- - low costlow cost- differentiation- differentiation- integrated low cost/differentiation- integrated low cost/differentiation
- - focused low costfocused 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. 1. Business-Level StrategyBusiness-Level Strategy (Competitive Strategy)(Competitive Strategy)
A Diversified CompanyA Diversified CompanyHas Two Levels of StrategyHas Two Levels of Strategy
How to create value for the corporation as a wholeHow to create value for the corporation as a whole
2. 2. Corporate-Level StrategyCorporate-Level Strategy (Companywide Strategy)(Companywide Strategy)
1. 1. What businesses should the What businesses should the corporation be in?corporation be in?
2. 2. How should the corporate office How should the corporate office manage the array of business units?manage the array of business units?
Corporate StrategyCorporate Strategy is what makes the corporate is what makes the corporate whole add up to more than the sum of its business whole add up to more than the sum of its business unit parts ( 2 + 2 => 5 )unit parts ( 2 + 2 => 5 )
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 Very High Levels of DiversificationDiversification
Related linked (mixed)Related linked (mixed) < 70% < 70% of revenues from dominant of revenues from dominant business, and only limited links existbusiness, and only limited links exist
AAAA
BBBB CCCC
Single businessSingle business > 95% > 95% of revenues from a single 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 revenues from a single business unitbusiness unit
BBBBAAAA
Unrelated-DiversifiedUnrelated-Diversified Business units not closely related Business units not closely related
AAAA
BBBB CCCC
< 70% < 70% of revenues from dominant of revenues from dominant business; all businesses share business; all businesses share product, technological and distribution product, technological and distribution linkageslinkages
Related constrainedRelated constrainedAAAA
BBBB CCCC
Motives, Incentives, and ResourcesMotives, Incentives, and Resourcesfor Diversificationfor Diversification
Motives to Enhance Strategic Motives to Enhance Strategic CompetitivenessCompetitiveness
Economies of ScopeEconomies of Scope
Market PowerMarket Power
Financial EconomiesFinancial Economies
ResourcesResources
ManagerialManagerialMotivesMotives
IncentivesIncentives
Incentives and Resources with Incentives and Resources with Neutral Effects of Strategic Neutral Effects of Strategic
CompetitivenessCompetitiveness
Anti-Trust RegulationAnti-Trust Regulation
Tax LawsTax Laws
Low PerformanceLow Performance
Uncertain Future Cash FlowsUncertain Future Cash Flows
Firm Risk ReductionFirm Risk Reduction
Tangible ResourcesTangible Resources
Intangible ResourcesIntangible Resources
ManagerialManagerialMotivesMotives
ResourcesResources
IncentivesIncentives
Motives, Incentives, and ResourcesMotives, Incentives, and Resourcesfor Diversificationfor Diversification
Managerial Motives Causing Managerial Motives Causing Value ReductionValue Reduction
Diversifying ManagerialDiversifying ManagerialEmployment RiskEmployment Risk
Increasing Managerial Increasing Managerial CompensationCompensation
ManagerialManagerialMotivesMotives
ResourcesResources
IncentivesIncentives
Motives, Incentives, and ResourcesMotives, Incentives, and Resourcesfor Diversificationfor Diversification
Summary Model of theSummary Model of theRelationship Between FirmRelationship Between Firm
Performance and DiversificationPerformance and Diversification
DiversificationDiversificationStrategyStrategy
ManagerialManagerialMotivesMotives
ResourcesResources
IncentivesIncentives
Adding Value by DiversificationAdding Value by Diversification
Diversification most effectively adds Diversification most effectively adds value by either of two mechanisms:value by either of two mechanisms:
By developing economies of scope By developing economies of scope between business units in the firms which between business units in the firms which leads to synergistic benefitsleads to synergistic benefits
By developing market power which leads By developing market power which leads to greater returnsto greater returns
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
Key Characteristics:
Example:Example: Using a common physical distribution system and sales force Using a common physical distribution system and sales force such as Procter & Gamble’s disposable diaper and paper towel divisionssuch as Procter & Gamble’s disposable diaper and paper towel divisions
Example:Example: General Electric’s costs to advertise, sell and service major General Electric’s costs to advertise, sell and service major appliances are spread over many different productsappliances are spread over many different products
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:
Example:Example: Procter & Gamble’s sharing of sales and physical Procter & Gamble’s sharing of sales and physical distribution for disposable diapers and paper towels is effective distribution for disposable diapers and paper towels is effective because these items are so bulky and costly to shipbecause these items are so bulky and costly to ship
Key Characteristics:
Sharing ActivitiesSharing ActivitiesAlternative Diversification StrategiesAlternative Diversification Strategies
Sharing Activities can enhance potential Sharing Activities can enhance potential for or reduce the cost of differentiationfor or reduce the cost of differentiation
Must involve activities that are crucial to Must involve activities that are crucial to competitive advantagecompetitive advantage
Assumptions:
