2004 by South-Western/Thomson Learning 1 Corporate-Level Strategy Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Chapter 7

©2004 by South-Western/Thomson Learning 1

Corporate-Level StrategyCorporate-Level Strategy

Robert E. HoskissonMichael A. Hitt

R. Duane Ireland

Chapter 7Chapter 7

2

Chapter 2Chapter 2Strategic LeadershipStrategic Leadership

Chapter 4Chapter 4The InternalThe InternalOrganizationOrganization

Chapter 6Chapter 6Competitive Rivalry andCompetitive Rivalry andCompetitive DynamicsCompetitive Dynamics

Chapter 9Chapter 9International StrategyInternational Strategy

Chapter 1Chapter 1Introduction toIntroduction to

Strategic ManagementStrategic Management

Chapter 3Chapter 3The ExternalThe ExternalEnvironmentEnvironment

Chapter 5Chapter 5Business-LevelBusiness-Level

StrategyStrategy

Chapter 8Chapter 8Acquisition andAcquisition and

Restructuring StrategiesRestructuring Strategies

Chapter 11Chapter 11Corporate GovernanceCorporate Governance

Strategic IntentStrategic IntentStrategic MissionStrategic Mission

Chapter 7Chapter 7Corporate-Level StrategyCorporate-Level Strategy

Chapter 10Chapter 10Cooperative StrategyCooperative Strategy

Chapter 12Chapter 12Strategic EntrepreneurshipStrategic Entrepreneurship

StrategicAnalysis

StrategicThinking

CreatingCompetitiveAdvantage

MonitoringAnd CreatingEntrepreneurialOpportunities

The Strategic Management ProcessThe Strategic Management Process

Chapter 5Chapter 5Business-LevelBusiness-Level

StrategyStrategy

Chapter 6Chapter 6Competitive Rivalry andCompetitive Rivalry andCompetitive DynamicsCompetitive Dynamics

Chapter 7Chapter 7Corporate-Level StrategyCorporate-Level Strategy

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Discussion QuestionsDiscussion Questions1. What is the difference between business-

and corporate- level strategy? How can corporate level diversification strategies be classified in regard to type and amount of diversification?

2. What are the reasons that firms pursue a corporate diversification strategy?

3. What are the value enhancing economic rationales for related diversification?

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Discussion Questions (cont.)Discussion Questions (cont.)Click Here

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4. What are the value enhancing economic rationales for unrelated diversification?

5. Why are diversified firms more efficiently managed with a multidivisional structure? What variants of the multidivisional form fit with the specific types of corporate strategy?


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Discussion Questions (cont.)Discussion Questions (cont.)Click Here

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6. What are the external as well as the internal incentives (generally value neutral motives) firms have to diversify? What resources foster increased diversification?

7. Are there managerial rationales that serve as motives to increase diversification but which may deflate the value of the firm?


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Discussion Questions (cont.)Discussion Questions (cont.)Click Here 8. How would you summarize the

relationship between diversification strategy and firm performance outcomes?

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Discussion Question 1Discussion Question 1

What is the difference between business- and corporate- level strategy? How can corporate level diversification strategies be classified in regard to type and amount of diversification?

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Levels and Types of DiversificationLevels and Types of DiversificationLow Levels of DiversificationLow Levels of Diversification

Single BusinessSingle Business> 95% of business from a single > 95% of business from a single business unitbusiness unit

Dominant BusinessDominant BusinessBetween 70 and 95% of business Between 70 and 95% of business from a single business unitfrom a single business unit

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Related ConstrainedRelated Constrained<70% of revenues from dominant <70% of revenues from dominant business; all businesses share business; all businesses share product, technological and product, technological and distribution linkagesdistribution linkages

Levels and Types of DiversificationLevels and Types of DiversificationModerate to High Levels of DiversificationModerate to High Levels of Diversification

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Related Linked (Mixed)Related Linked (Mixed)< 70% of revenues from dominant < 70% of revenues from dominant business, and only limited links business, and only limited links existexist

Levels and Types of DiversificationLevels and Types of DiversificationModerate to High Levels of DiversificationModerate to High Levels of Diversification

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Levels and Types of Levels and Types of DiversificationDiversification

UnrelatedUnrelated< 70% of revenue comes from the < 70% of revenue comes from the dominant business, and there are dominant business, and there are no common links between no common links between businessesbusinesses

Very High Levels of DiversificationVery High Levels of Diversification

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What are the reasons that firms pursue a corporate diversification strategy?

