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Jai Narain Vyas University,

Jodhpur

(Five years’ Law Integrated Program, Law Faculty)

Project Assignment Academic Year

2015-16

Sub: Strategic Management

Topic: “Corporate level strategies”

Submitted To: Submitted By:

Ms. Tripati K. Sandeep K Bohra

Roll No.: 20 (B.B.A LL.B.)

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PREFACE

As a part of the BBA Curriculum and in order to

gain practical Knowledge in the field of

management, we are required to make a report on

“Strategic Management”. The Basic Objective

behind doing this project report is to get knowledge

of different aspects of Strategies and Diversification

used in different levels of Corporate Sector.

In this project report we have included various

concepts, effects and implications regarding

complexities and hardships popped out in the

making of corporate level strategies.

Doing this Project report helped me to enhance my

knowledge regarding the work in to the role of

strategist in making of effective and tremendous

strategies at the glance of the corporation. Through

this report I come to know about importance of

hard work, research work and role of devotion

towards the work.

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ACKNOWLEDGEMENT

To make any project, essential requirement is able

guidance and references without which project is

incomplete. I am very much thankful to Professor

Ms. Tripati and who has provided me an

opportunity and motivation to gain knowledge

through this type of project. I shall get practical

knowledge from this project and this will help me a

lot in my career.

I am also thankful to Jai Narain Vyas University,

Jodhpur for providing facility of library and

computer laboratory, which are proved as valuable

input resources for preparing my project.

I am also obliged by my classmates, whose co-

operation has contributed major part in my project.

At last but not the least, I am thankful to all my

friends and other persons who have directly and

indirectly helped me during preparation of report.

Thank You

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List of Contents

1. Introduction................................................................................................................................................ 5

i) Corporate Strategy definition ........................................................................................................... 5

ii) Strategic Planning ........................................................................................................................... 6

iii) Product Diversification Strategy ................................................................................................. 7

Objectives ................................................................................................................................................... 7

Approach ..................................................................................................................................................... 7

iv) Growth level Diversification ......................................................................................................... 7

2. Levels of Diversification ......................................................................................................................... 8

i) Low Levels of Diversification............................................................................................................ 9

ii) Moderate and High Levels of Diversification .......................................................................... 9

iii) Very High Levels of Diversification ............................................................................................ 9

3. Reasons for Diversification .................................................................................................................. 10

i) Corporate-Level-Strategy: Creating Value through Diversification ................................... 10

ii) Corporate-level-strategy: Value-neutral Diversification ..................................................... 11

iii) Corporate-level-strategy: Value-reducing Diversification .................................................. 11

4. Importance of Diversification in Strategy ....................................................................................... 12

i) Avoiding Downturns ......................................................................................................................... 12

ii) Competitive Defence ..................................................................................................................... 12

iii) Stabilizing Influence ..................................................................................................................... 12

iv) Company Risks ............................................................................................................................... 13

Undiversifiable ........................................................................................................................................ 13

Diversifiable ............................................................................................................................................. 13

5. Portfolio Analysis ................................................................................................................................... 14

i) Introduction to Portfolio Analysis ................................................................................................. 14

ii) Levels of Portfolio Analysis......................................................................................................... 14

a) Analysing Returns ......................................................................................................................... 14

b) Risk Aversion .............................................................................................................................. 14

c) Dispersion of Returns ................................................................................................................... 14

iii) Portfolio Analysis Tools ............................................................................................................... 14

a) Nine cell industry attractiveness and competitive strength matrix ................................. 15

b) BCG growth share matrix ....................................................................................................... 15

References ............................................................................................................................................................ 16

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1. Introduction

Strategy is different from tactics. Tactics is a scheme for a specific

manoeuvre whereas strategy is the overall plan for deploying

resources to establish a favourable position.

According to Thompson & Strickland – “A company’s strategy

consists of the combination of competitive moves and business

approaches that managers employ to please customers and

compete successfully and achieve organizational objectives.”

