Related linked diversification companies

Our discussions of business-level strategies (Chapter 4) and the competitive rivalry and competitive dynamics associated with them (Chapter 5) have concentrated on firms competing in a single industry or product market.1 In this chapter, we introduce you to corporate-level strategies, which are strategies firms use to diversify their operations from a single business competing in a single market into several product markets—most commonly, into several businesses. Thus, a corporate-level strategy specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of differ- ent businesses competing in different product markets. Corporate-level strategies help companies to select new strategic positions—positions that are expected to increase the firm’s value.2 As explained in the Opening Case, General Electric competes in 16 widely diverse industries.

As is the case with GE, firms use corporate-level strategies as a means to grow rev- enues and profits, but there can be different strategic intents in addition to growth. Firms can pursue defensive or offensive strategies that realize growth but have different strategic intents. Firms can also pursue market development by moving into different geographic markets (this approach will be discussed in Chapter 8). Firms can acquire competitors (horizontal integration) or buy a supplier or customer (vertical integration). These strategies will be discussed in Chapter 7. The basic corporate strategy, the topic of this chapter, focuses on diversification.

The decision to take actions to pursue growth is never a risk-free choice for firms. Indeed, as the Opening Case explored, GE experienced difficulty in its media businesses, especially NBC, and its environmental record suffered. In one case, it tried to control NBC too much, trying to protect the firm. In so doing, it created questions about the objectivity of NBC’s reporting. Its environmental record likely suffered because of the lack of adequate oversight and the strong interest in producing returns for the share- holders. Effective firms carefully evaluate their growth options (including the different corporate-level strategies) before committing firm resources to any of them.3

Because the diversified firm operates in several different and unique product markets and likely in several businesses, it forms two types of strategies: corporate-level (or com- pany-wide) and business-level (or competitive).4 Corporate-level strategy is concerned with two key issues: in what product markets and businesses the firm should compete and how corporate headquarters should manage those businesses.5 For the diversified corporation, a business-level strategy (see Chapter 4) must be selected for each of the businesses in which the firm has decided to compete. In this regard, each of GE’s product divisions uses different business-level strategies; while most focus on differentiation, its consumer electronics business has products that compete in market niches to include some that are intended to serve the average income consumer. Thus, cost must also be an issue along with some level of quality.

As is the case with a business-level strategy, a corporate-level strategy is expected to help the firm earn above-average returns by creating value.6 Some suggest that few corporate-level strategies actually create value.7 As the Opening Case indicates, realizing value through a corporate strategy can be achieved but it is challenging to do so. In fact, GE is one of the few widely diversified and large firms that has been successful over time.

Evidence suggests that a corporate-level strategy’s value is ultimately determined by the degree to which “the businesses in the portfolio are worth more under the management of the company than they would be under any other ownership.”8 Thus, an effective corporate-level strategy creates, across all of a firm’s businesses, aggre- gate returns that exceed what those returns would be without the strategy9 and con- tributes to the firm’s strategic competitiveness and its ability to earn above-average returns.10

Product diversification, a primary form of corporate-level strategies, concerns the scope of the markets and industries in which the firm competes as well as “how managers buy, create and sell different businesses to match skills and strengths with opportunities presented to the firm.”11 Successful diversification is expected to reduce variability in the firm’s profitability as earnings are generated from different businesses.12 Diversification can also provide firms with the flexibility to shift their investments to markets where the greatest returns are possible rather than being dependent on only one or a few markets.13 Because firms incur development and monitoring costs when diversifying, the ideal portfolio of businesses balances diversification’s costs and benefits. CEOs and their top-management teams are responsible for determining the best portfolio for their company.14