Chapter 6 Corporate-Level Strategy

A Diversified Company Has Two Levels of Strategy 1. Business-Level Strategy (Competitive Strategy) How to create competitive advantage in each business in which the company competes - low cost - differentiation - integrated low cost/differentiation - focused low cost - focused differentiation

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Chapter 6Corporate-Level StrategyMichael A. HittR. Duane IrelandRobert E. Hoskisson©2000 South-Western College PublishingChapter 3InternalEnvironmentChapter 2ExternalEnvironmentThe StrategicManagementProcessStrategic IntentStrategic MissionStrategicCompetitivenessAbove AverageReturnsFeedbackStrategy FormulationChapter 4Business-LevelStrategyChapter 5CompetitiveDynamicsChapter 6Corporate-LevelStrategyChapter 8InternationalStrategyChapter 9CooperativeStrategiesChapter 7Acquisitions &RestructuringStrategy ImplementationChapter 10CorporateGovernanceChapter 11Structure& ControlChapter 12StrategicLeadershipChapter 13Entrepreneurship & InnovationStrategicInputsStrategicActionsStrategic OutcomesHow to create value for the corporation as a whole2. Corporate-Level Strategy (Companywide Strategy)- low cost- differentiation- integrated low cost/differentiation- focused low cost- focused differentiationHow to create competitive advantage in each business in which the company competes1. Business-Level Strategy (Competitive Strategy)A Diversified CompanyHas Two Levels of Strategy1. What businesses should the corporation be in?2. How should the corporate office manage the array of business units?Corporate Strategy is what makes the corporate whole add up to more than the sum of its business unit partsKey Questions of Corporate StrategyLevels and Types of DiversificationLow Levels of DiversificationModerate to High Levels of DiversificationVery High Levels of DiversificationRelated linked (mixed) 95% of revenues from a single business unitADominant businessBetween 70% and 95% of revenues from a single business unitBAUnrelated-DiversifiedBusiness units not closely related ABC< 70% of revenues from dominant business; all businesses share product, technological and distribution linkagesRelated constrainedABCMotives, Incentives, and Resourcesfor DiversificationMotives to Enhance Strategic CompetitivenessEconomies of ScopeMarket PowerFinancial EconomiesResourcesManagerialMotivesIncentivesIncentives and Resources with Neutral Effects of Strategic CompetitivenessAnti-Trust RegulationTax LawsLow PerformanceUncertain Future Cash FlowsFirm Risk ReductionTangible ResourcesIntangible ResourcesManagerialMotivesResourcesIncentivesMotives, Incentives, and Resourcesfor DiversificationManagerial Motives Causing Value ReductionDiversifying ManagerialEmployment RiskIncreasing Managerial CompensationManagerialMotivesResourcesIncentivesMotives, Incentives, and Resourcesfor DiversificationSummary Model of theRelationship Between FirmPerformance and DiversificationDiversificationStrategyManagerialMotivesResourcesIncentivesAdding Value by DiversificationDiversification most effectively adds value by either of two mechanisms:By developing economies of scope between business units in the firms which leads to synergistic benefitsBy developing market power which leads to greater returnsAlternative Diversification StrategiesRelated Diversification StrategiesUnrelated Diversification StrategiesSharing ActivitiesTransferring Core CompetenciesEfficient Internal Capital Market AllocationRestructuringKey Characteristics:Example: Using a common physical distribution system and sales force such as Procter & Gamble’s disposable diaper and paper towel divisionsExample: General Electric’s costs to advertise, sell and service major appliances are spread over many different productsSharing ActivitiesAlternative Diversification StrategiesAchieves economies of scaleBoosts efficiency of utilizationHelps move more rapidly down Learning CurveSharing Activities often lowers costs or raises differentiationSharing Activities can lower costs if it:Example: Shared order processing system may allow new features customers value or make more advanced remote sensing technology availableExample: Procter & Gamble’s sharing of sales and physical distribution for disposable diapers and paper towels is effective because these items are so bulky and costly to shipKey Characteristics:Sharing ActivitiesAlternative Diversification StrategiesSharing Activities can enhance potential for or reduce the cost of differentiationMust involve activities that are crucial to competitive advantageAssumptions:Sharing ActivitiesAlternative Diversification StrategiesStrong sense of corporate identityClear corporate mission that emphasizes the importance of integrating business unitsIncentive system that rewards more