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@study_ingmadesimple Luca du Toit A diversified company is a collection of individual businesses, and thus the strategy-making task is more complicated. In a one-business company, managers have to come up with a plan for competing successfully in only a single industry environment, whereas in a diversified company, the strategy-making challenge involves assessing multiple industry environments and developing a set of business strategies, one for each industry arena in which the diversified company operates. Top executives at a diversified company must then go one step further and devise a companywide/ corporate strategy for improving the performance of the company’s overall business line-up. LO 1 WHEN AND HOW BUSINESS DIVERSIFICATION CAN ENHANCE SHAREHOLDER VALUE. Top-level corporate executives have the task of crafting a diversified company’s overall corporate strategy. WHAT DOES CRAFTING A DIVERSIFICATION STRATEGY ENTAIL? (1) picking new industries to enter and deciding on the means of entry– Management needs to decide which new industries to enter and then whether to enter by: ►starting a new business from the ground up ►acquiring a company already in the industry ►forming a joint venture or strategic alliance with another company. (2) pursuing opportunities to leverage cross-business value chain relationships, where there is strategic fit, into competitive advantage– Management need to determine whether there are opportunities to strengthen a diversified company’s businesses by: ►transferring competitively valuable resources and capabilities from one business to another ►combining the related value chain activities of different businesses to achieve lower costs ►sharing the use of a powerful and well-respected brand name across multiple businesses ►encouraging knowledge sharing and collaborative activity among the businesses. (3) initiating actions to boost the combined performance of the corporation’s collection of businesses–Strategic options for improving the corporation’s overall performance include: ►sticking closely with the existing business line-up and pursuing opportunities presented by these businesses ►broadening the scope of diversification by entering additional industries ►retrenching to a narrower scope of diversification by divesting either poorly performing businesses or those that no longer fit into management’s long-range plans Why is this page out of focus?This is a Premium document. Become Premium to read the whole document. Why is this page out of focus?This is a Premium document. Become Premium to read the whole document. Why is this page out of focus?This is a Premium document. Become Premium to read the whole document. Why is this page out of focus?This is a Premium document. Become Premium to read the whole document. Why is this page out of focus?This is a Premium document. Become Premium to read the whole document. Why is this page out of focus?This is a Premium document. Become Premium to read the whole document. Learn about the 4 pillars What is Corporate Strategy?Corporate Strategy takes a portfolio approach to strategic decision making by looking across all of a firm’s businesses to determine how to create the most value. In order to develop a corporate strategy, firms must look at how the various business they own fit together, how they impact each other, and how the parent company is structured, in order to optimize human capital, processes, and governance. Corporate Strategy builds on top of business strategy, which is concerned with the strategic decision making for an individual business. Learn more in CFI’s Corporate & Business Strategy Course. What are the Components of Corporate Strategy?There are several important components of corporate strategy that leaders of organizations focus on. The main tasks of corporate strategy are:
In the following sections, this guide will break down the four main components outlined above. #1 Allocation of ResourcesThe allocation of resources at a firm focuses mostly on two resources: people and capital. In an effort to maximize the value of the entire firm, leaders must determine how to allocate these resources to the various businesses or business units to make the whole greater than the sum of the parts. Key factors related to the allocation of resources are:
#2 Organizational DesignOrganizational design involves ensuring the firm has the necessary corporate structure and related systems in place to create the maximum amount of value. Factors that leaders must consider are the role of the corporate head office (centralized vs decentralized approach) and the reporting structure of individuals and business units – vertical hierarchy, matrix reporting, etc. Key factors related to organizational design are:
#3 Portfolio ManagementPortfolio management looks at the way business units complement each other, their correlations, and decides where the firm will “play” (i.e. what businesses it will or won’t enter). Corporate Strategy related to portfolio management includes:
#4 Strategic TradeoffsOne of the most challenging aspects of corporate strategy is balancing the tradeoffs between risk and return across the firm. It’s important to have a holistic view of all the businesses combined and ensure that the desired levels of risk management and return generation are being pursued. Below are the main factors to consider for strategic tradeoffs:
Learn more in CFI’s Corporate & Business Strategy Course. SummaryCorporate Strategy is different than business strategy, as it focuses on how to manage resources, risk, and return across a firm, as opposed to looking at competitive advantages. Leaders responsible for strategic decision making have to consider many factors, including allocation of resources, organizational design, portfolio management, and strategic tradeoffs. By optimizing all of the above factors, a leader can hopefully create a portfolio of businesses that is worth more than just the sum of the parts. For more reading on strategy, check out the Harvard Business Review resources. Additional ResourcesThank you for reading CFI’s introductory guide to corporate strategy. To keep learning and advancing your career as a financial analyst, these additional CFI resources and guides will be a big help:
What are 4 types of corporate strategy?There are four types: stability, combination, retrenchment, and expansion strategy. It is different from the business strategy because business strategy surrounds and focuses on a specific business unit.
What does a corporate strategy include?The four most widely accepted key components of corporate strategy are visioning, objective setting, resource allocation, and prioritization.
What are the three overall types of corporate strategy?There are many corporate strategies examples but they can be condensed into three core approaches – growth, stability, and renewal.. Growth: To expand the business and increase profits.. Stability: To maintain current business operations.. Renewal: To revive an ailing business.. Why is corporate level strategy important to the diversified firm?Corporate-level strategies help companies to select new strategic positions — positions that are expected to increase the firm's value. Firms use corporate-level strategies as a means to grow revenues and profits, but there can be additional strategic intents to growth.
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