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Chapter

Chapter 6
6

Corporate-Level Strategy

Michael
Michael A.
A. Hitt
Hitt
R.
R. Duane
Duane Ireland
Ireland
Robert
Robert E.
E. Hoskisson
Hoskisson

©2000 South-Western College Publishing


Ch6
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 - focused low cost
- differentiation - focused differentiation
- integrated low cost/differentiation

2. Corporate-Level Strategy (Companywide Strategy)

How to create value for the corporation as a whole


Ch6
Key Questions of Corporate Strategy

1. 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 parts
Ch6
Levels and Types of Diversification
Low Levels of Diversification
Single business > 95% of revenues from a single A
business unit
Dominant business Between 70% and 95% of A
revenues from a single business
B
unit
Moderate to High Levels of Diversification
A
Related constrained < 70% of revenues from dominant
business; all businesses share product, B C
technological and distribution linkages

Related linked (mixed) < 70% of revenues from dominant A


business, and only limited links exist
B C

Very High Levels of Diversification A


Unrelated-Diversified Business units not closely related B C
Motives, Incentives, and Resources
for Diversification
Motives to Enhance
Strategic Competitiveness

Resources Economies of Scope


Market Power
Financial Economies
Incentives

Managerial
Motives

Ch6
Motives, Incentives, and Resources
for Diversification

Incentives and Resources


Resources with Neutral Effects of
Strategic Competitiveness
Anti-Trust Regulation
Tax Laws
Incentives Low Performance
Uncertain Future Cash Flows
Firm Risk Reduction
Managerial
Tangible Resources
Motives Intangible Resources

Ch6
Motives, Incentives, and Resources
for Diversification

Resources

Incentives
Managerial Motives
Causing Value Reduction
Managerial Diversifying Managerial
Motives Employment Risk
Increasing Managerial
Compensation
Ch6
Alternative Diversification Strategies

Related Diversification Strategies

Sharing Activities
Transferring Core Competencies

Unrelated Diversification Strategies

Efficient Internal Capital Market Allocation


Restructuring
Ch6
Alternative Diversification Strategies
Sharing Activities
Key Characteristics:
Sharing Activities often lowers costs or
raises differentiation
Example: Using a common physical distribution system
and sales force such as Procter & Gamble’s disposable
diaper and paper towel divisions

Sharing Activities can lower costs if it:


Achieves economies of scale
Boosts efficiency of utilization
Helps move more rapidly down Learning Curve
Example: General Electric’s costs to advertise, sell and
service major appliances are spread over many different
products Ch6
Alternative Diversification Strategies
Sharing Activities
Key Characteristics:
Sharing Activities can enhance potential for or
reduce the cost of differentiation
Example: Shared order processing system may allow new
features customers value or make more advanced remote
sensing technology available

Must involve activities that are crucial to


competitive advantage
Example: 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 ship
Ch6-
Alternative Diversification Strategies
Sharing Activities
Assumptions:

Strong sense of corporate identity

Clear corporate mission that emphasizes the


importance of integrating business units

Incentive system that rewards more than just


business unit performance

Ch6-
Alternative Diversification Strategies

Related Diversification Strategies

Sharing Activities
Transferring Core Competencies

Unrelated Diversification Strategies

Efficient Internal Capital Market Allocation


Restructuring
Ch6-
Alternative Diversification Strategies
Transferring Core Competencies
Key Characteristics:

Exploits Interrelationships among divisions

Start with Value Chain analysis

Identify ability to transfer skills or


expertise among similar value chains

Exploit ability to transfer activities

Ch6-
Alternative Diversification Strategies
Transferring Core Competencies
Assumptions:
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 meaningful

Transfer of skills involves activities which are


important to competitive advantage

The skills transferred represent significant sources


of competitive advantage for the receiving unit
Ch6-
Alternative Diversification Strategies

Related Diversification Strategies

Sharing Activities
Transferring Core Competencies

Unrelated Diversification Strategies

Efficient Internal Capital Market Allocation


Restructuring
Ch6-
Alternative Diversification Strategies
Efficient Internal Capital Market Allocation
Key Characteristics:
Firms pursuing this strategy frequently diversify by
acquisition:
Acquire sound, attractive companies
Acquired units are autonomous
Acquiring corporation supplies needed capital
Portfolio managers transfer resources from units that
generate cash to those with high growth potential and
substantial cash needs
Add professional management & control to sub-units
Sub-unit managers compensation based on unit resultsCh6-
Alternative Diversification Strategies
Efficient Internal Capital Market Allocation
Assumptions:

Managers have more detailed knowledge of firm


relative to outside investors

Firm need not risk competitive edge by disclosing


sensitive competitive information to investors

Firm can reduce risk by allocating resources among


diversified businesses, although shareholders can
generally diversify more economically on their own

Ch6-
Alternative Diversification Strategies

Related Diversification Strategies

Sharing Activities
Transferring Core Competencies

Unrelated Diversification Strategies

Efficient Internal Capital Market Allocation


Restructuring
Ch6-
Alternative Diversification Strategies
Restructuring
Key Characteristics:
Seek out undeveloped, sick or threatened organizations
or industries
Parent company (acquirer) intervenes and frequently:
- Changes sub-unit management team
- Shifts strategy
- Infuses firm with new technology
- Enhances discipline by changing control systems
- Divests part of firm
- Makes additional acquisitions to achieve critical mass
Frequently sell unit after making one-time changes since
parent no longer adds value to ongoing operations
Ch6-
Alternative Diversification Strategies
Restructuring
Assumptions:

Requires keen management insight in selecting


firms with depressed values or unforeseen potential

Must do more than restructure companies

Need to initiate restructuring of industries to


create a more attractive environment

Ch6-
Value-creating Strategies of Diversification
Operational and Corporate Relatedness
Related Constrained Both Operational and
High Diversification Corporate Relatedness
(Rare Capability and
Sharing: Vertical Integration Can Create Diseconomies
Operational (Market Power) of Scope)
Relatedness
Between
Business
Unrelated Related Linked
Diversification Diversification
Low (Financial Economies) (Economies of Scope)

Low High
Corporate Relatedness: Transferring Skills Into
Business Through Corporate Headquarters Ch6-
Performance Diversification and Firm Performance

Dominant Related Unrelated


Business Constrained Business

Level of Diversification Ch6-


Incentives to Diversify
Internal Incentives:
Poor performance may lead some firms to diversify to
attempt to achieve better returns
Firms may diversify to balance uncertain future cash
flows
Firm may diversify into different businesses in order
to reduce risk

Managers often have incentives to diversify in order to


increase their compensation and reduce employment
risk, although effective governance mechanisms may
restrict such abuses
Ch6-
Summary Model of the Relationship Between Firm
Performance and Diversification
Capital Market
Intervention and
Resources Market for
Managerial Talent

Incentives Diversification Firm


Strategy Performance

Managerial
Motives
Internal Strategy
Governance Implementation
Ch6-