ch07 discussion blue

8/8/2019 Ch07 Discussion Blue

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2004 by South-Western/Thomson Learning 1

Corporate-Level StrategyCorporate-Level Strategy

Robert E. Hoskisson

Michael A. Hitt

R. Duane Ireland

Chapter 7Chapter 7


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Chapter 2Chapter 2

Strategic LeadershipStrategic Leadership

Chapter 4Chapter 4

The InternalThe Internal

OrganizationOrganization

Chapter 6Chapter 6

Competitive Rivalry andCompetitive Rivalry and

Competitive DynamicsCompetitive Dynamics

Chapter 9Chapter 9

International StrategyInternational Strategy

Chapter 1Chapter 1

Introduction toIntroduction to

Strategic ManagementStrategic Management

Chapter 3Chapter 3

The ExternalThe External

EnvironmentEnvironment

Chapter 5Chapter 5

Business-LevelBusiness-Level

StrategyStrategy

Chapter 8Chapter 8Acquisition andAcquisition and

Restructuring StrategiesRestructuring Strategies

Chapter 11Chapter 11

Corporate GovernanceCorporate Governance

Strategic IntentStrategic Intent

Strategic MissionStrategic Mission

Chapter 7Chapter 7



Cooperative StrategyCooperative Strategy


Strategic EntrepreneurshipStrategic Entrepreneurship

Strategic

Analysis

Strategic

Thinking

Creating

Competitive

Advantage

Monitoring

And Creating

EntrepreneurialOpportunities

The Strategic Management ProcessThe Strategic Management Process

Chapter 5Chapter 5

Business-LevelBusiness-Level

StrategyStrategy

Chapter 6Chapter 6

Competitive Rivalry andCompetitive Rivalry and

Competitive DynamicsCompetitive Dynamics

Chapter 7Chapter 7



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Discussion QuestionsDiscussion Questions

1. What is the difference between business-and corporate- level strategy? How cancorporate level diversification strategies

be classified in regard to type andamount of diversification?

2. What are the reasons that firms pursue acorporate diversification strategy?

3. What are the value enhancing economicrationales for related diversification?

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Discussion Questions (cont.)Discussion Questions (cont.)Click

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4. What are the value enhancing

economic rationales for unrelated

diversification?

5. Why are diversified firms more

efficiently managed with a

multidivisional structure? What

variants of the multidivisional form fitwith the specific types of corporate

strategy?

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Discussion Questions (cont.)Discussion Questions (cont.)Click

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6. What are the external as well as the

internal incentives (generally value

neutral motives) firms have to

diversify? What resources foster

increased diversification?

7. Are there managerial rationales that

serve as motives to increasediversification but which may deflate

the value of the firm?

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Discussion Questions (cont.)Discussion Questions (cont.)

Click

Here 8. How would you summarize the

relationship between diversification

strategy and firm performance

outcomes?


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Discussion Question 1Discussion Question 1

What is the difference betweenbusiness- and corporate- level

strategy? How can corporate leveldiversification strategies beclassified in regard to type and

amount of diversification?


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Levels and Types of DiversificationLevels and Types of Diversification

Low Levels of DiversificationLow Levels of Diversification

Single BusinessSingle Business

> 95% of business from a single> 95% of business from a single

business unitbusiness unit

Dominant BusinessDominant Business

Between 70 and 95% of businessBetween 70 and 95% of business

from a single business unitfrom a single business unit


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Related ConstrainedRelated Constrained


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Related Linked (Mixed)Related Linked (Mixed)

< 70% of revenues from dominant< 70% of revenues from dominant

business, and only limited linksbusiness, and only limited links

existexist

Levels and Types of DiversificationLevels and Types of Diversification

Moderate to High Levels of DiversificationModerate to High Levels of Diversification


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Levels and Types ofLevels and Types of

DiversificationDiversification

UnrelatedUnrelated

< 70% of revenue comes from the< 70% of revenue comes from the

dominant business, and there aredominant business, and there are

no common links betweenno common links between

businessesbusinesses

Very High Levels of DiversificationVery High Levels of Diversification


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What are the reasons that firms pursuea corporate diversification strategy?


