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©2003 Southwestern Publishing Company 1
Corporate-Level StrategyCorporate-Level Strategy
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
Chapter 6Chapter 6
2
Strategy ImplementationStrategy Implementation
Chapter 11Chapter 11OrganizationalOrganizationalStructure and Structure and
ControlsControls
Chapter 10Chapter 10CorporateCorporate
GovernanceGovernance
Chapter 12Chapter 12StrategicStrategic
LeadershipLeadership
Strategy FormulationStrategy Formulation
StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average
ReturnsReturns
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment
Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment
The Strategic The Strategic Management Management ProcessProcess
Chapter 6Chapter 6Corporate-Corporate-
Level StrategyLevel Strategy
FeedbackFeedback
Str
ateg
ic I
np
uts
Str
ateg
ic I
np
uts
Str
ateg
ic A
ctio
ns
Str
ateg
ic A
ctio
ns
Str
ateg
ic O
utc
omes
Str
ateg
ic O
utc
omes
Chapter 13Chapter 13StrategicStrategic
EntrepreneurshipEntrepreneurship
Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry
and Competitiveand CompetitiveDynamics Dynamics
Chapter 4Chapter 4Business-LevelBusiness-Level
StrategyStrategy
3
Two Levels of StrategyTwo Levels of StrategyA diversified company has two levels of strategyA diversified company has two levels of strategy1. Business-Level Strategy1. Business-Level Strategy (Competitive Strategy)(Competitive Strategy)
How to create competitive advantage in each How to create competitive advantage in each business in which the company competesbusiness in which the company competes
- low cost- low cost - differentiation - differentiation- focused low cost- focused low cost - focused differentiation - focused differentiation
- integrated low cost/- integrated low cost/ differentiationdifferentiation
2. Corporate-Level Strategy2. Corporate-Level Strategy (Company-wide Strategy)(Company-wide Strategy)
How to create value for the corporation as a wholeHow to create value for the corporation as a whole
4
Key Questions in Key Questions in Corporate StrategyCorporate Strategy1. What businesses should the corporation 1. What businesses should the corporation
be in?be in?
2. How should the corporate office manage 2. How should the corporate office manage the array of business units?the array of business units?
Corporate StrategyCorporate Strategy is is what makes the what makes the corporate whole add up corporate whole add up to more than the sum of to more than the sum of its business unit partsits business unit parts
5
Levels and Types of DiversificationLevels and Types of Diversification
Low Levels of DiversificationLow Levels of DiversificationSingle BusinessSingle Business> 95% of business from a single > 95% of business from a single business unitbusiness unit
Dominant BusinessDominant BusinessBetween 70 and 95% of business Between 70 and 95% of business from a single business unitfrom a single business unit
6
Related ConstrainedRelated Constrained<70% of revenues from dominant <70% of revenues from dominant business; all businesses share business; all businesses share product, technological and product, technological and distribution linkagesdistribution linkages
Levels and Types of DiversificationLevels and Types of Diversification
Moderate to High Levels of DiversificationModerate to High Levels of Diversification
7
Related Linked (Mixed)Related Linked (Mixed)< 70% of revenues from dominant < 70% of revenues from dominant business, and only limited links business, and only limited links existexist
Levels and Types of DiversificationLevels and Types of Diversification
Moderate to High Levels of DiversificationModerate to High Levels of Diversification
8
Levels and Types of Levels and Types of DiversificationDiversification
UnrelatedUnrelated< 70% of revenue comes from the < 70% of revenue comes from the dominant business, and there are dominant business, and there are no common links between no common links between businessesbusinesses
Very High Levels of DiversificationVery High Levels of Diversification
9
Reasons for DiversificationReasons for Diversification
Reasons to Enhance Strategic Reasons to Enhance Strategic CompetitivenessCompetitiveness
• Economies of scope
• Market power
• Financial economics
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
10
Incentives with Neutral Incentives with Neutral Effects on Strategic Effects on Strategic CompetitivenessCompetitiveness
• Anti-trust regulation
• Tax laws
• Low performance
• Uncertain future cash flows
• Firm risk reduction
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
Reasons for DiversificationReasons for Diversification
11
Resources with varying Resources with varying effects on value creation and effects on value creation and strategic competitivenessstrategic competitiveness
• Tangible resources financial resources physical assets
• Intangible resources tacit knowledge customer relations image and reputation
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
Reasons for DiversificationReasons for Diversification
12
Managerial Motives (Value Managerial Motives (Value Reduction)Reduction)
• Diversifying managerial employment risk
• Increasing managerial compensation
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
Reasons for DiversificationReasons for Diversification
13
Value-creating Strategies of Diversification:Value-creating Strategies of Diversification: Operational and Corporate ReadinessOperational and Corporate Readiness
Related ConstrainedRelated ConstrainedDiversificationDiversification
Vertical IntegrationVertical Integration(Market Power)(Market Power)
UnrelatedUnrelatedDiversificationDiversification
(Financial Economies)(Financial Economies)
Both Operational andBoth Operational andCorporate RelatednessCorporate Relatedness
(Rare Capability(Rare Capabilityand can Createand can CreateDiseconomies ofDiseconomies of
