corporate level

7/29/2019 Corporate Level

1/27

Ch6-1

Corporate-Level Strategy


2/27

Ch6-2How 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 Strategy


3/27

Ch6-3

1. What businesses should the corporation

be in?

2. How should the corporate office managethe array of business units?

Corporate Strategy is what makes the corporate whole

add up to more than the sum of its business unit parts

Key Questions of Corporate Strategy


4/27

Levels and Types of Diversification

Low Levels of Diversification

Moderate to High Levels of Diversification

Very High Levels of Diversification

Related linked (mixed) < 70% of revenues from dominantbusiness, and only limited links exist

A

B C

Single business > 95% of revenues from a singlebusiness unit

A

Dominant business Between 70% and 95% of revenuesfrom a single business unit

B

A

Unrelated-Diversified Business units not closely related

A

B C

< 70% of revenues from dominantbusiness; all businesses share product,technological and distribution linkages

Related constrainedA

B C


5/27

Ch6-5

Motives, Incentives, and Resourcesfor Diversification

Motives to EnhanceStrategic Competitiveness

Economies of Scope

Market Power

Financial Economies

Resources

Managerial

Motives

Incentives


6/27

Ch6-6

Incentives and Resources

with Neutral Effects of

Strategic Competitiveness

Anti-Trust Regulation

Tax Laws

Low Performance

Uncertain Future Cash Flows

Firm Risk Reduction

Tangible Resources

Intangible Resources

Managerial

Motives

Resources

Incentives



7/27Ch6-7

Managerial Motives

Causing Value Reduction

Diversifying Managerial

Employment Risk

Increasing Managerial

Compensation

Managerial

Motives

Resources

Incentives



8/27Ch6-8

Summary Model of theRelationship Between Firm

Performance and Diversification

Diversification

Strategy

Managerial

Motives

Resources

Incentives


9/27Ch6-9

Adding Value by Diversification

Diversification most effectively adds valueby either of two mechanisms:

By developing economies of scope betweenbusiness units in the firms which leads tosynergistic benefits

By developing market power which leads togreater returns


10/27Ch6-10

Alternative Diversification Strategies

Related Diversification Strategies

Unrelated Diversification Strategies

Sharing ActivitiesTransferring Core Competencies

Efficient Internal Capital Market Allocation

Restructuring


11/27Ch6-11

Key Characteristics:

Example: Using a common physical distribution system

and sales force such as Procter & Gambles disposablediaper and paper towel divisions

Example:General Electrics costs to advertise, sell andservice major appliances are spread over many differentproducts

Sharing ActivitiesAlternative Diversification Strategies

Achieves economies of scale

Boosts efficiency of utilization

Helps move more rapidly down Learning Curve

Sharing Activities often lowers costs orraises differentiation

Sharing Activities can lower costs if it:


12/27Ch6-12

Example:Shared order processing system may allow new

features customers value or make more advanced remotesensing technology available

Example:Procter & Gambles sharing of sales and

physical distribution for disposable diapers and papertowels is effective because these items are so bulky and

costly to ship



Sharing Activities can enhance potential for orreduce the cost of differentiation

Must involve activities that are crucial to

competitive advantage


13/27Ch6-13

Assumptions:


Strong sense of corporate identity

Clear corporate mission that emphasizes the

importance of integrating business units

Incentive system that rewards more than justbusiness unit performance


14/27Ch6-14




Sharing ActivitiesTransferring Core Competencies


Restructuring


15/27Ch6-15


Transferring Core CompetenciesAlternative Diversification Strategies

Identify ability to transfer skills or

expertise among similar value chains

Exploit ability totransfer activities

ExploitsInterrelationships among divisions

Start withValue Chain

analysis


16/27Ch6-16

Assumptions:Transferring Core Competencies leads to competitiveadvantage only if the similarities among business unitsmeet the following conditions:

Activities involved in the businesses are similarenough that sharing expertise is meaningful

Transfer of skills involves activities which areimportant to competitive advantage

The skills transferred represent significant sources

of competitive advantage for the receiving unit

Transferring Core CompetenciesAlternative Diversification Strategies


17/27Ch6-17




Sharing Activities

Transferring Core Competencies


Restructuring


18/27Ch6-18


Firms pursuing this strategy frequently diversify byacquisition:

Efficient Internal Capital Market AllocationAlternative Diversification Strategies

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 andsubstantial cash needs

Add professional management & control to sub-units

Sub-unit managers compensation based on unit results


19/27Ch6-19

Assumptions:

Efficient Internal Capital Market AllocationAlternative Diversification Strategies

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


20/27Ch6-20




Sharing Activities

Transferring Core Competencies


Restructuring


21/27Ch6-21


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 systems


Seek out undeveloped, sick or threatened organizationsor industries

Parent company (acquirer) intervenes and frequently:

Frequently sell unit after making one-time changes since

parent no longer adds value to ongoing operations


22/27

Ch6-22

Assumptions:

RestructuringAlternative Diversification Strategies

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 tocreate a more attractive environment


23/27

Ch6-23

Internal Incentives:

Incentives to Diversify

Relaxation of Anti-Trust regulation allows morerelated acquisitions than in the past

Before 1986, higher taxes on dividends favoredspending retained earnings on acquisitions

After 1986, firms made fewer acquisitions withretained earnings, shifting to the use of debt to take

advantage of tax deductible interest payments

External Incentives:

Poor performance may lead some firms to

diversify to attempt to achieve better returns


24/27

Ch6-24

Value-creating Strategies of Diversification

Operational and Corporate Relatedness

Sharing:

OperationalRelatedness

Between

Business

Corporate Relatedness: Transferring Skills IntoBusiness Through Corporate Headquarters

Low High

High

Low

Related Linked

Diversification

(Economies of Scope)

Unrelated

Diversification

(Financial Economies)

Both Operational and

Corporate Relatedness

(Rare Capability and

Can Create Diseconomies

of Scope)

Related Constrained

Diversification

Vertical Integration

(Market Power)


25/27

Ch6-25

Perfor

mance

Level of Diversification

Diversification and Firm Performance

Dominant

Business

Unrelated

Business

Related

Constrained


26/27

Ch6-26

Incentives to Diversify

Internal Incentives:

Poor performance may lead some firms to diversify toattempt to achieve better returns

Firms may diversify to balance uncertain future cash

flows

Firm may diversify into different businesses in orderto reduce risk

Managers often have incentives to diversify in order toincrease their compensation and reduce employmentrisk, although effective governance mechanisms mayrestrict such abuses


27/27

Summary Model of the Relationship Between Firm

Performance and Diversification

Resources

Diversification

Strategy

Firm

Performance

Internal

Governance

Strategy

Implementation

Capital MarketIntervention and

Market for

Managerial Talent

Incentives

ManagerialMotives

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