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Reasons for DiversificationReasons for Diversification

Reasons to Enhance Strategic Reasons to Enhance Strategic CompetitivenessCompetitiveness

• Economies of scope• Market power• Financial economics

IncentivesIncentives

ResourcesResources

ManagerialManagerialMotivesMotives

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Resources with varying Resources with varying effects on value creation and effects on value creation and strategic competitivenessstrategic competitiveness

• Tangible resources financial resources physical assets

• Intangible resources tacit knowledge customer relations image and reputation


ResourcesResources



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Value-creating Strategies of Diversification:Value-creating Strategies of Diversification: Operational and Corporate ReadinessOperational and Corporate Readiness

Related ConstrainedRelated ConstrainedDiversificationDiversification

Vertical IntegrationVertical Integration(Market Power)(Market Power)

UnrelatedUnrelatedDiversificationDiversification

(Financial Economies)(Financial Economies)

Both Operational andBoth Operational andCorporate RelatednessCorporate Relatedness

(Rare Capability(Rare Capabilityand can Createand can CreateDiseconomies ofDiseconomies of

Scope)Scope)

Related LinkedRelated LinkedDiversificationDiversification(Economies of(Economies of

Scope)Scope)

Corporate Readiness: Transferring Skills into Corporate Readiness: Transferring Skills into Businesses Through Corporate HeadquartersBusinesses Through Corporate Headquarters

LowLow HighHigh

Shar

ing:

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Shar

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Ope

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Rel

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usin

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etw

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Bus

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LowLow

HighHigh

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Adding Value by DiversificationAdding Value by DiversificationDiversification most effectively adds value Diversification most effectively adds value by either of two mechanisms:by either of two mechanisms:– Economies of scope:Economies of scope: cost savings attributed cost savings attributed

to transferring the capabilities and competencies to transferring the capabilities and competencies developed in one business to a new businessdeveloped in one business to a new business

– Market power:Market power: when a firm is able to sell its when a firm is able to sell its products above the existing competitive level or products above the existing competitive level or reduce the costs of its primary and support reduce the costs of its primary and support activities below the competitive level, or bothactivities below the competitive level, or both

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Diversification and Diversification and Multidivisional StructureMultidivisional StructureThree major benefits

– more accurate monitoring of the performance of each business, simplifying problems of control

– facilitate comparisons between divisions, improving resource allocation process

– stimulate managers of poorly performing divisions to look for ways of improving performance

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Alternative Diversification Alternative Diversification StrategiesStrategiesRelated Diversification StrategiesRelated Diversification Strategies

– sharing activitiessharing activities

– transferring core competenciestransferring core competencies

Unrelated Diversification StrategiesUnrelated Diversification Strategies

– efficient internal capital market allocationefficient internal capital market allocation

– restructuringrestructuring

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Alternative Diversification Alternative Diversification StrategiesStrategiesRelated Diversification StrategiesRelated Diversification Strategies


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What are the value enhancing economic rationales for related diversification?

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Sharing Activities:Sharing Activities: Sharing activities often lowers costs or raises Sharing activities often lowers costs or raises

differentiationdifferentiation Sharing activities can lower costs if it:Sharing activities can lower costs if it:

– achieves economies of scaleachieves economies of scale– boosts efficiency of utilizationboosts efficiency of utilization– helps move more rapidly down the Learning Curvehelps move more rapidly down the Learning Curve

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

Key CharacteristicsKey Characteristics

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Sharing Activities:Sharing Activities: Strong sense of corporate identityStrong sense of corporate identity Clear corporate mission that emphasizes Clear corporate mission that emphasizes

the importance of integrating business the importance of integrating business unitsunits

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

AssumptionsAssumptions

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Related Diversification StrategiesRelated Diversification Strategies



Alternative Diversification Alternative Diversification StrategiesStrategies

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Transferring Core Competencies:Transferring Core Competencies:

Exploits interrelationships among Exploits interrelationships among divisionsdivisions

Start with value chain analysisStart with value chain analysis– identify ability to transfer skills or expertise identify ability to transfer skills or expertise

among similar value chainsamong similar value chains– exploit ability to transfer activitiesexploit ability to transfer activities


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Transferring Core Competencies: Transferring Core Competencies:

Transferring core competencies leads to Transferring core competencies leads to competitive advantage only if the competitive advantage only if the similarities among business units meet the similarities among business units meet the following conditions: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 the skills transferred represent significant

sources of competitive advantage for the sources of competitive advantage for the receiving unitreceiving unit


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Question 4Question 4

What are the value enhancing economic rationales for unrelated diversification?