Sharing ActivitiesSharing ActivitiesAlternative Diversification StrategiesAlternative Diversification Strategies
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 Incentive system that rewards more than just business unit performancejust business unit performance
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
Key Characteristics:
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
Assumptions:Transferring Core Competencies leads to competitive Transferring Core Competencies leads to competitive advantage only if the similarities among business advantage only if the similarities among business units meet the following conditions:units meet the following conditions:
Activities involved in the businesses are similar enough Activities involved in the businesses are similar enough that sharing expertise is meaningfulthat sharing expertise is meaningfulActivities involved in the businesses are similar enough Activities involved in the businesses are similar enough that sharing expertise is meaningfulthat sharing expertise is meaningful
Transfer of skills involves activities which are important to Transfer of skills involves activities which are important to competitive advantagecompetitive advantageTransfer of skills involves activities which are important to Transfer of skills involves activities which are important to competitive advantagecompetitive advantage
The skills transferred represent significant sources of The skills transferred represent significant sources of competitive advantage for the receiving unitcompetitive advantage for the receiving unit
Transferring Core CompetenciesTransferring Core CompetenciesAlternative Diversification StrategiesAlternative Diversification Strategies
Alternative Diversification StrategiesAlternative Diversification StrategiesRelated Diversification Strategies
Unrelated Diversification Strategies
Sharing ActivitiesSharing Activities
Transferring Core CompetenciesTransferring Core Competencies
Efficient Internal Capital Market AllocationEfficient Internal Capital Market Allocation
RestructuringRestructuring
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
Acquiring corporation supplies needed capital Acquiring 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
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 Firm can reduce risk by allocating resources among diversified businessesamong diversified businesses
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
Key Characteristics:
RestructuringRestructuring
- - Changes sub-unit management teamChanges sub-unit management team
- - Shifts strategyShifts strategy
-- Infuses (Infuses (注入注入 ) ) firm with new technologyfirm with new technology
-- Divests (Divests (剥夺剥夺 ) ) part of firmpart of firm
-- Enhances discipline by changing control systemsEnhances discipline by changing control systems
Alternative Diversification StrategiesAlternative Diversification Strategies
Seek out undeveloped, sick or threatened organizations Seek out undeveloped, sick or threatened organizations or industriesor industries
Parent company (acquirer) intervenes and frequentlyParent 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
Assumptions:RestructuringRestructuring
Alternative Diversification StrategiesAlternative Diversification Strategies
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 to Need to initiate restructuring of industries to create a more attractive environmentcreate a more attractive environment
Example: China Textiles IndustryExample: China Textiles Industry
Internal Incentives:
Incentives to DiversifyIncentives to Diversify
Relaxation of Anti-Trust regulation allows more related Relaxation of Anti-Trust regulation allows more related acquisitions than in the pastacquisitions than in the pastBefore 1986, higher taxes on dividends favored spending Before 1986, higher taxes on dividends favored spending retained earnings on acquisitionsretained earnings on acquisitionsAfter 1986, firms made fewer acquisitions with retained After 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of earnings, shifting to the use of debt to take advantage of tax deductible interest payments (after mid-90’s, situation tax deductible interest payments (after mid-90’s, situation changed again)changed again)
External 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
Per
form
ance
Per
form
ance
Level of DiversificationLevel of Diversification
Diversification and Firm PerformanceDiversification and Firm Performance
DominantDominantBusinessBusiness
UnrelatedUnrelatedBusinessBusiness
RelatedRelatedConstrainedConstrained
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 flowsFirms may diversify to balance uncertain future cash flows
Firm may diversify into different businesses in order to Firm may diversify into different businesses in order to reduce riskreduce 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 risk, increase their compensation and reduce employment risk, although effective governance mechanisms may restrict although effective governance mechanisms may restrict such abusessuch abuses
Summary Model of the Relationship Between Summary Model of the Relationship Between Firm Performance and DiversificationFirm Performance and Diversification
ResourcesResources
DiversificationDiversificationStrategyStrategy
FirmFirmPerformancePerformance
InternalInternalGovernanceGovernance
StrategyStrategyImplementationImplementation
Capital Market Capital Market Intervention and Intervention and
Market for Market for Managerial TalentManagerial Talent
IncentivesIncentives
ManagerialManagerialMotivesMotives