Ch6-1 Chapter 6 Corporate-Level Strategy Michael A. Hitt R. Duane Ireland Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2000

Ch6-1

Chapter 6Chapter 6

Corporate-Level StrategyCorporate-Level Strategy

Michael A. HittR. Duane Ireland

Robert E. Hoskisson

Michael A. HittR. Duane Ireland

Robert E. Hoskisson

©2000 South-Western College Publishing©2000 South-Western College Publishing

Ch6-2

Chapter 3Chapter 3InternalInternal

EnvironmentEnvironment

Chapter 2Chapter 2ExternalExternal

EnvironmentEnvironmentThe StrategicThe StrategicManagementManagement

ProcessProcess

The StrategicThe StrategicManagementManagement

ProcessProcess

Strategic IntentStrategic Intent

Strategic MissionStrategic Mission

StrategicStrategicCompetitivenessCompetitivenessAbove AverageAbove Average

ReturnsReturnsFeedback

Strategy FormulationStrategy Formulation

Chapter 4Chapter 4Business-LevelBusiness-Level

StrategyStrategy

Chapter 5Chapter 5CompetitiveCompetitiveDynamicsDynamics

Chapter 6Chapter 6Corporate-LevelCorporate-Level

StrategyStrategy

Chapter 8Chapter 8InternationalInternational

StrategyStrategy

Chapter 9Chapter 9CooperativeCooperative

StrategiesStrategies

Chapter 7Chapter 7Acquisitions &Acquisitions &RestructuringRestructuring

Strategy ImplementationStrategy Implementation

Chapter 10Chapter 10CorporateCorporate

GovernanceGovernance

Chapter 11Chapter 11StructureStructure& Control& Control

Chapter 12Chapter 12StrategicStrategic

LeadershipLeadership

Chapter 13Chapter 13Entrepreneurship & InnovationEntrepreneurship & Innovation

Str

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Str

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Str

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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

AAAA

BBBB CCCC

Single businessSingle business > 95% of revenues from a single > 95% of revenues from a single business unitbusiness unit

AAAA

Dominant businessDominant business Between 70% and 95% of Between 70% and 95% of revenues from a single business revenues from a single business unitunit BBBB

AAAA

Unrelated-DiversifiedUnrelated-Diversified Business units not closely related Business units not closely related

AAAA

BBBB CCCC

< 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 constrainedAAAA

BBBB CCCC

Ch6-6

Motives, Incentives, and ResourcesMotives, Incentives, and Resourcesfor Diversificationfor Diversification

Motives to Enhance Motives to Enhance Strategic CompetitivenessStrategic Competitiveness

Economies of ScopeEconomies of Scope

Market 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


ResourcesResources



Ch6-8

Managerial Motives Managerial Motives Causing Value ReductionCausing Value Reduction

Diversifying ManagerialDiversifying ManagerialEmployment RiskEmployment Risk

Increasing Managerial Increasing Managerial CompensationCompensation


ResourcesResources



Ch6-9

Summary Model of theSummary Model of theRelationship Between FirmRelationship Between Firm

Performance and DiversificationPerformance and Diversification

DiversificationDiversificationStrategyStrategy


ResourcesResources


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 scale

Boosts efficiency of utilizationBoosts efficiency of utilization

Helps 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



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:


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








Ch6-16


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 chainsIdentify 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 divisionsExploits Exploits InterrelationshipsInterrelationships among divisions among divisions

Start with Start with Value ChainValue Chain analysisanalysisStart 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 meaningfulActivities 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 advantageTransfer 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








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








Ch6-22



- - 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


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


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

Per

form

ance

Per

form

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



Documents

Ch6-1 Chapter 6 Corporate-Level Strategy Michael A. Hitt R. Duane Ireland Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2000