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Efficient Internal Capital Market Efficient Internal Capital Market Allocation:Allocation: Firms pursuing this strategy frequently Firms pursuing this strategy frequently

diversify by acquisition:diversify by acquisition:– acquire sound, attractive companiesacquire sound, attractive companies– acquired units are autonomousacquired units are autonomous– acquiring corporation supplies needed capitalacquiring corporation supplies needed capital– portfolio managers transfer resources from units portfolio managers transfer resources from units

that generate cash to those with high growth that generate cash to those with high growth potential and substantial cash needspotential and substantial cash needs

– add professional management & control to sub-add professional management & control to sub-unitsunits

– sub-unit managers compensation based on unit sub-unit managers compensation based on unit resultsresults


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Efficient Internal Capital Market Efficient Internal Capital Market Allocation:Allocation: Managers have more detailed knowledge Managers have more detailed knowledge

of firm relative to outside investorsof firm relative to outside investors Firm need not risk competitive edge by Firm need not risk competitive edge by

disclosing sensitive competitive disclosing sensitive competitive information to investorsinformation to investors

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


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– restructuringrestructuring

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Restructuring:Restructuring: Seek out undeveloped, sick or threatened Seek out undeveloped, sick or threatened

organizations or industriesorganizations or industries Parent company (acquirer) intervenes and Parent company (acquirer) intervenes and

frequently:frequently:– changes sub-unit management teamchanges sub-unit management team– shifts strategyshifts strategy– infuses firm with new technologyinfuses firm with new technology– enhances discipline by changing control enhances discipline by changing control

systemssystems– divests part of firmdivests part of firm– makes additional acquisitions to achieve makes additional acquisitions to achieve

critical masscritical mass


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Restructuring:Restructuring: Frequently sell unit after making one-time Frequently sell unit after making one-time

changes since parent no longer adds changes since parent no longer adds value to ongoing operationsvalue to ongoing operations


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Restructuring:Restructuring: Requires keen management insight in Requires keen management insight in

selecting firms with depressed values or selecting firms with depressed values or unforeseen potentialunforeseen potential

Must do more than restructure companiesMust do more than restructure companies Need to initiate restructuring of industries Need to initiate restructuring of industries

to create a more attractive environmentto create a more attractive environment



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Question 5Question 5Why are diversified firms more efficiently managed with a multidivisional structure? What variants of the multidivisional form fit with the specific types of corporate strategy?

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Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern:

SimpleSimpleStructureStructure

FunctionalFunctionalStructureStructure

MultidivisionalMultidivisionalStructureStructure

Sales Growth-Sales Growth-Coordination andCoordination andControl ProblemsControl Problems

Sales Growth-Sales Growth-Coordination andCoordination andControl ProblemsControl Problems

Efficient implementation Efficient implementation of formulated strategyof formulated strategy

Efficient Efficient implementation implementation of formulated of formulated strategystrategy

Multidivisional StructureMultidivisional Structure

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Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Strategic controlStrategic control

– operating divisionsoperating divisions– each division is separate business or profit each division is separate business or profit

centercenter Top corporate officer delegates Top corporate officer delegates

responsibilities to division managersresponsibilities to division managers– for day-to-day operationsfor day-to-day operations– for business-unit strategyfor business-unit strategy

Appropriate when the firm grows through Appropriate when the firm grows through diversificationdiversification


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Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Three major benefitsThree major benefits

– corporate officers able to more accurately corporate officers able to more accurately monitor the performance of each business, monitor the performance of each business, which simplifies the problem of controlwhich simplifies the problem of control

– facilitates comparisons between divisions, facilitates comparisons between divisions, which improves the resource allocation processwhich improves the resource allocation process

– stimulates managers of poorly performing stimulates managers of poorly performing divisions to look for ways of improving divisions to look for ways of improving performanceperformance


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Multidivisional StructureMultidivisional Structure Managers try to strike a balance between:Managers try to strike a balance between:

– competing among divisions for scarce capital competing among divisions for scarce capital resourcesresources

– creating opportunities for cooperation to creating opportunities for cooperation to develop synergiesdevelop synergies

The goal is to maximize overall firm The goal is to maximize overall firm performanceperformance

The decision-making of managers in a The decision-making of managers in a multidivisional structure may be:multidivisional structure may be:– centralized or decentralizedcentralized or decentralized– bureaucratic or non-bureaucraticbureaucratic or non-bureaucratic

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Multidivisional StructureMultidivisional Structure Balance on these dimensions may change Balance on these dimensions may change

over timeover time Structure will evolve over time with:Structure will evolve over time with:

– changes in strategychanges in strategy– degree of diversificationdegree of diversification– geographic scopegeographic scope– nature of competitionnature of competition