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Reasons for DiversificationReasons for Diversification

Reasons to Enhance StrategicReasons to Enhance Strategic

CompetitivenessCompetitiveness

Economies of scope

Market power

Financial economics

IncentivesIncentives

ResourcesResources

ManagerialManagerial

MotivesMotives


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Resources with varyingResources with varying

effects on value creation andeffects on value creation and

strategic competitivenessstrategic competitiveness Tangible resources

financial resources

physical assets

Intangible resources

tacit knowledge

customer relations

image and reputation


ResourcesResources


MotivesMotives



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Value-creating Strategies of Diversification:Value-creating Strategies of Diversification:Operational and Corporate ReadinessOperational and Corporate Readiness

Related ConstrainedRelated Constrained


Vertical IntegrationVertical Integration

(Market Power)(Market Power)

UnrelatedUnrelated


(Financial Economies)(Financial Economies)

Both Operational andBoth Operational and

Corporate RelatednessCorporate Relatedness

(Rare Capability(Rare Capability

and can Createand can Create

Diseconomies ofDiseconomies ofScope)Scope)

Related LinkedRelated Linked

DiversificationDiversification(Economies of(Economies of

Scope)Scope)

Corporate Readiness: Transferring Skills intoCorporate Readiness: Transferring Skills into

Businesses Through Corporate HeadquartersBusinesses Through Corporate Headquarters

LowLow HighHigh

Sharing:Op

era

tional

Sharin

g:Opera

tional

Relate

dnessBetw

een

Businesses

Relate

dness

Between

Businesses

LowLow

HighHigh


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Adding Value by DiversificationAdding Value by Diversification

Diversification most effectively adds valueDiversification most effectively adds value

by either of two mechanisms:by either of two mechanisms:

Economies of scope:Economies of scope:cost savings attributedcost savings attributedto transferring the capabilities and competenciesto transferring the capabilities and competencies

developed in one business to a new businessdeveloped in one business to a new business

Market power:Market power:when a firm is able to sell itswhen a firm is able to sell itsproducts above the existing competitive level orproducts above the existing competitive level or

reduce the costs of its primary and supportreduce the costs of its primary and support

activities below the competitive level, or bothactivities below the competitive level, or both


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Diversification andDiversification and

Multidivisional StructureMultidivisional StructureThree major benefits

more accurate monitoring of theperformance of each business,

simplifying problems of control facilitate comparisons between

divisions, improving resource allocationprocess

stimulate managers of poorlyperforming divisions to look for ways ofimproving performance


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Alternative DiversificationAlternative Diversification

StrategiesStrategies

Related Diversification StrategiesRelated Diversification Strategies

sharing activitiessharing activities

transferring core competenciestransferring core competencies

Unrelated Diversification StrategiesUnrelated Diversification Strategies

efficient internal capital market allocationefficient internal capital market allocation

restructuringrestructuring


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What are the value enhancingeconomic rationales for relateddiversification?


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Sharing Activities:Sharing Activities: Sharing activities often lowers costs or raisesSharing activities often lowers costs or raises

differentiationdifferentiation

Sharing activities can lower costs if it:Sharing activities can lower costs if it:

achieves economies of scaleachieves economies of scale

boosts efficiency of utilizationboosts efficiency of utilization

helps move more rapidly down the Learning Curvehelps move more rapidly down the Learning Curve

Sharing activities can enhance potential for orSharing activities can enhance potential for orreduce the cost of differentiationreduce the cost of differentiation

Must involve activities that are crucial toMust involve activities that are crucial tocompetitive advantagecompetitive advantage

Key CharacteristicsKey Characteristics


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Sharing Activities:Sharing Activities: Strong sense of corporate identityStrong sense of corporate identity

