Chapter-5

Corporate Level Strategy

Corporate Strategy:
Corporate level strategy is concerned with the strategic
decisions a business makes that affect the entire organization.
Financial performance, mergers and acquisitions, human
resource management and the allocation of resources are
considered part of corporate level strategy.
 Vertical Integration

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. Forward Vertical Integration

Supplier Manufacturer Distributor

Backward Vertical Integration

 Benefits and Risks of vertical integration

Benefits of Vertical integration:

 Vertical integration reduce the dependency on Supplier and
Distributor.
 Facilitates secured sources of Raw materials and profitable
distribution channel.
 Protection and control over valuable assets.
 Minimize cost and increase profit in both upstream and
downstream activities.
Risks of Vertical integration:
 Increase overhead and Capital Expenditure.
 Loss of Flexibility resulting from the large investment.
 Problems associated with the unbalanced capacities along the
value chain.
 Additional administrative costs associated with managing a
more complex set of activities.
 Diversification

• Simply diversification is the process of expanding firm’s

operations by entering new businesses.

• Diversification is the process of entering new industries,

distinct from a company’s core or original industry, to make
new kinds of products that can be sold profitably to customers
in these new industries.
Related Diversification

Related diversification is a corporate-level strategy

that is based on the goal of establishing a business unit
(division) in a new industry that is related to a
company’s existing business units by some form of
commonality or linkage between the value chain
functions of the existing and new business units
Related Diversification

A R&D Engineering Manufacturing Sales

B R&D Engineering Manufacturing Sales

C R&D Engineering Manufacturing Sales

Unrelated Diversification
Unrelated diversification is a corporate-level strategy
based on a multi business model whose goal is to increase
profitability through the use of general organizational
competencies to increase the performance of all the
company’s business units. Companies pursuing this
strategy are often called conglomerates, business
organizations that operate in many diverse industries.
 Benefits of Related Diversification

Related diversification enables a firm to benefit from horizontal

relationships across different businesses in the diversified
corporation by Facilitating Economies of Scope and
Enhancing Market Power.

1. Economies of Scope: Economies of scope refers to cost

savings from leveraging core competencies or sharing
related activities among businesses in the corporation.
i. Leveraging core competencies: In related diversification a firm
can get the economies scope by leveraging its core
competencies in both the business unit. Core competencies are
the main strengths or strategic advantages of a business,
including the combination of pooled knowledge and technical
capacities that allow a business to be competitive in the market.

i. Sharing Activities: Firms can achieve cost savings by sharing

activities among its Business units these include value-
creating activities such as common manufacturing facilities,
distribution channels, and sales forces.
2. Enhancing Market Power: Related Diversification helps a firm
to increase its market power. Market power refers to a firms
position in respect to its supplier, customer and Competitor.
Similar businesses 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.
 Merger & Acquisition

Merger:
Mergers refer to combination or consolidation of
two firms to form a new legal entity.
A merger describes two firms of approximately the
same size, who join forces to move forward as a
single new entity, rather than remain separately
owned and operated. This action is known as a
"merger of equals." Both companies' stocks are
surrendered and new company stock is issued in
its place.
 Merger & Acquisition

Acquisition:
When one company takes over another entity, and establishes
itself as the new owner, the purchase is called an acquisition.
From a legal point of view, the target company’s ceases to exist,
the buyer absorbs the business, and the buyer's stock continues to
be traded, while the target company’s stock ceases to trade. With
acquisitions one firm buys another either through a stock
purchase, cash, or the issuance of debt.
 Types of Merger

1. Horizontal Merger: Two companies that are in direct

competition and share the same product lines and markets.
2. Vertical merger: A customer and company or a supplier and
company. Think of a cone supplier merging with an ice cream
maker.
3. Congeneric mergers: Two businesses that serve the same
consumer base in different ways, such as a TV manufacturer
and a cable company.
 Types of Merger

4. Market-extension merger: Two companies that sell the

same products in different markets.
5. Product-extension merger: Two companies selling different
but related products in the same market.
6. Conglomeration: Two companies that have no common
business areas.
 Benefits & Risks of Merger & Acquisition

Benefits:
1. New possibilities offered by a new market
2. Obtaining easier access to a skilled labour force
3. You can diversify your portfolio
4. Buying or merging with another company is usually
cheaper
5. Better access to a larger market
6. Mergers and acquisitions can mean greater financial power
and more influence
 Benefits of Merger & Acquisition

Risks:
1. The takeover premium that is paid for an acquisition
typically is very high for the acquisitions.
2. As a result of M&A, employees of the small merging firm
may require exhaustive re-skilling.
3. Merging two firms that are doing similar activities may
mean duplication and over capability within the company
that may need retrenchments.
4. It creates distress within the employee base of each
organization.
5. It may increase the amount of debt that is owed.
6. There can be differences in corporate culture that are not
easy to consolidate.
 Strategic Alliance

The Strategic Alliance refers to the agreement between two or

more firms that unite to pursue the common set of goals but
remain independent after the formation of the alliance. In other
words, when two companies come together to achieve the
common objective by sharing the particular strengths
(resources) with each other is called as a strategic alliance.
 Benefits and Risks of Strategic Alliance
Benefits:
1. Market Entry: A strategic alliance can ease entry into a foreign
market. The local firm can provide knowledge of markets,
customer preferences, distribution networks, and suppliers. A
strategic alliance between British Airways and American Airlines
was created in 1993 and designed to give the two airlines increased
access to North American and European markets, respectively.
2. Sharing Risks And Expenses: Another major benefit of a
strategic alliance is that the firms involved can share risks. For
example, in the early 1990s, film manufacturers Kodak and Fuji
joined with camera manufacturers Nikon, Canon, and Minolta
to create cameras and film for an "Advanced Photo System.
3. Synergistic Affect of Shared knowledge and Expertise:
A strategic alliance can help a firm gain knowledge and
expertise. Further, when partners contribute skills, brands,
market knowledge, and assets, there is a synergistic effect.
4. Gaining Competitive Advantage: Strategic alliance can
help a firm gain a competitive advantage. For example, a
strategic alliance can be used to take advantage of a favorable
brand image that has been established by one of the partners.
(Establishing a brand image is a lengthy, expensive process.)
Risks:
1. Since each firm maintains its autonomy and has a different
way to perform the business operations, there could be a
difficulty in coping with each other’s style of performing the
business operations
2. There could be a mistrust among the parties when some
competitive or proprietary information is required to be
shared.
3. Often, the firms become so much dependent on each other
that they find difficult to operate distinctively and
individually at times when they are required to perform as a
separate entity.
 Portfolio Management

A method of assessing the competitive position of a portfolio

of Businesses within a corporation, suggesting strategic
alternatives for each business and identifying priorities for
the allocation of resources across the Businesses. The key
purpose of Portfolio management is to assist a firm in
achieving a balanced portfolio of Businesses.
 Relative Market Share
High Low
Industry Growth rate

High
Questio
Star
n Mark

Cash
Low Dogs
Cows
Stars: Stars are business unit 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: Questions marks are business unit competing in

high growth industries but having relatively low market share.
Resources should be invested in them to enhance their
competitive position.
Cash Cows: Cash cows are Business unit with high market share 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: Dogs are business unit with low market shares in low growth
industries. Because they have weak positions and limited potential,
most analysts recommended that they should be divested.