©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. Hoskisson

Michael 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

3

Levels and Types of DiversificationLevels and Types of Diversification

Low Levels of DiversificationLow Levels of DiversificationSingle 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

4

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


Moderate to High Levels of DiversificationModerate to High Levels of Diversification

5

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


Moderate to High Levels of DiversificationModerate to High Levels of Diversification

6

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

7

Why Diversify?Why Diversify?

To create additional value (e.g. through economies of scope)

To gain market power relative to competitors (e.g. vertical integration)

To reduce managerial employment risk

etc….

8

Relationship Between Relationship Between Diversification and PerformanceDiversification and Performance

Per

form

ance

Per

form

ance

Level of DiversificationLevel of Diversification

DominantBusiness

UnrelatedBusiness

RelatedConstrained

9

Value-creating Strategies of Diversification:Value-creating Strategies of Diversification: Operational and Corporate RelatednessOperational and Corporate Relatedness

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

LowLow HighHigh

Sh

arin

g: O

per

atio

nal

S

har

ing:

Op

erat

ion

al

Rel

ated

nes

s B

etw

een

Bu

sin

esse

sR

elat

edn

ess

Bet

wee

n B

usi

nes

ses

LowLow

HighHigh

10

Types of RelatednessTypes of Relatedness

Operational relatednessOperational relatedness– sharing value chain activitiessharing value chain activities– physical-base, involving tangible physical-base, involving tangible

resourcesresourcesCorporate relatednessCorporate relatedness

– transferring core competencies transferring core competencies – skill-base, involving intangible resourcesskill-base, involving intangible resources

11

Unrelated Diversification: Unrelated Diversification: Financial EconomiesFinancial EconomiesEfficient internal capital market Efficient internal capital market

resource allocation resource allocation – information asymmetryinformation asymmetry

Purchase, restructure, and sellPurchase, restructure, and sell– slow or standard cycle marketsslow or standard cycle markets– product-basedproduct-based

12

Strategy and Structure Growth Strategy and Structure Growth PatternsPatternsSingle or Dominant BusinessSingle or Dominant Business

– Simple structure (for smaller firms)Simple structure (for smaller firms)– Functional structure (for larger firms)Functional structure (for larger firms)

Related or Unrelated Diversified Related or Unrelated Diversified BusinessesBusinesses– M-Form structureM-Form structure

13

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

14

Cooperative Form of Multidivisional Cooperative Form of Multidivisional StructureStructure

GovernmentGovernmentAffairsAffairs

LegalLegalAffairsAffairs

CorporateCorporateR&D LabR&D Lab

StrategicStrategicPlanningPlanning

CorporateCorporateHumanHuman

ResourcesResources

CorporateCorporateMarketingMarketing

CorporateCorporateFinanceFinance

ProductProductDivisionDivision





PresidentPresidentHeadquarters OfficeHeadquarters Office

15

SBU Form of Multidivisional SBU Form of Multidivisional StructureStructure

PresidentPresident

CorporateCorporateR&D LabR&D Lab

StrategicStrategicPlanningPlanning

CorporateCorporateHRMHRM

CorporateCorporateMarketingMarketing

CorporateCorporateFinanceFinance

Headquarters OfficeHeadquarters Office

DivisionDivision

DivisionDivisionDivisionDivision

SBUSBU SBUSBU SBUSBU

DivisionDivision


DivisionDivision


16

Competitive Form of Multidivisional Competitive Form of Multidivisional StructureStructure

PresidentPresident


FinanceFinance AuditingAuditing


DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision

17

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

18

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

Emphasis on Emphasis on Strategic Strategic ControlsControls

Balance of Balance of Strategic &Strategic &FinancialFinancialControlsControls

Emphasis on Emphasis on Financial Financial ControlsControls

Structural Structural CharacteristicsCharacteristics

Cooperative Cooperative M-FormM-Form

SBUSBU M-FormM-Form

Competitive Competitive M-FormM-Form

19

Competitive Form of Multidivisional Competitive Form of Multidivisional Structure: Unrelated DiversificationStructure: Unrelated Diversification

PresidentPresident


FinanceFinance AuditingAuditing


DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision

Question: Question: What are the divisions competing for since What are the divisions competing for since divisions are unrelated and independent?divisions are unrelated and independent?

20

Three Major Benefits of the M-Three Major Benefits of the M-Form StructureForm Structure 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 which improves the resource allocation processprocess

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

21

ExternalExternal• Anti-trust regulation

• Tax laws

IncentivesIncentives

Drivers of DiversificationDrivers of Diversification

InternalInternal• Low performance

• Uncertain future cash flows

• Firm risk reduction

Incentives (Lower Potential Incentives (Lower Potential for Value Creation)for Value Creation)

22

Firms are more likely to diversify if Firms are more likely to diversify if they have the resources to do so.they have the resources to do so.

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


ResourcesResources


Resources (Higher Potential Resources (Higher Potential for Value Creation)for Value Creation)

23

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

• Diversifying managerial employment risk

• Increasing managerial compensation


ResourcesResources

ManagerialManagerialMotivesMotives


Documents

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