Clear corporate mission that emphasizesClear corporate mission that emphasizes

the importance of integrating businessthe importance of integrating business

unitsunits Incentive system that rewards more thanIncentive system that rewards more than

just business unit performancejust business unit performance

AssumptionsAssumptions


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Transferring Core Competencies:Transferring Core Competencies:

Exploits interrelationships amongExploits interrelationships among

divisionsdivisions

Start with value chain analysisStart with value chain analysis

identify ability to transfer skills or expertiseidentify ability to transfer skills or expertise

among similar value chainsamong similar value chains

exploit ability to transfer activitiesexploit ability to transfer activities



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Transferring Core Competencies:Transferring Core Competencies:

Transferring core competencies leads toTransferring core competencies leads tocompetitive advantage only if the similaritiescompetitive advantage only if the similaritiesamong business units meet the followingamong business units meet the following

conditions:conditions: activities involved in the businesses are similaractivities involved in the businesses are similarenough that sharing expertise is meaningfulenough that sharing expertise is meaningful

transfer of skills involves activities which aretransfer of skills involves activities which areimportant to competitive advantageimportant to competitive advantage

the skills transferred represent significantthe skills transferred represent significantsources of competitive advantage for thesources of competitive advantage for thereceiving unitreceiving unit



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Question 4Question 4

What are the value enhancing

economic rationales for unrelated

diversification?


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Efficient Internal Capital MarketEfficient Internal Capital Market

Allocation:Allocation: Firms pursuing this strategy frequentlyFirms pursuing this strategy frequently

diversify by acquisition:diversify by acquisition: acquire sound, attractive companiesacquire sound, attractive companies

acquired units are autonomousacquired units are autonomous acquiring corporation supplies needed capitalacquiring corporation supplies needed capital

portfolio managers transfer resources from unitsportfolio managers transfer resources from unitsthat generate cash to those with high growththat generate cash to those with high growthpotential and substantial cash needspotential and substantial cash needs

add professional management & control to sub-add professional management & control to sub-unitsunits

sub-unit managers compensation based on unitsub-unit managers compensation based on unitresultsresults



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Efficient Internal Capital MarketEfficient Internal Capital Market

Allocation:Allocation:Managers have more detailed knowledgeManagers have more detailed knowledge

of firm relative to outside investorsof firm relative to outside investors

Firm need not risk competitive edge byFirm need not risk competitive edge by

disclosing sensitive competitivedisclosing sensitive competitive

information to investorsinformation to investors

Firm can reduce risk by allocatingFirm can reduce risk by allocating

resources among diversified businesses,resources among diversified businesses,although shareholders can generallyalthough shareholders can generally

diversify more economically on their owndiversify more economically on their own



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restructuringrestructuring


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Restructuring:Restructuring:

Seek out undeveloped, sick or threatenedSeek out undeveloped, sick or threatenedorganizations or industriesorganizations or industries

Parent company (acquirer) intervenes andParent company (acquirer) intervenes and

frequently:frequently: changes sub-unit management teamchanges sub-unit management team

shifts strategyshifts strategy

infuses firm with new technologyinfuses firm with new technology

enhances discipline by changing controlenhances discipline by changing controlsystemssystems

divests part of firmdivests part of firm

makes additional acquisitions to achievemakes additional acquisitions to achieve

critical masscritical mass



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Frequently sell unit after making one-timeFrequently sell unit after making one-time

changes since parent no longer addschanges since parent no longer adds

value to ongoing operationsvalue to ongoing operations



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Requires keen management insight inRequires keen management insight in

selecting firms with depressed values orselecting firms with depressed values or

unforeseen potentialunforeseen potential

Must do more than restructure companiesMust do more than restructure companies

Need to initiate restructuring of industriesNeed to initiate restructuring of industries

to create a more attractive environmentto create a more attractive environment


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Why are diversified firms more

efficiently managed with a

multidivisional structure? Whatvariants of the multidivisional form fit

with the specific types of corporate

strategy?