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Three Variations of the Three Variations of the Multidivisional StructureMultidivisional Structure

MultidivisionalMultidivisionalStructureStructure(M-form)(M-form)

Strategic Business-UnitStrategic Business-Unit(SBU) Form(SBU) Form

CooperativeCooperativeFormForm

CompetitiveCompetitiveFormForm

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Cooperative Form of Multidivisional Cooperative Form of Multidivisional Structure:Structure: Related-Constrained StrategyRelated-Constrained Strategy

GovernmentGovernmentAffairsAffairs

LegalLegalAffairsAffairs

CorporateCorporateR&D LabR&D Lab

StrategicStrategicPlanningPlanning

CorporateCorporateHumanHuman

ResourcesResources

CorporateCorporateMarketingMarketing

CorporateCorporateFinanceFinance

ProductProductDivisionDivision





PresidentPresidentHeadquarters OfficeHeadquarters Office

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Cooperative Form of Multidivisional Cooperative Form of Multidivisional Structure:Structure: Structural integration devices create tight links Structural integration devices create tight links

among all divisionsamong all divisions Corporate office emphasizes centralized strategic Corporate office emphasizes centralized strategic

planning, human resources, and marketing to planning, human resources, and marketing to foster cooperation between divisionsfoster cooperation between divisions

R&D is likely to be centralizedR&D is likely to be centralized Rewards are subjective and tend to emphasize Rewards are subjective and tend to emphasize

overall corporate performance, in addition to overall corporate performance, in addition to divisional performancedivisional performance

Culture emphasizes cooperative sharingCulture emphasizes cooperative sharing

Related-Constrained StrategyRelated-Constrained Strategy

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SBU Form of Multidivisional SBU Form of Multidivisional Structure:Structure: Related-Linked StrategyRelated-Linked Strategy

PresidentPresident

CorporateCorporateR&D LabR&D Lab

StrategicStrategicPlanningPlanning

CorporateCorporateHRMHRM

CorporateCorporateMarketingMarketing

CorporateCorporateFinanceFinance

Headquarters OfficeHeadquarters Office

DivisionDivision

DivisionDivisionDivisionDivision

SBUSBU SBUSBU SBUSBU

DivisionDivision


DivisionDivision


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SBU Form of Multidivisional SBU Form of Multidivisional Structure:Structure: Structural integration devices create tight links Structural integration devices create tight links

among all divisionsamong all divisions Corporate office emphasizes centralized strategic Corporate office emphasizes centralized strategic

planning, human resources, and marketing to planning, human resources, and marketing to foster cooperation between divisionsfoster cooperation between divisions

R&D is likely to be centralizedR&D is likely to be centralized Rewards are subjective and tend to emphasize Rewards are subjective and tend to emphasize

overall corporate performance, in addition to overall corporate performance, in addition to divisional performancedivisional performance

Culture emphasizes cooperative sharingCulture emphasizes cooperative sharing

Related-Linked StrategyRelated-Linked Strategy

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Market PowerMarket PowerMultipoint competition

– two or more diversified firms simultaneously compete in the same product areas or geographic markets

Vertical integration– company produces its own inputs

(backward integration) or owns its own source of distribution of outputs

(forward integration)

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Simultaneous Operational Relatedness Simultaneous Operational Relatedness and Corporate Relatednessand Corporate RelatednessSimultaneously managing two

sources of knowledge is difficult and such efforts often fail

Either cooperative or SBU M-form structures would likely be implemented with this dual strategy

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Competitive Form of Multidivisional Competitive Form of Multidivisional Structure:Structure: Unrelated Diversification StrategyUnrelated Diversification Strategy

PresidentPresident

LegalLegalAffairsAffairs FinanceFinance AuditingAuditing

Headquarters OfficeHeadquarters Office

DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision

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Competitive Form of Multidivisional Competitive Form of Multidivisional Structure:Structure: Corporate headquarters has a small staffCorporate headquarters has a small staff Finance and auditing are the most prominent Finance and auditing are the most prominent

functions in the headquarters to manage cash flow functions in the headquarters to manage cash flow and ensure the accuracy of performance data and ensure the accuracy of performance data coming from divisionscoming from divisions

The legal affairs function becomes important when The legal affairs function becomes important when the firm acquires or divests assetsthe firm acquires or divests assets

Divisions are independent and separate for Divisions are independent and separate for financial evaluation purposesfinancial evaluation purposes

Divisions retain strategic control, but cash is Divisions retain strategic control, but cash is managed by the corporate officemanaged by the corporate office

