ch6-1 chapter 6 corporate-level strategy dr. mubarak ali
DESCRIPTION
Ch6-3 How to create value for the corporation as a whole 2. Corporate-Level Strategy (Companywide Strategy) - low cost - differentiation - integrated low cost/differentiation - focused low cost - focused differentiation How to create competitive advantage in each business in which the company competes 1. Business-Level Strategy (Competitive Strategy) A Diversified Company Has Two Levels of StrategyTRANSCRIPT
Ch6-1
Chapter 6
Corporate-Level Strategy
Dr. Mubarak Ali
Ch6-2
Chapter 3Internal
Environment
Chapter 2External
EnvironmentThe StrategicThe StrategicManagementManagement
ProcessProcessStrategic IntentStrategic Mission
StrategicCompetitivenessAbove Average
ReturnsFeedback
Strategy Formulation
Chapter 4Business-Level
Strategy
Chapter 5CompetitiveDynamics
Chapter 6Corporate-Level
Strategy
Chapter 8International
Strategy
Chapter 9Cooperative
Strategies
Chapter 7Acquisitions &Restructuring
Strategy Implementation
Chapter 10Corporate
Governance
Chapter 11Structure& Control
Chapter 12Strategic
Leadership
Chapter 13Entrepreneurship & Innovation
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Ch6-3
How to create value for the corporation as a wholeHow to create value for the corporation as a whole
2. Corporate-Level Strategy2. Corporate-Level Strategy (Companywide Strategy)(Companywide Strategy)
- low cost- low cost- differentiation- differentiation- integrated low cost/differentiation- integrated low cost/differentiation
- focused low cost- focused low cost- focused differentiation- focused differentiation
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
1. Business-Level Strategy1. Business-Level Strategy (Competitive Strategy)(Competitive Strategy)
A Diversified CompanyA Diversified CompanyHas Two Levels of StrategyHas Two Levels of Strategy
Ch6-4
1. 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 what makes the corporate whole is what makes the corporate whole add up to more than the sum of its business unit partsadd up to more than the sum of its business unit parts
Key Questions of Corporate StrategyKey Questions of Corporate Strategy
Levels and Types of DiversificationLevels and Types of DiversificationLow Levels of DiversificationLow Levels of Diversification
Moderate to High Levels of DiversificationModerate to High Levels of Diversification
Very High Levels of DiversificationVery High Levels of Diversification
Related linked (mixed)Related linked (mixed) < 70% of revenues from dominant < 70% of revenues from dominant business, and only limited links existbusiness, and only limited links exist
AA
BB CC
Single businessSingle business > 95% of revenues from a single > 95% of revenues from a single business unitbusiness unit
AA
Dominant businessDominant business Between 70% and 95% of Between 70% and 95% of revenues from a single business revenues from a single business unitunit BB
AA
Unrelated-Diversified Business units not closely related Business units not closely related
AA
BB CC
< 70% of revenues from dominant < 70% of revenues from dominant business; all businesses share product, business; all businesses share product, technological and distribution linkagestechnological and distribution linkages
Related constrainedRelated constrainedAA
BB CC
Ch6-6
Motives, Incentives, and ResourcesMotives, Incentives, and Resourcesfor Diversificationfor Diversification
Motives to Enhance Motives to Enhance Strategic CompetitivenessStrategic Competitiveness
Economies of ScopeEconomies of ScopeMarket PowerMarket Power
Financial EconomiesFinancial Economies
ResourcesResources
ManagerialManagerialMotivesMotives
IncentivesIncentives
Ch6-7
Incentives and Resources Incentives and Resources with Neutral Effects of with Neutral Effects of
Strategic CompetitivenessStrategic Competitiveness
Anti-Trust RegulationAnti-Trust RegulationTax LawsTax Laws
Low PerformanceLow PerformanceUncertain Future Cash FlowsUncertain Future Cash Flows
Firm Risk ReductionFirm Risk Reduction
Tangible ResourcesTangible ResourcesIntangible ResourcesIntangible Resources
ManagerialManagerialMotivesMotives
ResourcesResources
IncentivesIncentives
Motives, Incentives, and ResourcesMotives, Incentives, and Resourcesfor Diversificationfor Diversification
Ch6-8
Managerial Motives Managerial Motives Causing Value ReductionCausing Value Reduction
Diversifying ManagerialDiversifying ManagerialEmployment RiskEmployment Risk
Increasing Managerial Increasing Managerial CompensationCompensation
ManagerialManagerialMotivesMotives
ResourcesResources
IncentivesIncentives
Motives, Incentives, and ResourcesMotives, Incentives, and Resourcesfor Diversificationfor Diversification
Ch6-9
Summary Model of theSummary Model of theRelationship Between FirmRelationship Between Firm
Performance and DiversificationPerformance and Diversification
DiversificationDiversificationStrategyStrategy
ManagerialManagerialMotivesMotives
ResourcesResources
IncentivesIncentives
Ch6-10
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:
By developing economies of scope between By developing economies of scope between business units in the firms which leads to business units in the firms which leads to synergistic benefitssynergistic benefits
By developing market power which leads to By developing market power which leads to greater returnsgreater returns
Ch6-11
Alternative Diversification StrategiesAlternative Diversification Strategies
Related Diversification Strategies
Unrelated Diversification Strategies
Sharing ActivitiesSharing Activities
Transferring Core CompetenciesTransferring Core Competencies