Corporate level strategy includes:

Reach - defining the issues that are corporate responsibilities;

these might include identifying the overall goals of the

corporation, the types of businesses in which the corporation

should be involved, and the way in which businesses will be

integrated and managed.

Managing Activities and Business Inter relationships - Corporate

strategy seeks to develop synergies by sharing and coordinating

staff and other resources across business units, investing financial

resources across business units, and using business units to

complement other corporate business activities.

i) Corporate Strategy definition

Corporate Strategy define as, “The overall scope and direction of

a corporation and the way in which its various business

operations work together to achieve particular goals”.

Specifies actions a firm takes to gain a competitive advantage by

selecting and managing a group of different businesses competing

in different product markets

Corporate-level strategy concerns:

The scope of the markets and industries the firm competes

in.

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How the firm manages their portfolio of businesses.

Mode of entry into new businesses.

Internal development, acquisitions/ merger, joint

venture/ strategic alliance.

Level and type of diversification.

Capturing synergies between business units.

Allocating corporate resources.

ii) Strategic Planning

Strategic planning is a defined, recognizable set of activities

designed to achieve organizational objectives and goals. The

techniques for strategic planning may vary but the substantive

issues are essentially the same.

These include:

a) Establishing and periodically confirming the organization’s

mission and its corporate strategy.

b) Setting strategic or enterprise-level financial and non-

financial goals and objectives.

c) Developing broad plan of action necessary to attain these

goals and objectives, allocating resources on a basis

consistent with strategic directions, and managing the

various lines of business as an investment “portfolio”.

d) Communicating the strategy at all levels, as well as

developing action plans at lower levels that are supportive of

those at the enterprise level.

e) Monitoring results, measuring progress, and making such

adjustments as are required to achieve the strategic intent

specified in the strategic goals and objectives.

f) Reassessing mission, strategy, strategic goals and objectives,

and plans at all levels and, if required, revising any or all of

them.

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iii) Product Diversification Strategy

A product diversification strategy is a form of business

development. Small businesses that implement the strategy can

diversify their product range by modifying existing products or

adding new products to the range. The strategy provides

opportunities to grow the business by increasing sales to existing

customers or entering new markets.

Objectives

Set your objectives for product diversification. You can take a

defensive approach with the objective to protect your business if,

for example, demand drops for your products or you face strong

competition. This might be important for news companies that

have built their business on a single product. Declining market

share or revenue could threaten the survival of your business.

Alternatively, you can take an offensive approach where you see a

strong market opportunity but can’t take advantage of it with your

existing products.

Approach

You can approach product diversification in a number of ways.

You can modify your existing products so that the new version

appeals to a different group of customers. If you make tools for

building professionals, for example, consider developing a version

that appeals to amateur users. An alternative strategy is to offer

new products to your existing customers. A retailer of fruit and

vegetables could introduce a range of health foods that appeal to

the same customer group. Another approach is to add a new

product to your range, aimed at a new group of customers.

iv) Growth level Diversification

Growth strategies in business also include diversification, where a

small company will sell new products to new markets. This type of

strategy can be very risky, according to gaebler.com. A small

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company will need to plan carefully when using a diversification

growth strategy. Marketing research is essential because a

company will need to determine if consumers in the new market

will potentially like the new products.

Most small companies have plans to grow their business and increase sales and profits. However, there are certain methods companies must use for implementing a growth strategy. The method a company uses to expand its business is largely contingent upon its financial situation, the competition and even government regulation. Some common growth strategies in business include market penetration, market expansion, product expansion, diversification and acquisition.

2. Levels of Diversification (See Figure 1 Different Levels of Diversification)

Figure 1 Different Levels of Diversification

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i) Low Levels of Diversification

A firm pursing a low level of diversification uses either a single- or

a dominant-business corporate-level diversification strategy.

