Reference no: EM132230889
What is Corporate-level strategy and its purpose?
What level of diversification is ATT seeking? (Explain your answer)
Based on Table 6.1 page 179, what do you think are ATT’s reasons for diversification? (Why)
Do you think ATT has the tangible, intangible, and financial resources to diversify? (Explain)
Summary of lecture:
What is corporate-level strategy and its purpose?
Corporate-level strategies detail actions taken to gain a competitive advantage through the selection and management of a mix of businesses competing in several industries or product markets. Primary concerns of corporate-level strategy are:
What businesses should the firm be in?
How should the corporate office manage its group of businesses?
How can the corporation as a whole add up to more than the sum of its business parts?
Levels of Diversification
Levels and types of diversification defined in Figure 6.1 and discussed in more detail in the next sections of this chapter are:
Low Levels of Diversification
Single business
Dominant business
Moderate To High Levels of Diversification
Related-constrained diversification
Related-linked diversification (mixed related and unrelated)
Very High Levels of Diversification
Unrelated diversification
Low Levels of Diversification
Firms that follow single- or dominant-business strategies have low levels of diversification.
A single business is a firm where more than 95 percent of its revenues are generated by the dominant business.
In a day and age where most companies have almost too much going on, Michelin has remained faithful to the cause of strictly manufacturing quality tires.
A dominant business is a firm that generates between 70 and 95 percent of its sales within a single business area.
UPS is an example of a dominant business firm because, although 22 percent of revenue comes from international operations, it generates 60 percent of its revenue from its US package delivery service.
Moderate and High Levels of Diversification
A related-diversified firm is one that earns at least 30 percent of its revenues from sources outside the dominant business and whose units are related to each other—e.g., by the sharing of resources and by product, technological, and distribution linkages.
Very High Levels of Diversification
Unrelated-diversified (or highly diversified) firms do not share resources or linkages, as illustrated in Figure 6.1. Firms that pursue unrelated diversification strategies—often known as conglomerates—include United Technologies, Samsung, and Textron.
Reasons for Diversification
Firms may implement diversification strategies to enhance or increase the strategic competitiveness of the overall organization, and thus the value of the firm increases.
Value can be created through either related or unrelated diversification if the strategies enable the firm’s mix of businesses to increase revenues and/or decrease costs when implementing business-level strategies.
Firms may implement diversification strategies that are either value neutral or result in devaluation of the firm. They may attempt to diversify:
To neutralize a competitor’s market power
To reduce managers’ employment risk (i.e., risk of the CEO being unemployed when a dominant-business firm fails as compared to this risk when a single business fails when it is only one part of a diversified firm)
To increase managerial compensation because of the positive relationships between diversification, firm size, and compensation.
Firms follow diversification strategies for many reasons. These can be grouped into three broad sets of motives:
Motives to create value (value creating diversification):
Economies of scope through activity-sharing, value chain sharing, and the transfer of core competencies
Market power motives by vertical integration or blocking competitors
Economies of scope represent cost savings attributed to entering an additional business and sharing activities or using capabilities and core competencies developed in another business that can be transferred to a new business without significant additional costs.
To create economies of scope, tangible resources such as plant and equipment or other business-unit physical assets often must be shared. Less tangible resources, such as manufacturing know-how, also can be shared.
Market power exists when a firm is able to sell its products at prices above the existing competitive level or decrease the costs of its primary activities below the competitive level, or both.
Firms also might gain market power by following a vertical integration strategy, which exists when a company produces its own inputs (backward integration) or owns its own distribution system (forward integration).
A vertical integration strategy may be motivated by a firm’s desire to strengthen its position in its core business relative to competitors by increasing its market power.
Vertical integration enables a firm to increase market power by:
Developing the ability to save on its operations
Avoiding market costs
Improving product quality
Protecting its technology from imitation by rivals
Having strong ties between their assets for which no market prices exist
However, like other strategies that create value and aid the firm in achieving strategic competitiveness, vertical integration may not be the perfect answer because of risks and costs that accompany it.
Outside suppliers may be able to provide inputs at a lower cost (and, possibly also of a higher quality).
The costs of coordinating vertically integrated activities may exceed the value of the control realized.
Vertical integration may result in the firm losing strategic competitiveness if the internal unit does not keep up with changes in technology.
To vertically integrate, the firm may need to build a facility with capacity that exceeds the ability of its internal units to absorb, forcing the selling unit to sell to outside users in order to achieve scale economies.