Scope)Scope)
Related LinkedRelated LinkedDiversificationDiversification(Economies of(Economies of
Scope)Scope)
Corporate Readiness: Transferring Skills into Corporate Readiness: Transferring Skills into Businesses Through Corporate HeadquartersBusinesses Through Corporate Headquarters
LowLow HighHigh
Sh
arin
g: O
per
atio
nal
S
har
ing:
Op
erat
ion
al
Rel
ated
nes
s B
etw
een
Bu
sin
esse
sR
elat
edn
ess
Bet
wee
n B
usi
nes
ses
LowLow
HighHigh
14
Adding Value by DiversificationAdding Value by Diversification
Diversification most effectively adds value Diversification most effectively adds value by either of two mechanisms:by either of two mechanisms:– Economies of scope:Economies of scope: cost savings attributed cost savings attributed
to transferring the capabilities and competencies to transferring the capabilities and competencies developed in one business to a new businessdeveloped in one business to a new business
– Market power:Market power: when a firm is able to sell its when a firm is able to sell its products above the existing competitive level or products above the existing competitive level or reduce the costs of its primary and support reduce the costs of its primary and support activities below the competitive level, or bothactivities below the competitive level, or both
15
Alternative Diversification Alternative Diversification StrategiesStrategiesRelated Diversification StrategiesRelated Diversification Strategies
– sharing activitiessharing activities
– transferring core competenciestransferring core competencies
Unrelated Diversification StrategiesUnrelated Diversification Strategies
– efficient internal capital market allocationefficient internal capital market allocation
– restructuringrestructuring
16
Alternative Diversification Alternative Diversification StrategiesStrategiesRelated Diversification StrategiesRelated Diversification Strategies
– sharing activitiessharing activities
17
Sharing Activities:Sharing Activities: Sharing activities often lowers costs or raises Sharing activities often lowers costs or raises
differentiationdifferentiation Sharing activities can lower costs if it:Sharing activities can lower costs if it:
– achieves economies of scaleachieves economies of scale– boosts efficiency of utilizationboosts efficiency of utilization– helps move more rapidly down the Learning Curvehelps move more rapidly down the Learning Curve
Sharing activities can enhance potential for or Sharing activities can enhance potential for or reduce the cost of differentiationreduce the cost of differentiation
Must involve activities that are crucial to Must involve activities that are crucial to competitive advantagecompetitive advantage
Key CharacteristicsKey Characteristics
18
Sharing Activities:Sharing Activities: Strong sense of corporate identityStrong sense of corporate identity Clear corporate mission that emphasizes Clear corporate mission that emphasizes
the importance of integrating business the importance of integrating business unitsunits
Incentive system that rewards more than Incentive system that rewards more than just business unit performancejust business unit performance
AssumptionsAssumptions
19
Related Diversification StrategiesRelated Diversification Strategies
– sharing activitiessharing activities
– transferring core competenciestransferring core competencies
Alternative Diversification Alternative Diversification StrategiesStrategies
20
Transferring Core Competencies:Transferring Core Competencies:
Exploits interrelationships among Exploits interrelationships among divisionsdivisions
Start with value chain analysisStart with value chain analysis– identify ability to transfer skills or expertise identify ability to transfer skills or expertise
among similar value chainsamong similar value chains– exploit ability to transfer activitiesexploit ability to transfer activities
Key CharacteristicsKey Characteristics
21
Transferring Core Competencies: Transferring Core Competencies:
Transferring core competencies leads to Transferring core competencies leads to competitive advantage only if the competitive advantage only if the similarities among business units meet the similarities among business units meet the following conditions:following conditions:– activities involved in the businesses are similar activities involved in the businesses are similar
enough that sharing expertise is meaningfulenough that sharing expertise is meaningful– transfer of skills involves activities which are transfer of skills involves activities which are
important to competitive advantageimportant to competitive advantage– the skills transferred represent significant the skills transferred represent significant
sources of competitive advantage for the sources of competitive advantage for the receiving unitreceiving unit
AssumptionsAssumptions
22
Related Diversification StrategiesRelated Diversification Strategies
– sharing activitiessharing activities
– transferring core competenciestransferring core competencies
Alternative Diversification Alternative Diversification StrategiesStrategies
Unrelated Diversification StrategiesUnrelated Diversification Strategies
– efficient internal capital market allocationefficient internal capital market allocation
23
Efficient Internal Capital Market Efficient Internal Capital Market Allocation:Allocation: Firms pursuing this strategy frequently Firms pursuing this strategy frequently
diversify by acquisition:diversify by acquisition:– acquire sound, attractive companiesacquire sound, attractive companies– acquired units are autonomousacquired units are autonomous– acquiring corporation supplies needed capitalacquiring corporation supplies needed capital– portfolio managers transfer resources from units portfolio managers transfer resources from units
that generate cash to those with high growth that generate cash to those with high growth potential and substantial cash needspotential and substantial cash needs
