Corporate-Level Strategy

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

2. The Strategic Management Process Chapter 1 Introduction to Strategic Management Chapter 2 Strategic Leadership Strategic Thinking Chapter 3 The External Environment Chapter 4 The Internal Organization Strategic Intent Strategic Mission Strategic Analysis Chapter 5 Business-Level Strategy Chapter 5 Business-Level Strategy Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 7 Corporate-Level Strategy Chapter 7 Corporate-Level Strategy Creating Competitive Advantage Chapter 8 Acquisition and Restructuring Strategies Chapter 9 International Strategy Chapter 10 Cooperative Strategy Monitoring And Creating Entrepreneurial Opportunities Chapter 11 Corporate Governance Chapter 12 Strategic Entrepreneurship

3. Business Unit Business Unit Levels and Types of Diversification Low Levels of Diversification Single Business > 95% of business from a single business unit Dominant Business Between 70 and 95% of business from a single business unit

4. Business Unit Business Unit Business Unit Levels and Types of Diversification Moderate to High Levels of Diversification Related Constrained <70% of revenues from dominant business; all businesses share product, technological and distribution linkages

5. Business Unit Business Unit Business Unit Levels and Types of Diversification Moderate to High Levels of Diversification Related Linked (Mixed) < 70% of revenues from dominant business, and only limited links exist

6. Business Unit Business Unit Business Unit Levels and Types of Diversification Very High Levels of Diversification Unrelated < 70% of revenue comes from the dominant business, and there are no common links between businesses

7. Incentives Resources Managerial Motives Reasons for Diversification Reasons to Enhance Strategic Competitiveness • Economies of scope • Market power • Financial economics

8. Incentives Resources Managerial Motives Reasons for Diversification Resources with varying effects on value creation and strategic competitiveness • Tangible resources • financial resources • physical assets • Intangible resources • tacit knowledge • customer relations • image and reputation

9. Both Operational and Corporate Relatedness (Rare Capability and can Create Diseconomies of Scope) High Related Constrained Diversification Vertical Integration (Market Power) Related Linked Diversification (Economies of Scope) Unrelated Diversification (Financial Economies) Low Low High Value-creating Strategies of Diversification:Operational and Corporate Readiness Sharing: Operational Relatedness Between Businesses Corporate Readiness: Transferring Skills into Businesses Through Corporate Headquarters

10. Adding Value by Diversification Diversification most effectively adds value by either of two mechanisms: • Economies of scope:cost savings attributed to transferring the capabilities and competencies developed in one business to a new business • Market power:when a firm is able to sell its products above the existing competitive level or reduce the costs of its primary and support activities below the competitive level, or both

11. Diversification and Multidivisional Structure • Three major benefits • more accurate monitoring of the performance of each business, simplifying problems of control • facilitate comparisons between divisions, improving resource allocation process • stimulate managers of poorly performing divisions to look for ways of improving performance

12. Alternative Diversification Strategies Related Diversification Strategies • sharing activities • transferring core competencies Unrelated Diversification Strategies • efficient internal capital market allocation • restructuring

13. Alternative Diversification Strategies Related Diversification Strategies • sharing activities

14. Sharing Activities: Key Characteristics • Sharing activities often lowers costs or raises differentiation • Sharing activities can lower costs if it: • achieves economies of scale • boosts efficiency of utilization • helps move more rapidly down the Learning Curve • Sharing activities can enhance potential for or reduce the cost of differentiation • Must involve activities that are crucial to competitive advantage

15. Sharing Activities: Assumptions • Strong sense of corporate identity • Clear corporate mission that emphasizes the importance of integrating business units • Incentive system that rewards more than just business unit performance

16. Alternative Diversification Strategies • transferring core competencies Related Diversification Strategies • sharing activities

17. Transferring Core Competencies: Key Characteristics • Exploits interrelationships among divisions • Start with value chain analysis • identify ability to transfer skills or expertise among similar value chains • exploit ability to transfer activities

