business policy and strategy

© 2007 Thomson/South-Western.© 2007 Thomson/South-Western.All rights reserved.All rights reserved.

PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie CookThe University of West AlabamaThe University of West Alabama

Strategic Strategic ManagementManagementCompetitiveness and Globalization: Competitiveness and Globalization: Concepts and CasesConcepts and Cases Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson

Seventh edition

STRATEGIC

ACTIONS:

STRATEGY

FORMULATION

STRATEGIC

ACTIONS:

STRATEGY

FORMULATION

Student VersionStudent Version

CHAPTER 6CHAPTER 6

Corporate-Level Corporate-Level StrategyStrategy

© 2007 Thomson/South-Western. All rights reserved. 6–2

The Role of DiversificationThe Role of Diversification

• Diversification strategies play a major role in the Diversification strategies play a major role in the behavior of large firms.behavior of large firms.

• Product diversification concerns:Product diversification concerns:

The scope of the industries and markets in which the The scope of the industries and markets in which the firm competes.firm competes.

How managers buy, create and sell different How managers buy, create and sell different businesses to match skills and strengths with businesses to match skills and strengths with opportunities presented to the firm.opportunities presented to the firm.


Two Strategy LevelsTwo Strategy Levels

• Business-level Strategy (Competitive)Business-level Strategy (Competitive)

Each business unit in a diversified firm chooses a Each business unit in a diversified firm chooses a business-level strategy as its means of competing in business-level strategy as its means of competing in individual product markets.individual product markets.

• Corporate-level Strategy (Companywide)Corporate-level Strategy (Companywide)

Specifies actions taken by the firm to gain a Specifies actions taken by the firm to gain a competitive advantage by selecting and managing a competitive advantage by selecting and managing a group of different businesses competing in several group of different businesses competing in several industries and product markets.industries and product markets.


Levels of Diversification: Low LevelLevels of Diversification: Low Level

Dominant BusinessDominant Business

Between 70% and 95% of Between 70% and 95% of revenue comes from a single revenue comes from a single business.business.

AA

AA

BB

Single BusinessSingle BusinessMore than 95% of revenue More than 95% of revenue comes from a single business.comes from a single business.


Levels of Diversification: Moderate to Levels of Diversification: Moderate to HighHigh• Related ConstrainedRelated Constrained

Less than 70% of revenue Less than 70% of revenue comes from a single comes from a single business and all business and all businesses share businesses share product, technological product, technological and distribution linkages.and distribution linkages.

• Related Linked (mixed Related Linked (mixed related and unrelated)related and unrelated)Less than 70% of revenue Less than 70% of revenue

comes from the dominant comes from the dominant business, and there are only business, and there are only limited links between limited links between businesses.businesses.

CC

AA

BBCC

AA

BB


Levels of Diversification: Very High Levels of Diversification: Very High Levels Levels • Unrelated DiversificationUnrelated Diversification

Less than 70% of revenue comes from the dominant Less than 70% of revenue comes from the dominant business, and there are no common links between business, and there are no common links between businesses.businesses.

CCBB

AA


High Low

Value-Creating Strategies of Value-Creating Strategies of DiversificationDiversification

Operational and Corporate Relatedness

Corporate Relatedness: Transferring Skills into Businesses through Corporate Headquarters

Operational Relatedness:

Sharing Activities between

Businesses

High

Low

Related Constrained Related Constrained DiversificationDiversification

Vertical Integration Vertical Integration (Market Power)(Market Power)

UnrelatedUnrelatedDiversification Diversification

(Financial Economies)(Financial Economies)

Related Linked Related Linked DiversificationDiversification

(Economies of Scope)(Economies of Scope)

Both Operational and Both Operational and Corporate RelatednessCorporate Relatedness

(Rare capability that creates (Rare capability that creates diseconomies of scope)diseconomies of scope)


Related DiversificationRelated Diversification

• Firm creates value by building upon or Firm creates value by building upon or extending:extending: ResourcesResources CapabilitiesCapabilities Core competenciesCore competencies

• Economies of ScopeEconomies of Scope Cost savings that occur when a firm transfers Cost savings that occur when a firm transfers

capabilities and competencies developed in one of its capabilities and competencies developed in one of its businesses to another of its businesses.businesses to another of its businesses.


Related Diversification: Economies of Related Diversification: Economies of ScopeScope• Value is created from economies of scope Value is created from economies of scope

through:through:

Operational relatedness in sharing activitiesOperational relatedness in sharing activities

Corporate relatedness in transferring skills or Corporate relatedness in transferring skills or corporate core competencies among units.corporate core competencies among units.

• The difference between sharing activities and The difference between sharing activities and transferring competencies is based on how the transferring competencies is based on how the resources are jointly used to create economies resources are jointly used to create economies of scope.of scope.


Related Diversification: Market PowerRelated Diversification: Market Power

• Market power exists when a firm can:Market power exists when a firm can: Sell its products above the existing competitive level Sell its products above the existing competitive level

and/or and/or Reduce the costs of its primary and support activities Reduce the costs of its primary and support activities

below the competitive level.below the competitive level.


Related Diversification: Market Power Related Diversification: Market Power (cont’d)(cont’d)• Multipoint CompetitionMultipoint Competition

Two or more diversified firms simultaneously compete Two or more diversified firms simultaneously compete in the same product areas or geographic markets.in the same product areas or geographic markets.

• Vertical IntegrationVertical Integration

Backward integrationBackward integration—a firm produces its own inputs.—a firm produces its own inputs.