than just business unit performanceAlternative Diversification StrategiesRelated Diversification StrategiesUnrelated Diversification StrategiesSharing ActivitiesTransferring Core CompetenciesEfficient Internal Capital Market AllocationRestructuringKey Characteristics:Transferring Core CompetenciesAlternative Diversification StrategiesIdentify ability to transfer skills or expertise among similar value chainsExploit ability to transfer activitiesExploits Interrelationships among divisionsStart with Value Chain analysisAssumptions:Transferring Core Competencies leads to competitive advantage only if the similarities among business units meet the following conditions:Activities involved in the businesses are similar enough that sharing expertise is meaningfulTransfer of skills involves activities which are important to competitive advantageThe skills transferred represent significant sources of competitive advantage for the receiving unitTransferring Core CompetenciesAlternative Diversification StrategiesAlternative Diversification StrategiesRelated Diversification StrategiesUnrelated Diversification StrategiesSharing ActivitiesTransferring Core CompetenciesEfficient Internal Capital Market AllocationRestructuringKey Characteristics:Firms pursuing this strategy frequently diversify by acquisition:Efficient Internal Capital Market AllocationAlternative Diversification StrategiesAcquire sound, attractive companiesAcquired units are autonomousAcquiring corporation supplies needed capital Portfolio managers transfer resources from units that generate cash to those with high growth potential and substantial cash needsAdd professional management & control to sub-unitsSub-unit managers compensation based on unit resultsAssumptions:Efficient Internal Capital Market AllocationAlternative Diversification StrategiesManagers have more detailed knowledge of firm relative to outside investorsFirm need not risk competitive edge by disclosing sensitive competitive information to investorsFirm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their ownAlternative Diversification StrategiesRelated Diversification StrategiesUnrelated Diversification StrategiesSharing ActivitiesTransferring Core CompetenciesEfficient Internal Capital Market AllocationRestructuringKey Characteristics:Restructuring- Changes sub-unit management team- Shifts strategy- Infuses firm with new technology- Divests part of firm- Makes additional acquisitions to achieve critical mass- Enhances discipline by changing control systemsAlternative Diversification StrategiesSeek out undeveloped, sick or threatened organizations or industriesParent company (acquirer) intervenes and frequently:Frequently sell unit after making one-time changes since parent no longer adds value to ongoing operationsAssumptions:RestructuringAlternative Diversification StrategiesRequires keen management insight in selecting firms with depressed values or unforeseen potentialMust do more than restructure companiesNeed to initiate restructuring of industries to create a more attractive environmentInternal Incentives:Incentives to DiversifyRelaxation of Anti-Trust regulation allows more related acquisitions than in the pastBefore 1986, higher taxes on dividends favored spending retained earnings on acquisitionsAfter 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of tax deductible interest paymentsExternal Incentives:Poor performance may lead some firms to diversify to attempt to achieve better returns Value-creating Strategies of DiversificationOperational and Corporate RelatednessSharing:OperationalRelatednessBetweenBusinessCorporate Relatedness: Transferring Skills Into Business Through Corporate HeadquartersLowHighHighLowRelated Linked Diversification(Economies of Scope)UnrelatedDiversification(Financial Economies)Both Operational and Corporate Relatedness(Rare Capability and Can Create Diseconomies of Scope)Related Constrained DiversificationVertical Integration(Market Power)PerformanceLevel of DiversificationDiversification and Firm PerformanceDominantBusinessUnrelatedBusinessRelatedConstrainedIncentives to DiversifyInternal Incentives:Poor performance may lead some firms to diversify to attempt to achieve better returns Firms may diversify to balance uncertain future cash flowsFirm may diversify into different businesses in order to reduce riskManagers often have incentives to diversify in order to increase their compensation and reduce employment risk, although effective governance mechanisms may restrict such abusesSummary Model of the Relationship Between Firm Performance and DiversificationResourcesDiversificationStrategyFirmPerformanceInternalGovernanceStrategyImplementationCapital Market Intervention and Market for Managerial TalentIncentivesManagerialMotives