Chapter 6_Slides Hitt

8/3/2019 Chapter 6_Slides Hitt

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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



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Managerial MotivesCausing Value Reduction

Diversifying ManagerialEmployment Risk

Increasing Managerial

Compensation

ManagerialMotives

Resources

Incentives



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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



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:


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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Restructuring


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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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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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Sharing Activities

Transferring Core Competencies


Restructuring


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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


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


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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Incentives to Diversify Internal Incentives:

Poor performance may lead some firms to diversify toattempt to achieve better returns

Firms may diversify to balance uncertain future cashflows

Firm may diversify into different businesses in orderto reduce risk

Managers often have incentives to diversify in order toincrease their compensation and reduce employmentrisk, although effective governance mechanisms mayrestrict such abuses


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Summary Model of the Relationship Between FirmPerformance and Diversification

Resources

DiversificationStrategy

FirmPerformance

Internal

Governance

Strategy

Implementation

Capital MarketIntervention and

Market forManagerial Talent

Incentives

ManagerialMotives

Documents

Chapter 6_Slides Hitt