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Strategy and Structure GrowthStrategy and Structure Growth

Pattern:Pattern:SimpleSimple

StructureStructure

FunctionalFunctional

StructureStructure

MultidivisionalMultidivisional

StructureStructureSales Growth-Sales Growth-

Coordination andCoordination and

Control ProblemsControl Problems

Sales Growth-Sales Growth-

Coordination andCoordination and

Control ProblemsControl Problems

Efficient implementationEfficient implementation

of formulated strategyof formulated strategy

EfficientEfficient

implementationimplementation

of formulatedof formulated

strategystrategy

Multidivisional StructureMultidivisional Structure


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Pattern:Pattern: Strategic controlStrategic control

operating divisionsoperating divisions

each division is separate business or profiteach division is separate business or profit

centercenter Top corporate officer delegatesTop corporate officer delegates

responsibilities to division managersresponsibilities to division managers for day-to-day operationsfor day-to-day operations

for business-unit strategyfor business-unit strategyAppropriate when the firm grows throughAppropriate when the firm grows through

diversificationdiversification



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Pattern:Pattern: Three major benefitsThree major benefits

corporate officers able to more accuratelycorporate officers able to more accurately

monitor the performance of each business,monitor the performance of each business,

which simplifies the problem of controlwhich simplifies the problem of control facilitates comparisons between divisions,facilitates comparisons between divisions,

which improves the resource allocation processwhich improves the resource allocation process

stimulates managers of poorly performingstimulates managers of poorly performing

divisions to look for ways of improvingdivisions to look for ways of improvingperformanceperformance



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Managers try to strike a balance between:Managers try to strike a balance between:

competing among divisions for scarce capitalcompeting among divisions for scarce capital

resourcesresources

creating opportunities for cooperation tocreating opportunities for cooperation todevelop synergiesdevelop synergies

The goal is to maximize overall firmThe goal is to maximize overall firm

performanceperformance The decision-making of managers in aThe decision-making of managers in a

multidivisional structure may be:multidivisional structure may be:

centralized or decentralizedcentralized or decentralized

bureaucratic or non-bureaucraticbureaucratic or non-bureaucratic


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Balance on these dimensions may changeBalance on these dimensions may changeover timeover time

Structure will evolve over time with:Structure will evolve over time with:

changes in strategychanges in strategy

degree of diversificationdegree of diversification

geographic scopegeographic scope

nature of competitionnature of competition


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Three Variations of theThree Variations of the


MultidivisionalMultidivisional

StructureStructure

(M-form)(M-form)

Strategic Business-UnitStrategic Business-Unit

(SBU) Form(SBU) Form

CooperativeCooperative

FormForm

CompetitiveCompetitive

FormForm


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Cooperative Form of MultidivisionalCooperative Form of Multidivisional

Structure:Structure: Related-Constrained StrategyRelated-Constrained Strategy

GovernmentGovernment

AffairsAffairs

LegalLegal

AffairsAffairs

CorporateCorporate

R&D LabR&D Lab

StrategicStrategic

PlanningPlanning

CorporateCorporate

HumanHuman

ResourcesResources

CorporateCorporate

MarketingMarketing

CorporateCorporate

FinanceFinance

ProductProduct

DivisionDivision

ProductProduct

DivisionDivision

ProductProduct

DivisionDivision

ProductProduct

DivisionDivision

ProductProduct

DivisionDivision

PresidentPresidentHeadquarters OfficeHeadquarters Office


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Cooperative Form of MultidivisionalCooperative Form of Multidivisional

Structure:Structure: Structural integration devices create tight linksStructural integration devices create tight links

among all divisionsamong all divisions

Corporate office emphasizes centralized strategicCorporate office emphasizes centralized strategic

planning, human resources, and marketing toplanning, human resources, and marketing tofoster cooperation between divisionsfoster cooperation between divisions

R&D is likely to be centralizedR&D is likely to be centralized

Rewards are subjective and tend to emphasizeRewards are subjective and tend to emphasize

overall corporate performance, in addition tooverall corporate performance, in addition todivisional performancedivisional performance

