Corporate Level Strategy

1. CORPORATE-LEVEL STRATEGY:
CREATING VALUE THROUGH
DIVERSIFICATION
By: JOHN LEO D. HACHASO

2. CORPORATE-LEVEL STRATEGY
A strategy that focuses on gaining long-term revenue, profits and
market value through managing operation in multiple businesses.
means the overall plan for the future of the business. The strategy
involves decision-making for financials, employees, management,
and goals for the company.

3. There have been several studies that were conducted over a variety of time
periods that show how disappointingly acquisitions have typically turned out. For
example:
A study evaluated the stock market reaction of 600 acquisitions over the period
between 1975 and 1991. The result indicated that the acquiring firms suffered
an average of 4 percent drop in market value(after adjusting for market
movements) in the three months following the acquisitions announcement.
A study investigated 270 mergers that took place between 2000 and 2003 in
multiple countries and regions. It found that after a merger, sales growth
decreased by 6 percent, earnings growth dropped 9.4 percent and market
valuations declined 2.5 percent.

4. Making Diversification Work: An Overview
Diversification
is the process of firms expanding their operations by entering new
business.
Types of Diversification
Diversification into related business (Concentric Diversification)
Harley-davidson’s launch of motorcycle apparael – utilized its brand recognition
and existing customer base to sell Harley-davidson’s clothing and accessories.
Diversification into unrelated businesses (Conglomerate Diversification)
General Electric: A manufacturing giant that has ventured into financial services
and media in the past.

5. Related Diversification: Economies of Scope
and Revenue Enhancement
Economies of scope
It refers to cost savings from leveraging core competencies or sharing
related activities among businesses in the corporation. A firm can also
enjoy greater revenues if two business attain higher levels of sales growth
combined than their company could attain independently.
arise when a company can produce a wider range of related products or
services with a lower overall cost compared to producing them
separately. This cost advantage comes from sharing resources and
capabilities across the different businesses.

6. Leveraging Core Competencies
When a company expands into a related business, it can utilize its existing
strengths and expertise, often called core competencies. This could be
manufacturing processes, marketing know-how, a strong brand reputation,
or established distribution channels.
Core competencies reflect the collective learning in organizations- how to
coordinate diverse production skills, integrate multiple streams of
technologies and market diverse products and services.

7. Three Criteria for a Core Competencies
Creating Superior customer value
Different business in the corporation must be similar in
at least one important way related to the core
competence
Core Competencies must be difficult for competitors to
imitate or find substitute for

8. Sharing Activities
It is having activities of two or more business’ value chains done
by one of the businesses.
Deriving Cost Savings – is the most common type of synergy
and the easiest to estimate. Cost savings come from many
sources, including from the elimination of jobs, facilities and
related expenses that are no longer needed when functions are
consolidated and from economies of scale in purchasing.

9. Related Diversification: Market Power
Market Power – firm’s abilities to profit through restricting or controlling supply to a
market or coordinating with other firms to reduce investment.
Pooled Negotiating Power – Similar business working together or the affiliation of a
business with a strong parent can strengthen an organization’s bargaining position
relative to suppliers and customers and enhance its position vis-à-vis competitors.
Vertical Integration – occurs when a firm becomes its own supplier or distributor.
That is, it represents an expansion or extension of the firm by integrating preceding or
successive production processes. The firm incorporates more processes toward the
original source of raw materials (backward integration) or toward the ultimate
consumer (forward integration).

10. IN MAKING VERTICAL INTEGRATION DECISIONS,
FIVE ISSUES SHOULD BE CONSIDERED:
Is the company satisfied with the quality of the value that its present
suppliers and distributors are providing?
Are there activities in the industry value chain presently being outsourced
or performed independently by others that are viable source of future
profits?
Is there a high level of stability in the demand for the organization’s
products?
Does the company have the necessary competencies to execute the
vertical integration strategies?
Will the vertical integration initiative have potential negative impacts on the
firm’s stakeholders?