18. Transferring Core Competencies: Assumptions • Transferring core competencies leads to competitive advantage only if the similarities among business units meet the following conditions: • activities involved in the businesses are similar enough that sharing expertise is meaningful • transfer of skills involves activities which are important to competitive advantage • the skills transferred represent significant sources of competitive advantage for the receiving unit

19. Alternative Diversification Strategies Related Diversification Strategies • sharing activities • transferring core competencies Unrelated Diversification Strategies • efficient internal capital market allocation

20. Efficient Internal Capital Market Allocation: Key Characteristics • Firms pursuing this strategy frequently diversify by acquisition: • acquire sound, attractive companies • acquired units are autonomous • acquiring corporation supplies needed capital • portfolio managers transfer resources from units that generate cash to those with high growth potential and substantial cash needs • add professional management & control to sub-units • sub-unit managers compensation based on unit results

21. Efficient Internal Capital Market Allocation: Assumptions • Managers have more detailed knowledge of firm relative to outside investors • Firm need not risk competitive edge by disclosing sensitive competitive information to investors • Firm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their own

22. Alternative Diversification Strategies Related Diversification Strategies • sharing activities • transferring core competencies Unrelated Diversification Strategies • efficient internal capital market allocation • restructuring

23. Restructuring: Key Characteristics • Seek out undeveloped, sick or threatened organizations or industries • Parent company (acquirer) intervenes and frequently: • changes sub-unit management team • shifts strategy • infuses firm with new technology • enhances discipline by changing control systems • divests part of firm • makes additional acquisitions to achieve critical mass

24. Restructuring: Key Characteristics • Frequently sell unit after making one-time changes since parent no longer adds value to ongoing operations

25. Restructuring: Assumptions • Requires keen management insight in selecting firms with depressed values or unforeseen potential • Must do more than restructure companies • Need to initiate restructuring of industries to create a more attractive environment

26. Sales Growth- Coordination and Control Problems Simple Structure Functional Structure Sales Growth- Coordination and Control Problems Multidivisional Structure Strategy and Structure Growth Pattern: Multidivisional Structure Efficient implementation of formulated strategy Efficient implementation of formulated strategy

27. Strategy and Structure Growth Pattern: Multidivisional Structure • Strategic control • operating divisions • each division is separate business or profit center • Top corporate officer delegates responsibilities to division managers • for day-to-day operations • for business-unit strategy • Appropriate when the firm grows through diversification

28. Strategy and Structure Growth Pattern: Multidivisional Structure • Three major benefits • corporate officers able to more accurately monitor the performance of each business, which simplifies the problem of control • facilitates comparisons between divisions, which improves the resource allocation process • stimulates managers of poorly performing divisions to look for ways of improving performance

29. Multidivisional Structure • Managers try to strike a balance between: • competing among divisions for scarce capital resources • creating opportunities for cooperation to develop synergies • The goal is to maximize overall firm performance • The decision-making of managers in a multidivisional structure may be: • centralized or decentralized • bureaucratic or non-bureaucratic

30. Multidivisional Structure • Balance on these dimensions may change over time • Structure will evolve over time with: • changes in strategy • degree of diversification • geographic scope • nature of competition

31. Multidivisional Structure (M-form) Cooperative Form Competitive Form Strategic Business-Unit (SBU) Form Three Variations of the Multidivisional Structure

32. President Government Affairs Legal Affairs Corporate R&D Lab Strategic Planning Corporate Human Resources Corporate Marketing Corporate Finance Product Division Product Division Product Division Product Division Product Division Cooperative Form of Multidivisional Structure: Related-Constrained Strategy Headquarters Office

33. Cooperative Form of Multidivisional Structure: Related-Constrained Strategy • Structural integration devices create tight links among all divisions • Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions • R&D is likely to be centralized • Rewards are subjective and tend to emphasize overall corporate performance, in addition to divisional performance • Culture emphasizes cooperative sharing