– add professional management & control to sub-add professional management & control to sub-unitsunits
– sub-unit managers compensation based on unit sub-unit managers compensation based on unit resultsresults
Key CharacteristicsKey Characteristics
24
Efficient Internal Capital Market Efficient Internal Capital Market Allocation:Allocation: Managers have more detailed knowledge Managers have more detailed knowledge
of firm relative to outside investorsof firm relative to outside investors Firm need not risk competitive edge by Firm need not risk competitive edge by
disclosing sensitive competitive disclosing sensitive competitive information to investorsinformation to investors
Firm can reduce risk by allocating Firm can reduce risk by allocating resources among diversified businesses, resources among diversified businesses, although shareholders can generally although shareholders can generally diversify more economically on their owndiversify more economically on their own
AssumptionsAssumptions
25
Related Diversification StrategiesRelated Diversification Strategies
– sharing activitiessharing activities
– transferring core competenciestransferring core competencies
Unrelated Diversification StrategiesUnrelated Diversification Strategies
– efficient internal capital market allocationefficient internal capital market allocation
Alternative Diversification Alternative Diversification StrategiesStrategies
– restructuringrestructuring
26
Restructuring:Restructuring: Seek out undeveloped, sick or threatened Seek out undeveloped, sick or threatened
organizations or industriesorganizations or industries Parent company (acquirer) intervenes and Parent company (acquirer) intervenes and
frequently:frequently:– changes sub-unit management teamchanges sub-unit management team– shifts strategyshifts strategy– infuses firm with new technologyinfuses firm with new technology– enhances discipline by changing control enhances discipline by changing control
systemssystems– divests part of firmdivests part of firm– makes additional acquisitions to achieve makes additional acquisitions to achieve
critical masscritical mass
Key CharacteristicsKey Characteristics
27
Restructuring:Restructuring: Frequently sell unit after making one-time Frequently sell unit after making one-time
changes since parent no longer adds changes since parent no longer adds value to ongoing operationsvalue to ongoing operations
Key CharacteristicsKey Characteristics
28
Restructuring:Restructuring: Requires keen management insight in Requires keen management insight in
selecting firms with depressed values or selecting firms with depressed values or unforeseen potentialunforeseen potential
Must do more than restructure companiesMust do more than restructure companies Need to initiate restructuring of industries Need to initiate restructuring of industries
to create a more attractive environmentto create a more attractive environment
AssumptionsAssumptions
29
Incentives to DiversifyIncentives to Diversify
External Incentives:External Incentives: Relaxation of anti-trust regulation allows more Relaxation of anti-trust regulation allows more
related acquisitions than in the pastrelated acquisitions than in the past Before 1986, higher taxes on dividends favored Before 1986, higher taxes on dividends favored
spending retained earnings on acquisitionsspending retained earnings on acquisitions After 1986, firms made fewer acquisitions with After 1986, firms made fewer acquisitions with
retained earnings, shifting to the use of debt to retained earnings, shifting to the use of debt to take advantage of tax deductible interest take advantage of tax deductible interest paymentspayments
30
Incentives to DiversifyIncentives to DiversifyInternal Incentives:Internal Incentives: Poor performance may lead some firms to Poor performance may lead some firms to
diversify to attempt to achieve better returnsdiversify to attempt to achieve better returns Firms may diversify to balance uncertain future Firms may diversify to balance uncertain future
cash flowscash flows Firms may diversify into different businesses in Firms may diversify into different businesses in
order to reduce riskorder to reduce risk
31
Resources and DiversificationResources and Diversification Besides strong incentives, firms are more Besides strong incentives, firms are more
likely to diversify if they have the likely to diversify if they have the resources to do soresources to do so
Value creation is determined more by Value creation is determined more by appropriate use of resources than appropriate use of resources than incentives to diversifyincentives to diversify
32
Managerial Motives to DiversifyManagerial Motives to DiversifyManagers have motives to diversifyManagers have motives to diversify
– diversification increases size; size is diversification increases size; size is associated with executive compensationassociated with executive compensation
– diversification reduces employment riskdiversification reduces employment risk– effective governance mechanisms may restrict effective governance mechanisms may restrict
such motivessuch motives
33
Relationship Between Relationship Between Diversification and PerformanceDiversification and Performance
Per
form
ance
Per
form
ance
Level of DiversificationLevel of Diversification
DominantBusiness
UnrelatedBusiness
RelatedConstrained
34
Relationship Between Firm Relationship Between Firm Performance and DiversificationPerformance and Diversification
IncentivesIncentives
ManagerialManagerialMotivesMotives
ResourcesResources DiversificationDiversificationStrategyStrategy
FirmFirmPerformancePerformance
InternalInternalGovernanceGovernance
StrategyStrategyImplementationImplementation
Capital MarketCapital MarketIntervention and theIntervention and theMarket forMarket forManagerial TalentManagerial Talent