Efficient Internal Capital Market AllocationEfficient Internal Capital Market Allocation
RestructuringRestructuring
Ch6-12
Key Characteristics:
Example:Example: Using a common physical distribution system Using a common physical distribution system and sales force such as Procter & Gamble’s disposable and sales force such as Procter & Gamble’s disposable diaper and paper towel divisionsdiaper and paper towel divisions
Example:Example: General Electric’s costs to advertise, sell and General Electric’s costs to advertise, sell and service major appliances are spread over many different service major appliances are spread over many different productsproducts
Sharing ActivitiesSharing ActivitiesAlternative Diversification StrategiesAlternative Diversification Strategies
Achieves economies of scaleAchieves economies of scaleBoosts efficiency of utilizationBoosts efficiency of utilizationHelps move more rapidly down Learning CurveHelps move more rapidly down Learning Curve
Sharing Activities often lowers costs or Sharing Activities often lowers costs or raises differentiationraises differentiation
Sharing Activities can lower costs if it:Sharing Activities can lower costs if it:
Ch6-13
Example:Example: Shared order processing system may allow new Shared order processing system may allow new features customers value or make more advanced remote features customers value or make more advanced remote sensing technology availablesensing technology available
Example:Example: Procter & Gamble’s sharing of sales and Procter & Gamble’s sharing of sales and physical distribution for disposable diapers and paper physical distribution for disposable diapers and paper towels is effective because these items are so bulky and towels is effective because these items are so bulky and costly to shipcostly to ship
Key Characteristics:
Sharing ActivitiesSharing ActivitiesAlternative Diversification StrategiesAlternative Diversification Strategies
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
Ch6-14
Assumptions:Sharing ActivitiesSharing Activities
Alternative Diversification StrategiesAlternative Diversification Strategies
Strong sense of corporate identityStrong sense of corporate identity
Clear corporate mission that emphasizes the Clear corporate mission that emphasizes the importance of integrating business unitsimportance of integrating business units
Incentive system that rewards more than just Incentive system that rewards more than just business unit performancebusiness unit performance
Ch6-15
Alternative Diversification StrategiesAlternative Diversification Strategies
Related Diversification Strategies
Unrelated Diversification Strategies
Sharing ActivitiesSharing Activities
Transferring Core CompetenciesTransferring Core Competencies
Efficient Internal Capital Market AllocationEfficient Internal Capital Market Allocation
RestructuringRestructuring
Ch6-16
Key Characteristics:
Transferring Core CompetenciesTransferring Core CompetenciesAlternative Diversification StrategiesAlternative Diversification Strategies
Identify ability to transfer skills or Identify ability to transfer skills or expertise among similar value chainsexpertise among similar value chains
Exploit ability to Exploit ability to transfer activitiestransfer activities
Exploits Exploits InterrelationshipsInterrelationships among divisions among divisions
Start with Start with Value ChainValue Chain analysisanalysis
Ch6-17
Assumptions:
Transferring Core Competencies leads to competitive Transferring Core Competencies leads to competitive advantage only if the similarities among business units advantage only if the similarities among business units meet the following conditions:meet the 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 sources The skills transferred represent significant sources of competitive advantage for the receiving unitof competitive advantage for the receiving unit
Transferring Core CompetenciesTransferring Core CompetenciesAlternative Diversification StrategiesAlternative Diversification Strategies
Ch6-18
Alternative Diversification StrategiesAlternative Diversification Strategies
Related Diversification Strategies
Unrelated Diversification Strategies
Sharing ActivitiesSharing Activities
Transferring Core CompetenciesTransferring Core Competencies
Efficient Internal Capital Market AllocationEfficient Internal Capital Market Allocation
RestructuringRestructuring
Ch6-19
Key Characteristics:Firms pursuing this strategy frequently diversify by Firms pursuing this strategy frequently diversify by acquisition:acquisition:
Efficient Internal Capital Market AllocationEfficient Internal Capital Market AllocationAlternative Diversification StrategiesAlternative Diversification Strategies
Acquire sound, attractive companiesAcquire sound, attractive companies
Acquired units are autonomousAcquired units are autonomous
Acquiring corporation supplies needed capital Acquiring corporation supplies needed capital
Portfolio managers transfer resources from units that Portfolio managers transfer resources from units that generate cash to those with high growth potential and generate cash to those with high growth potential and substantial cash needssubstantial cash needs
Add professional management & control to sub-unitsAdd professional management & control to sub-units
Sub-unit managers compensation based on unit resultsSub-unit managers compensation based on unit results
Ch6-20
Assumptions:
Efficient Internal Capital Market AllocationEfficient Internal Capital Market AllocationAlternative Diversification StrategiesAlternative Diversification Strategies