34. President Corporate R&D Lab Strategic Planning Corporate HRM Corporate Marketing Corporate Finance Division Division Division Division Division Division Division Division Division SBU SBU SBU SBU Form of Multidivisional Structure: Related-Linked Strategy Headquarters Office

35. SBU Form of Multidivisional Structure: Related-Linked Strategy • Structural integration devices create tight links among all divisions • Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions • R&D is likely to be centralized • Rewards are subjective and tend to emphasize overall corporate performance, in addition to divisional performance • Culture emphasizes cooperative sharing

36. Market Power • Multipoint competition • two or more diversified firms simultaneously compete in the same product areas or geographic markets • Vertical integration • company produces its own inputs (backward integration) or owns its own source of distribution of outputs (forward integration)

37. Simultaneous Operational Relatedness and Corporate Relatedness • Simultaneously managing two sources of knowledge is difficult and such efforts often fail • Either cooperative or SBU M-form structures would likely be implemented with this dual strategy

38. President Legal Affairs Finance Auditing Division Division Division Division Division Division Competitive Form of Multidivisional Structure: Unrelated Diversification Strategy Headquarters Office

39. Competitive Form of Multidivisional Structure: Unrelated Diversification Strategy • Corporate headquarters has a small staff • Finance and auditing are the most prominent functions in the headquarters to manage cash flow and ensure the accuracy of performance data coming from divisions • The legal affairs function becomes important when the firm acquires or divests assets • Divisions are independent and separate for financial evaluation purposes • Divisions retain strategic control, but cash is managed by the corporate office • Divisions compete for corporate resources

40. Characteristics of Various Structural Forms Structural Characteristics Cooperative M-Form Competitive M-Form SBU M-Form Type of Strategy Related- Constrained Related- Linked Unrelated Diversification Degree of Centralization Centralized at Corporate Office Partially Centralized in SBUs Decentralized to Divisions Use of Integrating Mechanisms Extensive Moderate Nonexistent

41. Characteristics of Various Structural Forms Structural Characteristics Cooperative M-Form Competitive M-Form SBU M-Form Divisional Performance Appraisal Subjective Strategic Criteria Strategic & Financial Criteria Objective Financial Criteria Divisional Incentive Compensation Linked to Corporate Performance Linked to Corporate SBU & Division Performance Linked to Divisional Performance

42. Incentives Resources Managerial Motives Reasons for Diversification Incentives with Neutral Effects on Strategic Competitiveness • Anti-trust regulation • Tax laws • Low performance • Uncertain future cash flows • Firm risk reduction

43. Incentives to Diversify External Incentives: • Relaxation of anti-trust regulation allows more related acquisitions than in the past • Before 1986, higher taxes on dividends favored spending retained earnings on acquisitions • After 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of tax deductible interest payments

44. Incentives to Diversify Internal Incentives: • Poor performance may lead some firms to diversify an attempt to achieve better returns • Firms may diversify to balance uncertain future cash flows • Firms may diversify into different businesses in order to reduce risk

45. Resources and Diversification • Besides strong incentives, firms are more likely to diversify if they have the resources to do so • Value creation is determined more by appropriate use of resources than incentives to diversify

46. Reasons for Diversification Incentives Resources Managerial Motives Managerial Motives (Value Reduction) • Diversifying managerial employment risk • Increasing managerial compensation

47. Managerial Motives to Diversify Managers have motives to diversify • diversification increases size; size is associated with executive compensation • diversification reduces employment risk • effective governance mechanisms may restrict such motives

48. Relationship Between Diversification and Performance Performance Dominant Business Related Constrained Unrelated Business Level of Diversification

49. Capital Market Intervention and the Market for Managerial Talent Incentives Managerial Motives Resources Firm Performance Diversification Strategy Strategy Implementation Internal Governance Relationship Between Firm Performance and Diversification