lecture6

Corporate-Level Strategy

A diversified company is one that has more than one business in more than one industry. Diversification as a corporate-level strategy is a fairly recent phenomenon. In 1950 only 38% of the largest U.S. industrial firms were diversified, growing to 63% by 1974.

Why Do Organizations Diversify?

Resources- Motives to enhance strategic Competitiveness through:

Economies of scope or related diversification

activity-sharing

transfer of core competencies

Market Power Motives (related diversification)

Blocking competitors through multi-point competition

Vertical integration

Financial Economies Motives Unrelated Diversification)

Improve efficient of capital allocation through an internal capital market

Restructuring the portfolio of business

Incentives Motives that are value-neutral with respect to strategic competitiveness Antitrust regulation Tax incentives Low performance Reduce risk Tangible resources Intangible resources Managerial Motives Diversify managerial employment risk Increase managerial compensation

Degree of Diversification

Single Business - Organizations that earn 95% of their revenues from their dominant business. Wrigley Company

Dominant Business – Organizations that generate between 70 and 95% of their income within a single category, but have one or more other businesses. American Airlines - Saber.

Moderate to High Level Businesses – Less than 70% of the company's revenues from a single business unit. Japanese companies

High Levels of Diversification Businesses – Business that earn around 30% from their dominant business with units that are not closely related. (Xerox)

Diversification Strategies:

Unrelated Diversification

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