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    Ch6-1

    Chapter 6

    Corporate-Level Strategy

    Michael A. Hitt

    R. Duane IrelandRobert E. Hoskisson

    2000 South-Western College Publishing

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    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 eachbusiness in which the company competes

    1. Business-Level Strategy (Competitive Strategy)

    A Diversified CompanyHas Two Levels of Strategy

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    Ch6-3

    1. What businesses should the corporationbe in?

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

    Corporate Strategy is what makes the corporate wholeadd up to more than the sum of its business unit parts

    Key Questions of Corporate Strategy

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    Levels and Types of DiversificationLow 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 constrained A

    B C

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    Ch6-5

    Motives, Incentives, and Resourcesfor Diversification

    Motives to EnhanceStrategic Competitiveness

    Economies of Scope

    Market Power

    Financial Economies

    Resources

    ManagerialMotives

    Incentives

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    Ch6-6

    Incentives and Resourceswith Neutral Effects of

    Strategic Competitiveness

    Anti-Trust Regulation

    Tax Laws

    Low Performance

    Uncertain Future Cash Flows

    Firm Risk Reduction

    Tangible Resources

    Intangible Resources

    ManagerialMotives

    Resources

    Incentives

    Motives, Incentives, and Resourcesfor Diversification

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    Managerial MotivesCausing Value Reduction

    Diversifying ManagerialEmployment Risk

    Increasing Managerial

    Compensation

    ManagerialMotives

    Resources

    Incentives

    Motives, Incentives, and Resourcesfor Diversification

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    Alternative Diversification Strategies

    Related Diversification Strategies

    Unrelated Diversification Strategies

    Sharing ActivitiesTransferring Core Competencies

    Efficient Internal Capital Market Allocation

    Restructuring

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    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 scaleBoosts efficiency of utilizationHelps move more rapidly down Learning Curve

    Sharing Activities often lowers costs orraises differentiation

    Sharing Activities can lower costs if it:

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    Example: Shared order processing system may allow newfeatures customers value or make more advanced remotesensing technology available

    Example: Procter & Gambles sharing of sales andphysical distribution for disposable diapers and papertowels is effective because these items are so bulky and

    costly to ship

    Key Characteristics:

    Sharing ActivitiesAlternative Diversification Strategies

    Sharing Activities can enhance potential for orreduce the cost of differentiation

    Must involve activities that are crucial to

    competitive advantage

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    Assumptions:

    Sharing ActivitiesAlternative Diversification Strategies

    Strong sense of corporate identity

    Clear corporate mission that emphasizes theimportance of integrating business units

    Incentive system that rewards more than justbusiness unit performance

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    Alternative Diversification Strategies

    Related Diversification Strategies

    Unrelated Diversification Strategies

    Sharing ActivitiesTransferring Core Competencies

    Efficient Internal Capital Market Allocation

    Restructuring

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    Key Characteristics:

    Transferring Core CompetenciesAlternative Diversification Strategies

    Identify ability to transfer skills orexpertise among similar value chains

    Exploit ability to transfer activities

    Exploits Interrelationships among divisions

    Start with Value Chain analysis

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    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

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    Alternative Diversification Strategies

    Related Diversification Strategies

    Unrelated Diversification Strategies

    Sharing ActivitiesTransferring Core Competencies

    Efficient Internal Capital Market Allocation

    Restructuring

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    Key Characteristics: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 thatgenerate 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

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    Assumptions:

    Efficient Internal Capital Market AllocationAlternative Diversification Strategies

    Managers have more detailed knowledge of firmrelative to outside investors

    Firm need not risk competitive edge by disclosingsensitive competitive information to investors

    Firm can reduce risk by allocating resources amongdiversified businesses, although shareholders cangenerally diversify more economically on their own

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    Alternative Diversification Strategies

    Related Diversification Strategies

    Unrelated Diversification Strategies

    Sharing Activities

    Transferring Core Competencies

    Efficient Internal Capital Market Allocation

    Restructuring

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    Key Characteristics:

    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

    Alternative Diversification Strategies

    Seek out undeveloped, sick or threatened organizationsor industries

    Parent company (acquirer) intervenes and frequently:

    Frequently sell unit after making one-time changes sinceparent no longer adds value to ongoing operations

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    Assumptions:Restructuring

    Alternative Diversification Strategies

    Requires keen management insight in selectingfirms with depressed values or unforeseen potential

    Must do more than restructure companies

    Need to initiate restructuring of industries tocreate a more attractive environment

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    Value-creating Strategies of DiversificationOperational and Corporate Relatedness

    Sharing:

    OperationalRelatednessBetweenBusiness

    Corporate Relatedness: Transferring Skills IntoBusiness Through Corporate Headquarters

    Low High

    High

    Low

    Related LinkedDiversification

    (Economies of Scope)

    UnrelatedDiversification

    (Financial Economies)

    Both Operational andCorporate Relatedness(Rare Capability and

    Can Create Diseconomiesof Scope)

    Related ConstrainedDiversification

    Vertical Integration(Market Power)

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    P e r

    f o r m a n c e

    Level of Diversification

    Diversification and Firm Performance

    DominantBusiness

    UnrelatedBusiness

    RelatedConstrained

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