11. Benefits and Risk of Vertical Integration
Benefits
A secure source of raw materials
or distribution channels.
Protection of and control over
valuable assets.
Proprietary access to new
technologies developed by the
unit.
Simplified procurement and
administrative procedures.
Risks
Costs and expenses associated
with increased overhead and
capital expenditures.
Loss of flexibility resulting from
large investments.
Problems associated with
unbalanced capacities along the
value chain.
Additional administrative costs
associated with managing a more
complex set of activities.

12. Analyzing Vertical Integration:
The Transaction Cost Perspective
A perspective that the choice of a transaction’s governance structure, such as
vertical integration or market transaction, is influenced by transaction costs,
including search, negotiating, contracting, monitoring and enforcement costs,
associated with each choice.
According to this perspective, every market transaction involves some transaction
cost.
a decision to purchase an input from an outside source leads to search costs (i.e. cost to
find where it is available, the level of quality etc.)
cost associated with negotiating
contract needs to be written spelling out future possible contingencies
parties in a contract have to monitor each other.
Party does not comply with the terms of the contract, there are enforcement costs.

13. CHAPTER 6
CORPORATE
STRATEGY
MARY JUDITH T. PEÑALES
6.4
6.5
6.6
UNRELATED
DIVERSIFICATION:
FINANCIAL SYNERGIES
AND PARENTING
THE MEANS TO ACHIEVE
DIVERSIFICATION
HOW MANAGERIAL
MOTIVES CAN ERODE
VALUE CREATION

14. RELATIONSHIP IN BUSINESS
CORPORATE STRATEGY
Vertical relationships
Horizontal relationships
▪ are basically the business arrangements between buyers and sellers. These
relationships are often said to be between “upstream” parties, such as the original
producer of a good, and “downstream” final users or distributor
▪ include business relationships with firms operating in the same
market level, as competitors or as complementors, that is, producing
substitutable or complementary products (or services)

15. UNRELATED
DIVERSIFICATION
A FIRM ENTERING A
DIFFERENT BUSINESS
THAT HAS LITTLE
HORIZONTAL
INTERACTION WITH OTHER
BUSINESS OF A FIRM.

16. TWO MAIN SOURCES OF SYNERGIES
UNRELATED DIVERSIFICATION
PARENTING ADVANTAGE - THE POSITIVE
CONTRIBUTIONS OF THE CORPORATE OFFICE TO
A NEW BUSINESS AS A RESULT OF EXPERTISE
AND SUPPORT PROVIDED AND NOT AS A RESULT
OF SUBSTANTIAL CHANGES IN ASSETS, CAPITAL
STRUCTURE OR MANAGEMENT.
Corporate Parenting
THE INTERVENTION OF THE CORPORATE OFFICE IN A NEW
BUSINESS THAT SUBSTANTIALLY CHANGES THE ASSETS,
THE CAPITAL STRUCTURE, AND/OR MANAGEMENT,
INCLUDING SELLING OFF PARTS OF THE BUSINESS,
CHANGING THE MANAGEMENT, REDUCING PARYOLL AND
UNNECCESSARY SOURCES OF EXPENSES, CHANGING
STRATEGIES, AND INFUSING THE NEW BUSINESS WITH
NEW TECHNOLOGIES, PROCESSES, AND REWARD
SYSTEMS.
Restructuring

17. 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.
Involves changing the debt-equity mix,
or the mix between different classes of
debt or equity. Although, the
substitution of equity with debt is more
common in buy-out situations,
occasionally the parent may provide
addtional equity capital.
typically involves changes in the composition of the top
management team, organizational structure, and reporting
relationships. Tight financial control, rewards based strictly
on meeting short ot medium-term perfomance goals, and
reductin in the number of middle-level managers are
common steps inmanagement restructuring. In some cases,
parental intervention may even result in changes in strategy
as well as infusion of new technologies and processes
RESTRUCTURING
CAN INVOLVE
CHANGES IN:
Capital
restructuring Management
restructuring

