vertical integration by starting its own operations or
by acquiring a company already performing the activities it wants to
bring in house. Thus, integration is basically of two types:
1. Vertical integration
2. Horizontal integration
Vertical Integration
• Expanding the firm’s range of activities backward into the sources of supply and/or
forward into the distribution channels is called “Vertical Integration”. There are two types
of vertical integration:
• Backward Integration: Backward integration involves gaining ownership or increased control of a
firm’s suppliers.
• Forward Integration: Forward integration involves gaining ownership or increased control over
distributors or retailers.
• Advantages of Vertical Integration: The following are the advantages of vertical
integration:
1. A secure supply of raw materials or distribution channels.
2. Control over raw materials and other inputs required for production or distribution
channels.
3. Access to new business opportunities and technologies.
4. Elimination of need to deal with a wide variety of suppliers and distributors.
• Risks
1. Increased costs, expenses and capital requirements.
2. Loss of flexibility in investments.
3. Problems associated with unbalanced facilities or unfulfilled demand.
4. Additional administrative costs associated with managing a more complex set of activities.
Horizontal Integration
• Horizontal integration is a strategy of seeking ownership or increased
control over a firm’s competitors. It is also termed as horizontal
diversification.
• This strategy generally involves the acquisition, merger or takeover of one
or more similar firms operating at the same stage of the industry value
chain.
• Horizontal integration is an appropriate strategy when:
1. A firm competes in a growing industry.
2. Increased economies of scale provide a major competitive advantage.
3. A firm has both the capital and human talent needed to successfully manage an
expanded organisation.
4. Competitors are faltering due to lack of managerial expertise or resources, which the
firm has.
Diversification Strategies
• Diversification is the process of adding new businesses to the existing
businesses of the company. It adds new products or markets to the existing
ones.
• Diversification into both Related and Unrelated Businesses: Some
companies may diversify into both related and unrelated businesses. The
actual practice varies from company to company.
• There are three types of enterprises in this respect:
1. Dominant business enterprises: In such enterprises, one major “core” business
accounts for 50 to 80 per cent of total revenues and the remaining comes from small
related and unrelated businesses
2. Narrowly diversified enterprise: These are enterprises that are diversified around a
few (two to five) related or unrelated businesses .
3. Broadly diversified enterprises: These enterprises are diversified around a wide-
ranging collection of related and unrelated businesses.
Unrelated Diversification:
Financial Synergies and Parenting
• In non-related diversification the creation of synergies derives from
the interaction of the corporate office with the individual business
units.
• There are two main sources of such synergies.
• First, the corporate office can contribute to “parenting” and restructuring of
businesses.
• Second, the corporate office can add value by viewing the entire corporation
as a family or “portfolio” of businesses and allocating resources to optimize
corporate goals of profitability, cash flow, and growth
Corporate Parenting
• Parenting advantage: the positive contributions of the corporate office to a
new business as a result of expertise and support provided from corporate
office.
• Parent companies improve plans and budgets and provide especially
competent central functions such as legal, financial, human resource
management, procurement, and the like. Such contributions often help
business units to substantially increase their revenues and profits.
• They also help subsidiaries make wise choices in their own acquisitions,
divestitures, and new internal development decisions.
• They work to improve a range of operating activities, such as new product
development processes, sales force activities, quality improvement, and
supply chain management.
Corporate Restructuring
• The intervention of the corporate office in a new business that substantially
changes the assets, capital structure, and/or management.
• It includes selling off parts of the business, changing the management, reducing
payroll and unnecessary sources of expenses, changing strategies, and infusing
the new business with new technologies, processes, and reward systems.
• Restructuring can involve changes in assets, capital structure, or management.
• Asset restructuring involves the sale of unproductive assets, or even whole lines of
businesses, that are peripheral. In some cases, it may even involve acquisitions that
strengthen the core business.
• Capital restructuring involves changing the debt-equity mix, or the mix between different
classes of debt or equity.
• Management restructuring typically involves changes in the composition of the top
management team, organizational structure, and reporting relationships.
Portfolio Management

• Portfolio management is a method of (a) assessing the competitive

position of a portfolio of businesses within a corporation, (b)
suggesting strategic alternatives for each business, and (c) identifying
priorities for the allocation of resources across the businesses.
• The key purpose of portfolio models is to assist a firm in achieving a
balanced portfolio of businesses. This consists of businesses whose
profitability, growth, and cash flow characteristics complement each
other and adds up to a satisfactory overall corporate performance.
• The Boston Consulting Group’s (BCG) growth/share matrix is among
the best known of these approaches
 Boston Consulting Group’s (BCG) approach
• SBU is plotted on a two-dimensional grid in
which the axes are relative market share and
industry growth rate.
• Each of the four quadrants of the grid has
different implications for the SBUs that fall into
the category:
• Stars are SBUs competing in high-growth industries
with relatively high market shares. These firms have
long-term growth potential and should continue to
receive substantial investment funding.
• Question Marks are SBUs competing in high-growth
industries but having relatively weak market shares.
Resources should be invested in them to enhance
their competitive positions.
• Cash Cows are SBUs with high market shares in low-
growth industries. These units have limited long-run
potential but represent a source of current cash flows
to fund investments in “stars” and “question marks.”
• Dogs are SBUs with weak market shares in low-growth
industries. Because they have weak positions and
limited potential, most analysts recommend that they
be divested.
Benefits & limitations of Portfolio Analysis
• It provides a snapshot of the businesses in a corporation’s portfolio.
• The corporate office can provide high-quality review and coaching for
the individual businesses.
• Portfolio analysis provides a basis for developing strategic goals and
reward/evaluation systems for business managers.
• It compare SBUs on only two dimensions, making the implicit but
erroneous assumption.
• Unless care is exercised, the process becomes largely mechanical,
substituting an oversimplified graphical model.