Developing Corporate Strategy

Garden City University
Faculty Of Business Administration

Master of Business Administration
 Strategic Management
 Lecture Five
 Developing Corporate Strategy
 Presented by:Dr.Ashraf Elsiddig Babiker
Corporate Strategy
Corporate strategy must address issues

related to decisions about entering or
exiting an industry.
Specifically , effective corporate
strategies must answer three
interrelated questions :

In which business arenas should a
company compete ?
Which vehicles should it use to enter
or exit a business ?
What underlying economic logic
makes it sensible to compete in
multiple businesses ?
Corporate-level strategy must maintain
strategic unity across business units and
facilitate cooperation (or competition)
among units in order to create value for
shareholders.
Thus, although fundamentally related
to each other through the common goal of
achieving competitive advantage, business
strategy and corporate strategy have
different objectives .
Most largely and publicly traded
firms are combinations of business
units operating in multiple product,
service, and geographic markets
(often globally) ; they are rarely
single business operations .
Economic logic of Diversification :
Expanding the firm’s scope -

whether the addition of new
vertical, horizontal, complementary, or
geographic arenas- doesn’t necessarily
create value for shareholders.
Strategies need to understand the
sources of potential value creation
from diversification, and they need
to know how to determine
whether a firm can control those
sources .
That’s why we’re going to turn to two
concepts that are critical in evaluating
opportunities for diversification and
value creation:
economics of scope and revenue-
enhancement opportunities.
Collectively, these are often referred to
as synergy.
Synergy : Condition under which
the combined benefits of activities
in two or more arenas are greater
than the simple sum of those
benefits.
Economics of Scope
E. of Scope are reductions in average costs
that result from producing two or more
products jointly , instead of producing them
separately.
E. of Scope are possible when the company
can control a resource or value chain activity
across more than one product, service, or
geographic arena.
Although we focus on productive
resources (production) for the sake of
presentation, you should recognize that
the economies of scope are possible in all
value-chain activities, not simply
production , e.g. co-marketing of two
products may provide cost savings (it may
also help increase revenue-enhancement
synergies).
What tactics results in Economies of Scope?
E. of Scope savings generally result
when a firm uses common resources
across business units.
Or to put it in another way : Whenever a
common resource can be used across
more than one business unit, the
company has the potential to generate
economies of scope.
If for instance, the cost of material
that’s common to two or more products is
lower when purchased in greater quantity,
then jointly producing two products may
increase purchase volume and, therefore,
cut costs.
The ability to join the procurement
function in this case and buy materials
jointly creates an economy of scope.
Likewise , a manufacturing facility
that achieves minimum efficient scale for
one product may have excess capacity
that it can put to use in producing other
products.
In this case the total cost for both
products will be lower because the cost
of the common facility can be spread
across two businesses.
Revenue-Enhancement
Another sign of a synergy and a measure
of whether a portfolio of businesses
jointly held under single corporate
ownership creates more value than
independent ownership is revenue
enhancement through joint ownership.
Revenue-Enhancement Synergy, exists
when the whole is greater than the sum
of the parts. Simply put, if two business
units are able to generate more revenue
because they are collectively owned by a
single corporate parent, the strategy of
common ownership is synergetic.
Revenue-Enhancement Synergy, may
result from a variety of tactics, such as
packaging products that were
previously sold separately, sharing
complementary knowledge in the
interest of new-product innovation, or
increasing shared distribution
opportunities.
Sources of Revenue-
Enhancement Synergies
Revenue-Enhancement Synergies
generally arise from packaging and joint-
selling opportunities. In recent years ,
for example, firms in the financial-service
industry have been actively acquiring or
merging with firms in adjacent sectors in
order to package products for current
customers in different sectors.
Corporate strategy
Benefits and Limits
of Diversification
Advantages of Diversification
Because mutual gains may be derived from either
cost savings or revenue-enhancement synergies, a
corporation that maintains ownership over
multiple business units may have an advantage
over competing businesses that are owned and
managed separately. A company achieves this so-
called “ parenting advantage” when the joint cash
flows of two or more collectively owned business
units exceed the sum of the cash flows that they
would generate independently.
Limits of Diversification
In many cases, diversification creates
diseconomies of scope __ average cost
increases resulting from the joint output of two
or more products within a single firm.
Two things increase a firm’s level of
diversification: the number of separate
businesses it operates and the degree of
relatedness of those businesses.
Relatedness is typically assessed by how similar
the underlying industries are.
The most diversified firms are those that
own lots of businesses in very different
industries; this is known as unrelated
diversification.
Firms that own many businesses gathered in a
few industries are following what is known as
related diversification.
Both forms of diversification can create
management problems.
Scope of Diversification
The firm can expand its arenas in three
dimensions of vertical, horizontal and geographic.
Vertical Scope: vertical expansion in scope is
often a logical growth option because a company
is familiar with the arena that it’s entering.
Horizontal Scope: extent to which a firm
participates in related market segments or
industries outside its existing industries.
Geographic Scope : size and diversity of
geographic arenas in which a firm operates.

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Garden City University

Faculty Of Business Administration

Corporate strategy must address issues

Expanding the firm’s scope -

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