18. PORTFOLIO
MANAGEMENT
A METHOD OF :
IDENTIFYING PRIORITIED FOR
THE ALLOCATION OF RESOURCES
ACROSS THE BUSINESS.
ASSESSING THE
COMPETITIVE POSITION OF A
PORTFOLIO OF BUSINESSES
WITHIN A CORPORATION
SUGGESTING STRATEGIC
ALTERNATIVES FOR EACH
BUSINESS

19. PORTFOLIO MANAGEMENT
• in using portfolio
strategy approaches, a
corporation tries to create
shareholder value in a
number of ways:
1. Portolio analysis
provides a snapshot
of the businesses in a
corporation's
portfolio
3. The corporate office
is able to provide
financial resources to
the business units on
favorable terms that
reflect the
corporation's overall
ability to raise funds.
2. The expertise and
analytical resources in
the corporate office
provide guidance in
determining what firms
may be attractive (or
unattractive)
acquisitions
4. The corporate office
can provife high-
quality review and
coaching for the
individual businesses.
5. Portfolio analysis
provides a basis for
developing strategic goals
and reward/evaluation
systems for business
managers

20. FOUR QUADRANTS
OF THE GRID
• Stars - are SBUs competing
in high-growth industries
with relatively high market
shares. These firms gave 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 a 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
divested

21. LIMITATIONS
1. they compare strategic business unit (SBUs) on only two dimensions, making the
implicit but erroneous assumptions that :
▪ those are the only factor that really matter
▪ every unit can be accurately compared on that basis
2. the approach views each SBU as a stand-alone entity, ignoring common core business
practices and value-creating activities that may hold promise for synergies across business
units.
3. unless care is exercised, the process largely mechanical, substituting an oversimplified
graphical model for the important contributions of the CEO's (and other corporate managers')
experience and judgment.
4. the reliance on "strict rules" regarding recource allocation across SBUs can be
detrimental to a firm's long-term viability.
5. while colorful and easy to comprehend, the imagery of portfolio (BCG) matrix can
lead to troublesome and overly simplistic prescriptions.

22. 1. THROUGH
ACQUISITIONS OR
MERGERS,
CORPORATIONS CAN
DIRECTLTY ACQUIRE A
FIRM'S ASSET AND
COMPETENCIES
2. CORPORATIONS
MAY AGREE TO POOL
THE RESOURCES OF
OTHER COMPANIES
WITH THEIR
RESOURCE BASE,
COMMONLY KNOWN
AS JOINT VENTURE OR
STRATEGIC ALLIANCE
3. CORPORATIONS
MAY DIVERSIFY INTO
NEW PRODUCTS,
MARKETS AND
TECHNOLOGIES
THROUGH INTERNAL
DEVELOPMENT,
CALLED CORPORATE
ENTREPRENEURSHIP
THREE BASIC MEANS
TO ACHIEVE
DIVERSIFICATION
• Acquisition
• Mergers
• one firm buys another
through a stock purchase, cash
or the issuance of debt; the
incorporation of one firm into
another through purchase
• entail a combination or
consolidation of two firms to
form a new legal entity

23. M&A
Motives and Benefits.
▪ Obtaining valuable resources that can help an organization expand in its product offerings and
services. Firms often use acquisitions to acquire critical human capital referred to as acq-hires.
▪ Provide opportunity for firms to attain the three bases of synergy - leveraging core
competencies, sharing activities, and building market power.
▪ Can lead to consolidation within an industry and can force other players to merge.
▪ Can enter new market segments by way of acquisitions.
Potential Limitations
▪ The takeover premium that is paid for an acquisition typically is very high.
▪ Competing firms often can imitate any advantages realized or copy synergies that result from
the merge and acquisitions (M&A)
▪ Managers' credibility and ego can sometimes get in the way of sound business decision
▪ There can be many cultural issues that may doom the intended benefits from M&A