Forward integrationForward integration—a firm operates its own —a firm operates its own distribution system for delivering its outputs.distribution system for delivering its outputs.


Related Diversification: ComplexityRelated Diversification: Complexity

• Simultaneous Operational Relatedness and Simultaneous Operational Relatedness and Corporate RelatednessCorporate Relatedness

Involves managing two sources of knowledge Involves managing two sources of knowledge simultaneously:simultaneously:

• Operational forms of economies of scopeOperational forms of economies of scope

• Corporate forms of economies of scopeCorporate forms of economies of scope

Many such efforts often fail because of Many such efforts often fail because of implementation difficulties.implementation difficulties.


Unrelated DiversificationUnrelated Diversification

• Financial EconomiesFinancial Economies

Are cost savings realized through improved Are cost savings realized through improved allocations of financial resources.allocations of financial resources.

• Based on investments inside or outside the firmBased on investments inside or outside the firm

Create value through two types of financial Create value through two types of financial economies:economies:

• Efficient internal capital allocationsEfficient internal capital allocations

• Purchase of other corporations and the restructuring their Purchase of other corporations and the restructuring their assetsassets


Unrelated Diversification (cont’d)Unrelated Diversification (cont’d)

• Efficient Internal Capital Market AllocationEfficient Internal Capital Market Allocation

Corporate office distributes capital to business Corporate office distributes capital to business divisions to create value for overall company.divisions to create value for overall company.

• Corporate office gains access to information about those Corporate office gains access to information about those businesses’ actual and prospective performance.businesses’ actual and prospective performance.

Conglomerates have a fairly short life cycle because Conglomerates have a fairly short life cycle because financial economies are more easily duplicated by financial economies are more easily duplicated by competitors than are gains from operational and competitors than are gains from operational and corporate relatedness.corporate relatedness.


Unrelated Diversification: RestructuringUnrelated Diversification: Restructuring

• Restructuring creates financial economiesRestructuring creates financial economies

A firm creates value by buying and selling other firms’ A firm creates value by buying and selling other firms’ assets in the external market.assets in the external market.

• Resource allocation decisions may become Resource allocation decisions may become complex, so success often requires:complex, so success often requires:

Focus on mature, low-technology businesses.Focus on mature, low-technology businesses.

Focus on businesses not reliant on a client Focus on businesses not reliant on a client orientation.orientation.


External Incentives to DiversifyExternal Incentives to Diversify

• Antitrust laws in 1960s and 1970s Antitrust laws in 1960s and 1970s discouraged mergers that created discouraged mergers that created increased market power (vertical or increased market power (vertical or horizontal integration.horizontal integration.

• Mergers in the 1960s and 1970s thus Mergers in the 1960s and 1970s thus tended to be unrelated.tended to be unrelated.

• Relaxation of antitrust enforcement Relaxation of antitrust enforcement results in more and larger horizontal results in more and larger horizontal mergers.mergers.

• Early 2000: antitrust concerns seem to Early 2000: antitrust concerns seem to be emerging and mergers now more be emerging and mergers now more closely scrutinized.closely scrutinized.

Anti-trust Anti-trust LegislationLegislation


External Incentives to Diversify (cont’d)External Incentives to Diversify (cont’d)

• High tax rates on dividends cause a High tax rates on dividends cause a corporate shift from dividends to corporate shift from dividends to buying and building companies in high-buying and building companies in high-performance industries.performance industries.

• 1986 Tax Reform Act1986 Tax Reform Act

Reduced individual ordinary income tax Reduced individual ordinary income tax rate from 50 to 28 percent.rate from 50 to 28 percent.

Treated capital gains as ordinary Treated capital gains as ordinary income. income.

Thus created incentive for shareholders Thus created incentive for shareholders to prefer dividends to acquisition to prefer dividends to acquisition investments.investments.

Anti-trust Anti-trust LegislationLegislation

Tax LawsTax Laws


Internal Incentives to DiversifyInternal Incentives to Diversify

• High performance eliminates the High performance eliminates the need for greater diversification.need for greater diversification.

• Low performance acts as Low performance acts as incentive for diversification.incentive for diversification.

• Firms plagued by poor Firms plagued by poor performance often take higher performance often take higher risks (diversification is risky).risks (diversification is risky).

Low Low PerformancPerformanc

ee


Internal Incentives to Diversify (cont’d)Internal Incentives to Diversify (cont’d)

• Diversification may be Diversification may be defensive strategy if:defensive strategy if:

Product line matures.Product line matures.

Product line is threatened.Product line is threatened.

Firm is small and is in mature Firm is small and is in mature or maturing industry.or maturing industry.


ee

Uncertain Uncertain Future Future

Cash FlowsCash Flows


Internal Incentives to Diversify (cont’d)Internal Incentives to Diversify (cont’d)

• Synergy exists when the value created Synergy exists when the value created by businesses working together by businesses working together exceedsexceeds the value created by them the value created by them working independentlyworking independently

• … … but synergy creates joint but synergy creates joint interdependence between business interdependence between business units.units.

• A firm may become risk averse and A firm may become risk averse and constrain its level of activity sharing.constrain its level of activity sharing.

• A firm may reduce level of technological A firm may reduce level of technological change by operating in more certain change by operating in more certain environments.environments.


ee

Uncertain Uncertain Future Future

Cash FlowsCash Flows

Synergy Synergy and Risk and Risk

ReductionReduction

business policy and strategy

Business

levels of diversification

businesses actual

financial economiesa

lowtechnology businesses

group of different businesses

corporate relatednessinvolves

corporate shift

business divisions