Culture emphasizes cooperative sharingCulture emphasizes cooperative sharing

Related-Constrained StrategyRelated-Constrained Strategy


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SBU Form of MultidivisionalSBU Form of Multidivisional

Structure:Structure: Related-Linked StrategyRelated-Linked Strategy

PresidentPresident

CorporateCorporate

R&D LabR&D Lab

StrategicStrategic

PlanningPlanning

CorporateCorporate

HRMHRM

CorporateCorporate

MarketingMarketing

CorporateCorporate

FinanceFinance

Headquarters OfficeHeadquarters Office

DivisionDivision

DivisionDivisionDivisionDivision

SBUSBU SBUSBU SBUSBU

DivisionDivision


DivisionDivision



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SBU Form of MultidivisionalSBU Form of Multidivisional

Structure:Structure: Structural integration devices create tight linksStructural integration devices create tight links

among all divisionsamong all divisions

Corporate office emphasizes centralized strategicCorporate office emphasizes centralized strategic

planning, human resources, and marketing toplanning, human resources, and marketing tofoster cooperation between divisionsfoster cooperation between divisions

R&D is likely to be centralizedR&D is likely to be centralized

Rewards are subjective and tend to emphasizeRewards are subjective and tend to emphasize

overall corporate performance, in addition tooverall corporate performance, in addition todivisional performancedivisional performance

Culture emphasizes cooperative sharingCulture emphasizes cooperative sharing

Related-Linked StrategyRelated-Linked Strategy


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Market PowerMarket Power

Multipoint competition two or more diversified firms

simultaneously compete in the same

product areas or geographic marketsVertical integration

company produces its own inputs

(backward integration) or owns its ownsource of distribution of outputs

(forward integration)


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Simultaneous Operational RelatednessSimultaneous Operational Relatedness

and Corporate Relatednessand Corporate Relatedness

Simultaneously managing two

sources of knowledge is difficult and

such efforts often failEither cooperative or SBU M-form

structures would likely be

implemented with this dual strategy


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Competitive Form of MultidivisionalCompetitive Form of Multidivisional

Structure:Structure: Corporate headquarters has a small staffCorporate headquarters has a small staff Finance and auditing are the most prominentFinance and auditing are the most prominent

functions in the headquarters to manage cash flowfunctions in the headquarters to manage cash flowand ensure the accuracy of performance dataand ensure the accuracy of performance data

coming from divisionscoming from divisions The legal affairs function becomes important whenThe legal affairs function becomes important when

the firm acquires or divests assetsthe firm acquires or divests assets Divisions are independent and separate forDivisions are independent and separate for

financial evaluation purposesfinancial evaluation purposes Divisions retain strategic control, but cash isDivisions retain strategic control, but cash is

managed by the corporate officemanaged by the corporate office Divisions compete for corporate resourcesDivisions compete for corporate resources

Unrelated Diversification StrategyUnrelated Diversification Strategy


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Characteristics of VariousCharacteristics of Various

Structural FormsStructural FormsStructuralStructural

CharacteristicsCharacteristicsCooperativeCooperative

M-FormM-FormSBUSBU

M-FormM-FormCompetitiveCompetitive

M-FormM-Form

Degree ofDegree ofCentralizationCentralization

Centralized atCentralized atCorporateCorporate

OfficeOffice

PartiallyPartiallyCentralizedCentralized

in SBUsin SBUs

DecentralizedDecentralizedto Divisionsto Divisions

Use ofUse ofIntegratingIntegrating

MechanismsMechanismsExtensiveExtensive ModerateModerate NonexistentNonexistent

Type ofType ofStrategyStrategy Related-Related-ConstrainedConstrained Related-Related-LinkedLinked UnrelatedUnrelatedDiversificationDiversification


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Characteristics of VariousCharacteristics of Various

