Chapter 6: Corporate-Level Strategy 175
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 (company-
wide) and business-level (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 company,
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 which 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,
Disney is one of the few large, widely diversified 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 manage-
ment 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, aggregate returns that
exceed what those returns would be without the strategy^9 and contributes 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 diversi-
fying, 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
We begin this chapter by examining different levels of diversification (from low to
high). After describing the different reasons firms diversify their operations, we focus on
two types of related diversification (related diversification signifies a moderate to high
level of diversification for the firm). When properly used, these strategies help create
value in the diversified firm, either through the sharing of resources (the related con-
strained strategy) or the transferring of core competencies across the firm’s different busi-
nesses (the related linked strategy). We then examine unrelated diversification, which
is another corporate-level strategy that can create value. Thereafter, the chapter shifts
to the incentives and resources that can stimulate diversification which is value neutral.
However, managerial motives to diversify, the final topic in the chapter, can actually
destroy some of the firm’s value.
6-1 Levels of Diversification
Diversified firms vary according to their level of diversification and the connections
between and among their businesses. Figure 6.1 lists and defines five categories of busi-
nesses according to increasing levels of diversification. The single and dominant busi-
ness categories denote no or relatively low levels of diversification; more fully diversified