Managers have more detailed knowledge of firm Managers have more detailed knowledge of firm relative to outside investorsrelative to outside investors
Firm need not risk competitive edge by disclosing Firm need not risk competitive edge by disclosing sensitive competitive information to investorssensitive competitive information to investors
Firm can reduce risk by allocating resources among Firm can reduce risk by allocating resources among diversified businesses, although shareholders can diversified businesses, although shareholders can generally diversify more economically on their owngenerally diversify more economically on their own
Ch6-21
Alternative Diversification StrategiesAlternative Diversification Strategies
Related Diversification Strategies
Unrelated Diversification Strategies
Sharing ActivitiesSharing Activities
Transferring Core CompetenciesTransferring Core Competencies
Efficient Internal Capital Market AllocationEfficient Internal Capital Market Allocation
RestructuringRestructuring
Ch6-22
Key Characteristics:RestructuringRestructuring
- - Changes sub-unit management teamChanges sub-unit management team- - Shifts strategyShifts strategy-- Infuses firm with new technology Infuses firm with new technology
-- Divests part of firm Divests part of firm-- Makes additional acquisitions to achieve critical mass Makes additional acquisitions to achieve critical mass
-- Enhances discipline by changing control systems Enhances discipline by changing control systems
Alternative Diversification StrategiesAlternative Diversification Strategies
Seek out undeveloped, sick or threatened organizations Seek out undeveloped, sick or threatened organizations or industriesor industries
Parent company (acquirer) intervenes and frequently:Parent company (acquirer) intervenes and frequently:
Frequently sell unit after making one-time changes since Frequently sell unit after making one-time changes since parent no longer adds value to ongoing operationsparent no longer adds value to ongoing operations
Ch6-23
Assumptions:RestructuringRestructuring
Alternative Diversification StrategiesAlternative Diversification Strategies
Requires keen management insight in selecting Requires keen management insight in selecting firms with depressed values or unforeseen potentialfirms with depressed values or unforeseen potential
Must do more than restructure companiesMust do more than restructure companies
Need to initiate restructuring of industries to Need to initiate restructuring of industries to create a more attractive environmentcreate a more attractive environment
Ch6-24
Internal Incentives:
Incentives to DiversifyIncentives to Diversify
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 take retained earnings, shifting to the use of debt to take advantage of tax deductible interest paymentsadvantage of tax deductible interest payments
External Incentives:
Poor performance may lead some firms to Poor performance may lead some firms to diversify to attempt to achieve better returns diversify to attempt to achieve better returns
Ch6-25
Value-creating Strategies of DiversificationValue-creating Strategies of DiversificationOperational and Corporate RelatednessOperational and Corporate Relatedness
Sharing:Sharing:OperationalOperationalRelatednessRelatedness
BetweenBetweenBusinessBusiness
Corporate Relatedness:Corporate Relatedness: Transferring Skills Into Transferring Skills Into Business Through Corporate HeadquartersBusiness Through Corporate Headquarters
LowLow HighHigh
HighHigh
LowLow
Related Linked Related Linked DiversificationDiversification
(Economies of Scope)(Economies of Scope)
UnrelatedUnrelatedDiversificationDiversification
(Financial Economies)(Financial Economies)
Both Operational and Both Operational and Corporate RelatednessCorporate Relatedness(Rare Capability and (Rare Capability and
Can Create Diseconomies Can Create Diseconomies of Scope)of Scope)
Related Constrained Related Constrained DiversificationDiversification
Vertical IntegrationVertical Integration(Market Power)(Market Power)
Ch6-26
Perf
orm
ance
Perf
orm
ance
Level of DiversificationLevel of Diversification
Diversification and Firm PerformanceDiversification and Firm Performance
DominantDominantBusinessBusiness
UnrelatedUnrelatedBusinessBusiness
RelatedRelatedConstrainedConstrained
Ch6-27
Incentives to DiversifyIncentives to DiversifyInternal Incentives:Internal Incentives:
Poor performance may lead some firms to diversify to Poor performance may lead some firms to diversify to attempt to achieve better returns attempt to achieve better returns
Firms may diversify to balance uncertain future cash Firms may diversify to balance uncertain future cash flowsflows
Firm may diversify into different businesses in order Firm may diversify into different businesses in order to reduce riskto reduce risk
Managers often have incentives to diversify in order to Managers often have incentives to diversify in order to increase their compensation and reduce employment increase their compensation and reduce employment risk, although effective governance mechanisms may risk, although effective governance mechanisms may restrict such abusesrestrict such abuses
Ch6-28
Summary Model of the Relationship Between Firm Summary Model of the Relationship Between Firm Performance and DiversificationPerformance and Diversification
ResourcesResources
DiversificationDiversificationStrategyStrategy
FirmFirmPerformancePerformance
InternalInternalGovernanceGovernance
StrategyStrategyImplementationImplementation
Capital Market Capital Market Intervention and Intervention and
Market for Market for Managerial TalentManagerial Talent
IncentivesIncentives
ManagerialManagerialMotivesMotives