Structural FormsStructural Forms

DivisionalDivisional

IncentiveIncentiveCompensationCompensation

Linked toLinked to

CorporateCorporatePerformancePerformance

Linked toLinked to

CorporateCorporateSBU & DivisionSBU & DivisionPerformancePerformance

Linked toLinked to

DivisionalDivisionalPerformancePerformance

DivisionalDivisional

PerformancePerformanceAppraisalAppraisal

SubjectiveSubjectiveStrategicStrategicCriteriaCriteria

Strategic &Strategic &FinancialFinancialCriteriaCriteria

ObjectiveObjectiveFinancialFinancialCriteriaCriteria

StructuralStructuralCharacteristicsCharacteristics

CooperativeCooperativeM-FormM-Form

SBUSBUM-FormM-Form

CompetitiveCompetitiveM-FormM-Form

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What are the external as well as

the internal incentives (generally

value neutral motives) firms haveto diversify? What resources

foster increased diversification?


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Incentives with NeutralIncentives with Neutral

Effects on StrategicEffects on Strategic

CompetitivenessCompetitiveness Anti-trust regulation

Tax laws

Low performance

Uncertain future cash flows

Firm risk reduction


ResourcesResources


MotivesMotives



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Incentives to DiversifyIncentives to Diversify

External Incentives:External Incentives: Relaxation of anti-trust regulation allows moreRelaxation of anti-trust regulation allows more

related acquisitions than in the pastrelated acquisitions than in the past

Before 1986, higher taxes on dividends favoredBefore 1986, higher taxes on dividends favoredspending retained earnings on acquisitionsspending retained earnings on acquisitions

After 1986, firms made fewer acquisitions withAfter 1986, firms made fewer acquisitions withretained earnings, shifting to the use of debt toretained earnings, shifting to the use of debt totake advantage of tax deductible interesttake advantage of tax deductible interest

paymentspayments


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Incentives to DiversifyIncentives to Diversify

Internal Incentives:Internal Incentives: Poor performance may lead some firms toPoor performance may lead some firms to

diversify an attempt to achieve better returnsdiversify an attempt to achieve better returns Firms may diversify to balance uncertain futureFirms may diversify to balance uncertain future

cash flowscash flows Firms may diversify into different businesses inFirms may diversify into different businesses in

order to reduce riskorder to reduce risk


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Resources and DiversificationResources and Diversification

Besides strong incentives, firms are moreBesides strong incentives, firms are more

likely to diversify if they have thelikely to diversify if they have the

resources to do soresources to do so

Value creation is determined more byValue creation is determined more by

appropriate use of resources thanappropriate use of resources than

incentives to diversifyincentives to diversify

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Are there managerial rationales

that serve as motives to

increase diversification butwhich may deflate the value of

the firm?


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Managerial Motives (ValueManagerial Motives (Value

Reduction)Reduction)

Diversifying managerialemployment risk

Increasing managerial

compensation


ResourcesResources


MotivesMotives



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Managerial Motives to DiversifyManagerial Motives to Diversify

Managers have motives to diversifyManagers have motives to diversify diversification increases size; size isdiversification increases size; size is

associated with executive compensationassociated with executive compensation

diversification reduces employment riskdiversification reduces employment risk effective governance mechanisms may restricteffective governance mechanisms may restrict

such motivessuch motives

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How would you summarize the

relationship between diversificationstrategy and firm performance

outcomes?

R l i hi BR l i hi B


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Relationship BetweenRelationship Between

Diversification and PerformanceDiversification and Performance

Perfor

man

ce

Perfor

man

ce

Level of DiversificationLevel of Diversification

Dominant

Business

Unrelated

Business

Related

Constrained

l i hi iR l i hi B Fi


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Relationship Between FirmRelationship Between Firm

Performance and DiversificationPerformance and Diversification



MotivesMotives

ResourcesResourcesDiversificationDiversification

StrategyStrategyFirmFirm

PerformancePerformance

InternalInternal

GovernanceGovernanceStrategyStrategy

ImplementationImplementation

Capital MarketCapital Market

Intervention and theIntervention and the

Market forMarket for

Managerial TalentManagerial Talent

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