24. DIVESTMENT
THE EXIT OF A BUSINESS FROM A FIRM'S PORTFOLIO
OBJECTIVES: It can be used to help a firm reverse an earlier
acquisition that didn't work out as planned.
▪ enabling managers to focus on thier efforts more directly
on the firm's core businesses,
▪ providing the firm with more resources to spend on more
attractive alternatives
▪ raising cash to help fund existing businesses

25. 7 PRINCIPLES FOR
SUCCESSFUL DIVESTITURE:
1. Remove the emotion from the decision.
2. Know the value of the business you are
selling.
3. Time the deal right.
4. Maintain a sizable pool of potential buyers.
5. Tell a story about the deal.
6. Run divestitures systematically through a
project office.
7. Communicate clearly and frequently.

26. STRATEGIC ALLIANCES
AND JOINT VENTURES
Potential Advantages:
▪ entering new markets
▪ reducing manufacturing(or other) costs in the value chain and,
▪ developing and diffusing new technologies
Potential Downsides:
▪ many alliances and joint ventures fail to meet expectations for a
variety of reasons : without proper partner, synergies are not created nor
developed, may not complement strength and incompatibility and lack
of trust
STRATEGIC ALLIANCE
JOINT VENTURES
A COOPERATIVE
RELATIONSHIP BETWEEN TWO
OR MORE FIRMS
NEW ENTITIES FORMED
WITHIN A STRATEGIC
ALLIANCE IN WHICH TWO OR
MORE FIRMS, THE PARENTS,
CONTRIBUTE EQUITY TO
FORM THE NEW LEGAL
ENTITY.

27. Advantage :
▪ capture the value created by their own innovative activities without
having to "share the wealth" with alliance partners or face difficulties
associated with combining activities across the value chains of several firms or
merging corporate cultures.
▪ firms can also develop new products or services at a relatively lower cost
and thus rely on their own resources rathaer than turning to external funding.
Disadvantages:
▪ It may be time consuming
▪ firms may forfeit the benefits of speed that growth through mergers or
acquisitions can provide
INTERNAL
DEVELOPMENT
ENTERING A NEW
BUSINESS THROUGH
INVESTMENT IN NEW
FACILITIES, OFTEN
CALLED CORPORATE
ENTREPRENEURSHIP
AND NEW VENTURE
DEVELOPMENT.

28. HOW MANAGERIAL MOTIVES
CAN ERODE VALUE CREATION
MANAGERIAL MOTIVES
GROWTH FOR GROWTH'S SAKE
MANAGERS ACTING IN THEIR OWN SELF-
INTEREST RATHER THAN TO MAXIMIZE LONG-
TERM SHAREHOLDER VALUE.
MANAGERS' ACTIONS TO GROW THE SIZE OF
THEIR FIRMS NOT TO INCREASE LONG-TERM
PROFITABILITY BUT TO SERVE MANAGERIAL
SELF-INTEREST

29. GROWTH FOR GROWTH'S SAKE
• Egotism - managers' action to shape their firms' strategies to serve their interests
rather than maximize long-term shareholder value
Poison pill - used by a company to give shareholders
certain rights in the event of takeover by another firm;
also called shareholder rights plans
Greenmail - a payment to a firm to a hostile
party for the firm's stock at a premium, made
when the firm's management fells that the
hostile party is about to make a tender offer.
Golden Parachute - a prearranged contract with
managers specifying that, in the event of a hostile
takeover, the target firm's managers will be paid a
significant severance pay.
• Antitakeover Tactics - managers'
actions to avoid losing wealth or power
as a result of a hostile takeover.
Unfriendly or hostile takeovers can
occur when a company's stock
becomes undervalued.

30. THANK
YOU!