Divisions compete for corporate resourcesDivisions compete for corporate resources

Unrelated Diversification StrategyUnrelated Diversification Strategy

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Characteristics of Various Characteristics of Various Structural FormsStructural Forms

Structural Structural CharacteristicsCharacteristics

Cooperative Cooperative M-FormM-Form

SBUSBU M-FormM-Form

Competitive Competitive M-FormM-Form

Degree ofDegree ofCentralizationCentralization

Centralized atCentralized atCorporate Corporate

OfficeOffice

Partially Partially CentralizedCentralized

in SBUsin SBUs

DecentralizedDecentralizedto Divisionsto Divisions

Use ofUse ofIntegratingIntegrating

MechanismsMechanismsExtensiveExtensive ModerateModerate NonexistentNonexistent

Type ofType ofStrategyStrategy

Related-Related-ConstrainedConstrained

Related-Related-LinkedLinked

UnrelatedUnrelatedDiversificationDiversification

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Characteristics of Various Characteristics of Various Structural FormsStructural Forms

DivisionalDivisionalIncentiveIncentive

CompensationCompensation

Linked toLinked toCorporateCorporate

PerformancePerformance

Linked toLinked toCorporateCorporate

SBU & Division SBU & Division PerformancePerformance

Linked toLinked toDivisionalDivisional

PerformancePerformance

DivisionalDivisionalPerformancePerformance

AppraisalAppraisal

SubjectiveSubjectiveStrategicStrategicCriteriaCriteria

Strategic &Strategic &FinancialFinancialCriteriaCriteria

Objective Objective FinancialFinancialCriteriaCriteria

Structural Structural CharacteristicsCharacteristics

Cooperative Cooperative M-FormM-Form

SBUSBU M-FormM-Form

Competitive Competitive M-FormM-Form


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What are the external as well as the internal incentives (generally value neutral motives) firms have to diversify? What resources foster increased diversification?

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Incentives with Neutral Incentives with Neutral Effects on Strategic Effects on Strategic CompetitivenessCompetitiveness

• Anti-trust regulation• Tax laws• Low performance• Uncertain future cash flows• Firm risk reduction


ResourcesResources



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Incentives to DiversifyIncentives to DiversifyExternal Incentives:External Incentives: 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 retained earnings, shifting to the use of debt to take advantage of tax deductible interest take advantage of tax deductible interest paymentspayments

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Incentives to DiversifyIncentives to DiversifyInternal Incentives:Internal Incentives: Poor performance may lead some firms to Poor performance may lead some firms to

diversify an attempt to achieve better returnsdiversify an attempt to achieve better returns Firms may diversify to balance uncertain future Firms may diversify to balance uncertain future

cash flowscash flows Firms may diversify into different businesses in Firms may diversify into different businesses in

order to reduce riskorder to reduce risk

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Resources and DiversificationResources and Diversification Besides strong incentives, firms are more Besides strong incentives, firms are more

likely to diversify if they have the likely to diversify if they have the resources to do soresources to do so

Value creation is determined more by Value creation is determined more by appropriate use of resources than appropriate use of resources than incentives to diversifyincentives to diversify


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Are there managerial rationales that serve as motives to increase diversification but which may deflate the value of the firm?

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Managerial Motives (Value Managerial Motives (Value Reduction)Reduction)

• Diversifying managerial employment risk

• Increasing managerial compensation


ResourcesResources



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Managerial Motives to DiversifyManagerial Motives to DiversifyManagers have motives to diversifyManagers have motives to diversify

– diversification increases size; size is diversification increases size; size is associated with executive compensationassociated with executive compensation

– diversification reduces employment riskdiversification reduces employment risk– effective governance mechanisms may restrict effective governance mechanisms may restrict

such motivessuch motives


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How would you summarize the relationship between diversification strategy and firm performance outcomes?

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Relationship Between Relationship Between Diversification and PerformanceDiversification and Performance

Perf

orm

ance

Perf

orm

ance

Level of DiversificationLevel of Diversification

DominantBusiness

UnrelatedBusiness

RelatedConstrained

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Relationship Between Firm Relationship Between Firm Performance and DiversificationPerformance and Diversification



ResourcesResources DiversificationDiversificationStrategyStrategy

FirmFirmPerformancePerformance

InternalInternalGovernanceGovernance

StrategyStrategyImplementationImplementation

Capital MarketCapital MarketIntervention and theIntervention and theMarket forMarket forManagerial TalentManagerial Talent

Documents

2004 by South-Western/Thomson Learning 1 Corporate-Level Strategy Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Chapter 7