strategic management ch07

7-1© 2006 by Nelson, a division of Thomson Canada Limited.

Corporate-Level Strategy

Chapter Seven

© 2006 by Nelson, a division of Thomson Canada Limited.


The Strategic Management

Process

Chapter 5: Bus.-Level Strategy

Chapter 7:Corp.-Level

Strategy

Chapter 8:Acquisition & Restructuring

Chapter 9:International

Strategy

Chapter 10:Cooperative

Strategy

Strategy Formulation

Chapter 11:Corporate

Governance

Ch. 12: Org. Structure & Controls

Chapter 13:Strategic

Leadership

Chapter 14:Org. Renewal & Innovation

Strategy Implementation

StrategicActions

Chapter 3:The External Environment

Strategic Competitiveness

Strategic Mission & Strategic Intent

Strategic Objectives & Inputs

Chapter 1: Strategic

ManagementStrategic

Competitiveness Ch. 2: Strat. Mgmt . &

Performance



Chapter 4:The Internal Environment


Chapter 6:Competitive Dynamics


Strategy


Corporate–Level StrategyKnowledge Objectives:

1. Define corporate-level strategy and discuss its importance to the diversified firm.

2. Describe the advantages & disadvantages of single-business strategies and dominant-business strategies.

3. Explain 3 primary reasons why firms move from single- & dominant-business strategies to more diversified ones

4. Describe how related-diversified firms create value by sharing or transferring core competencies

5. Explain the two ways value can be treated with an unrelated-diversification strategy

6. Discuss incentives & resources that encourage divers-ification & motives that encourage over-diversifcation


Corporate-level strategy specifies actions to be taken by the firm to gain a competitive advantage

by selecting & managing a group of different businesses competing in several industries &

product markets

Corporate Strategy concerns 2 key questions:

1. What businesses should the firm in? 2. How should the corporate office manage the array of business units?


Firms Vary by Degree of Diversification

Single-business > 95% of revenues from a single business unit

Low Levels of Diversification

AAAA

Dominant-business Between 70% & 95% of revenues from a single business unit BBBBAAAA

Unrelated-Diversified Business units not closely related High Levels of Diversification AAAA

BBBB CCCC

Moderate to High Levels of Diversification< 70% of revenues from dominant business; bus.s share product, technological & distribution links

Related constrained

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

AAAA

BBBB CCCC

BBBB

AAAA

CCCC


Motives to Enhance Motives to Enhance Strategic CompetitivenessStrategic Competitiveness

•Economies of ScopeEconomies of Scope

•Market PowerMarket Power

•Financial EconomiesFinancial Economies

ResourcesResources

IncentivesIncentives

ManagerialManagerialMotivesMotives

Reasons for Diversification

*


Incentives & Resources Incentives & Resources with Neutral Effects of with Neutral Effects of

Strategic CompetitivenessStrategic Competitiveness

ResourcesResources




•Anti-Competition RegulationAnti-Competition Regulation•Tax LawsTax Laws

•Low PerformanceLow Performance

•Uncertain Future Cash Uncertain Future Cash FlowsFlows

•Firm Risk ReductionFirm Risk Reduction

•Tangible ResourcesTangible Resources

•Intangible ResourcesIntangible Resources


•Managerial Motives Managerial Motives Causing Value ReductionCausing Value Reduction

•Diversifying ManagerialDiversifying ManagerialEmployment RiskEmployment Risk

•Increasing Managerial Increasing Managerial CompensationCompensation


ResourcesResources



*


Summary Model of the Relationship between Firm Performance & Diversification

ResourcesResources



DiversificationStrategy


Value-creating Strategies of DiversificationOperational and Corporate Relatedness

Corporate Relatedness: Transferring Skills Into Business Through Corporate Headquarters

Low High

Sharing:OperationalRelatednessBetweenBusiness

High

Low

•Related Linked Diversification

(Economies of Scope)

•UnrelatedDiversification

(Financial Economies)

•Both Operational and Corporate Relatedness

(Rare & can create diseconomies of scope)

•Related Constrained Diversification

•Vertical Integration

(Market Power)