A single-business diversification strategy is a corporate-level

strategy wherein the firm generates 95% or more of its sales

revenue from its core business area.

With the dominant-business diversification strategy, the firm

generates between 70% and 95% of its total revenue within a single

business area. United Parcel Service (UPS) uses this strategy.

ii) Moderate and High Levels of Diversification

A firm generating more than 30%of its revenue outside a dominant

business and whose businesses are related to each other in some

manner uses a related diversification corporate-level strategy.

The diversified company with a portfolio of businesses with only a

few links between them is called a mixed related and unrelated

firm and is using the related linked diversification strategy.

Compared with related constrained firms, related linked firms

share fewer resources and assets between their businesses,

concentrating instead on transferring knowledge and core

competencies between the businesses. As with firms using each

type of diversification strategy, companies implementing the

related linked strategy constantly adjust the mix in their portfolio

of businesses as well as make decisions about how to manage their

businesses.

iii) Very High Levels of Diversification

A highly diversified firm that has no relationships between its

businesses follows an unrelated diversification strategy.

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3. Reasons for Diversification

i) Corporate-Level-Strategy: Creating Value through

Diversification

Corporate-level strategy focuses on two key, but related issues:

what businesses should the corporation compete in and how can

the corporation best manage them in a synergistic manner in order

to maximize value. (Dess, 2010).

Dess, Lumpkin and Eisner explain it well when they compare core

competencies with a tree. While the trunk and limbs represent a

company’s core products and the leaves and flowers represent

end-products, the core competencies are the roots of the tree.

The roots provide the nourishment for the core and end products

but are not readily visible when looking at the tree as a whole.

However, the roots/core competencies are the glue that holds the

business together. For core competencies to create value for the

business, it must meet three criteria:

a) The core competency must enhance the company’s competitive advantage by creating customer value.

b) The different businesses within the corporation must be similar in at least one way related to the core competencies.

c) The core competencies must be difficult to replicate or imitate by competitors.

Managers must be cautious. There are numerous studies that have shown that a majority of alliances fail – demonstrating that they did not meet the goals of the parent companies or delivers strategic benefits.1

1 Kale and Singh, 2009

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ii) Corporate-level-strategy: Value-neutral Diversification

In the value neutral diversification, there are some areas in which

corporate strategies made with the full endeavour. The following

areas in which corporate strategies are concern are:-

a) Antitrust Regulation and Tax Laws

b) Low Performance

c) Uncertain Future Cash Flows

d) Synergy and Firm Risk Reduction

e) Tangible and Intangible Resources and Diversification

Value-neutral reasons for diversification include those of a desire to match

and thereby neutralize a competitor’s market power (such as to neutralize

another firm’s advantage by acquiring a similar distribution outlet).

Decisions to expand a firm’s portfolio of businesses to reduce managerial risk

can have a negative effect on the firm’s value. Greater amounts of

diversification reduce managerial risk in that if one of the businesses in a

diversified firm fails, the top executive of that business remains employed by

the corporation.

In addition, because diversification can increase a firm’s size and thus

managerial compensation, managers have motives to diversify a firm to a

level that reduces its value.

iii) Corporate-level-strategy: Value-reducing Diversification

In the value reducing/destroying diversification, there are some

areas in which corporate strategies made with the full endeavour.

The following areas in which corporate strategies are concern are:-

a) Diversifying Managerial employment risk.

b) Increasing Managerial compensation.

Diversification destroys value because it, for instance, creates

inefficient internal capital markets during the course of

overinvestment in low performing-business (Stulz, 1990); or due to

internal power efforts that generate influence costs (Rajan,

Servaes, and Zingales, 2000) Moreover, managers of divisions that

have a future perspective in the firm are encouraged to persuade

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the top management of the firm to conduct resources in their

direction (Meyer, Milgrom and Roberts, 1992).