Transferring Core CompetenciesTransferring Core Competencies22

Efficient Internal Capital Market Allocation

Unrelated Diversification Strategies

3

Restructuring4

Sharing ActivitiesSharing Activities11

Related Diversification Strategies

Alternative Diversification Strategies


Sharing Activities can lower costs if it:

Example: Laboratory costs forcing drug companies to merge in order to continue R&D efforts

** Achieves economies of scale

** Boosts efficiency of utilization

** Helps move more rapidly down Learning Curve

Sharing Activities can enhance differentiation if it:

Example: Shared order processing may allow discovery of new features customers value from a group of products

11 Sharing ActivitiesSharing Activities

Involves activities crucial to competitive advantage**

Key Characteristics


** Incentive system that rewards more than just business unit performance

Strong sense of corporate identity**

Assumptions

11 Sharing ActivitiesSharing Activities

Clear corporate mission that emphasizes the importance of integrating business units

**

*




Related Diversification StrategiesAlternative Diversification Strategies



3

Restructuring4


** Exploits Interrelationships among divisions

** Start with Value Chain analysis

Identify ability to transfer skills or expertise among similar value chains

Exploit ability to share activities

Two firms can share the same sales force, logistics network or distribution channels.

Key Characteristics

22 Transferring Core CompetenciesTransferring Core Competencies


Assumptions

Transferring Core Competencies leads to competitive advantage only if the similarities among business units meet the following conditions:

22 Transferring Core CompetenciesTransferring Core Competencies

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.

**





3

Restructuring4





•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 results.

Key Characteristics Firms using this strategy often diversify by acquisition:

3 Efficient Internal Capital Market Allocation


Assumptions

Managers have more detailed knowledge of firm relative to outside investors.

Firm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their own.

Firm need not risk competitive edge by disclosing sensitive competitive information to investors.

Efficient Internal Capital Market Allocation3 Efficient Internal Capital Market Allocation




3

Restructuring4






Key Characteristics•Seek out undeveloped, sick or threatened organizations or industries

Often sells unit after making one-time changes since parent no longer adds value to ongoing operations.

•Parent firm (acquirer) intervenes & frequently:- Changes sub-unit management team- Shifts strategy

- Divests part of firm- Makes additional acquisitions to achieve critical mass

- Infuses firm with new technology- Enhances discipline by changing control systems

4 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.

4 Restructuring

*


Per

form

ance

Level of Diversification

DominantBusiness

UnrelatedBusiness

RelatedConstrained

Diversification & Firm Performance


External Incentives

•Relaxation of Anti-Competition regulation allows more related acquisitions than in the past.

Incentives to Diversify

•Poor performance may lead some firms to diversify to attempt to achieve better returns in new industries.

•Firms may diversify into different businesses in order to reduce risk.

Internal Incentives

•Firms may diversify to balance uncertain future cash flows.

•Managers often have incentives to diversify to raise their compensation & reduce employment risk. (Effective governance mechanisms may restrict such abuses)


FirmFirmPerformancePerformance

Summary Model of the Relationship between Firm Performance & Diversification

ResourcesResources



DiversificationDiversificationStrategyStrategy

Capital Market Capital Market Intervention and Intervention and

Market for Market for Managerial TalentManagerial Talent

InternalInternalGovernanceGovernance

StrategyStrategyImplementationImplementation


The Strategic Management

Process



Strategy

Chapter 8:Acquisition & Restructuring

Chapter 9:International

Strategy

Chapter 10:Cooperative

Strategy

Strategy Formulation

Chapter 11:Corporate

Governance

Ch. 12: Org. Structure & Controls

Chapter 13:Strategic

Leadership

Chapter 14:Org. Renewal & Innovation

Strategy Implementation

StrategicActions


Strategic Competitiveness

Strategic Mission & Strategic Intent

Strategic Objectives & Inputs

Chapter 1: Strategic

ManagementStrategic

Competitiveness Ch. 2: Strat. Mgmt . &

Performance



Chapter 4:The Internal Environment


Chapter 6:Competitive Dynamics


Strategy

strategic management ch07

Education