4. Importance of Diversification in Strategy

Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries and other categories. It aims to maximize return by investing in different areas that would each react differently to the same event. Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk.

Following are the importance of diversification:

i) Avoiding Downturns

A conservative reason to diversify is to avoid major repercussions when an industry or sector suffers a downturn. Some single-business or single-product organizations couldn't survive a lengthy decline in their industry. A fashion retailer often sells in multiple product categories, for instance, because fashion is so trendy and unpredictable. Being diversified protects the company against changes. Many fashion retailers also expand into new store formats, such as for children or babies, to diversify.

ii) Competitive Defence

Another reason to diversify is that under-served locations or customers have

available revenue for somebody in your industry to take advantage of. If your

company doesn't diversity and expand to fill the additional demand,

competitors are likely to do so. If you get in first, you can often increase your

customer base or establish yourself as a top provider. Movie rental provider

Blockbuster dissolved, in part, because it failed to protect against competitors

moving into new DVD-by-mail and online-streaming formats.

iii) Stabilizing Influence

Diversity also helps your company build stability. If you concentrate too

heavily on a single industry or product, you risk volatility in revenue and

resources as demand rises and falls. If your business stretches across many

industries or categories, you may have more predictability. Advertising

agencies often diversify clients to avoid major drops in revenue and having to

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cut significant staff if a single industry falters. Losing a client here or there

isn't as destabilizing if the company is diversified.

iv) Company Risks

As important and valuable as diversification is, it does have drawbacks and

risks. When you expand, you potentially lose focus on what your best

products or offerings are. You also have to spread out your business

investments and costs, which may prevent you from putting enough money in

cash-cow sectors or products. If you expand, you need experts to work for you

or partner with you to achieve success in newer, unproven areas.

Investors confront two main types of risk when investing:

Undiversifiable

Also known as "systematic" or "market risk," undiversifiable risk is associated with

every company. Causes are things like inflation rates, exchange rates, political

instability, war and interest rates. This type of risk is not specific to a particular

company or industry, and it cannot be eliminated, or reduced, through

diversification; it is just a risk that investors must accept.

Diversifiable

This risk is also known as "unsystematic risk," and it is specific to a company,

industry, market, economy or country; it can be reduced through diversification. The

most common sources of unsystematic risk are business risk and financial risk. Thus,

the aim is to invest in various assets so that they will not all be affected the same way

by market events.

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5. Portfolio Analysis

i) Introduction to Portfolio Analysis

Portfolio analysis involves quantifying the operational and financial impact of the portfolio. It is vital to evaluate the performances of investments and timing the returns effectively.

The analysis of a portfolio extends to all classes of investments such as bonds, equities, indexes, commodities, funds, options and securities. Portfolio analysis gains importance because each asset class has peculiar risk factors and returns associated with it. Hence, the composition of a portfolio affects the rate of return of the overall investment.

ii) Levels of Portfolio Analysis

Portfolio analysis is broadly carried out for each asset at three levels:

a) Analysing Returns

While performing portfolio analysis, prospective returns are calculated through the

average and compound return methods. An average return is simply the arithmetic

average of returns from individual assets. However, compound return is the

arithmetic mean that considers the cumulative effect on overall returns.

b) Risk Aversion

This method analyses the portfolio composition while considering the risk appetite of

an investor. Some investors may prefer to play safe and accept low profits rather

than invest in risky assets that can generate high returns.

c) Dispersion of Returns

It is the measure of volatility or standard deviation of returns for a particular asset.

Simply put, dispersion refers is the difference between the real interest rate and the

calculated average return.

iii) Portfolio Analysis Tools

Useful Tools for Portfolio Analysis Include:

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a) Nine cell industry attractiveness and competitive strength matrix

b) BCG growth share matrix

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References Dess, L. &. (2010).

Meyer, Milgrom and Roberts. (1992).

Rajan, Servaes, and Zingales. (2000).

Stulz. (1990).

Reuters 2013 ed. March