Chapter 7 CorporateLevel Strategy Robert E Hoskisson Michael
Chapter 7 Corporate-Level Strategy Robert E. Hoskisson Michael A. Hitt R. Duane Ireland © 2004 by South-Western/Thomson Learning 1
The Strategic Management Process Strategic Thinking Chapter 1 Introduction to Strategic Management Chapter 2 Strategic Leadership Strategic Analysis Chapter 3 The External Environment Chapter 4 The Internal Organization Strategic Intent Strategic Mission Chapter 5 Business-Level Strategy Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 7 Corporate-Level Strategy Chapter 8 Acquisition and Restructuring Strategies Chapter 9 International Strategy Chapter 10 Cooperative Strategy Creating Competitive Advantage Monitoring And Creating Entrepreneurial Opportunities Chapter 11 Corporate Governance Chapter 12 Strategic Entrepreneurship 2
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 3
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 4
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 5
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 6
Reasons for Diversification Incentives Resources Reasons to Enhance Strategic Competitiveness • Economies of scope • Market power • Financial economics Managerial Motives 7
Reasons for Diversification Incentives Resources Managerial Motives 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 8
Value-creating Strategies of Diversification: Sharing: Operational Relatedness Between Businesses Operational and Corporate Readiness High Related Constrained Diversification Vertical Integration (Market Power) Low Unrelated Diversification (Financial Economies) Both Operational and Corporate Relatedness (Rare Capability and can Create Diseconomies of Scope) Related Linked Diversification (Economies of Scope) Low High Corporate Readiness: Transferring Skills into 9 Businesses Through Corporate Headquarters
Adding Value by 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 10
Diversification and Multidivisional Structure l 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 11
Alternative Diversification Strategies Related Diversification Strategies – sharing activities – transferring core competencies Unrelated Diversification Strategies – efficient internal capital market allocation – restructuring 12
Alternative Diversification Strategies Related Diversification Strategies – sharing activities 13
Sharing Activities: Key Characteristics Sharing activities often lowers costs or raises differentiation l Sharing activities can lower costs if it: l – – – 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 l Must involve activities that are crucial to competitive advantage l 14
Sharing Activities: Assumptions Strong sense of corporate identity l Clear corporate mission that emphasizes the importance of integrating business units l Incentive system that rewards more than just business unit performance l 15
Alternative Diversification Strategies Related Diversification Strategies – sharing activities – transferring core competencies 16
Transferring Core Competencies: Key Characteristics Exploits interrelationships among divisions l Start with value chain analysis l – identify ability to transfer skills or expertise among similar value chains – exploit ability to transfer activities 17
Transferring Core Competencies: Assumptions l 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 18
Alternative Diversification Strategies Related Diversification Strategies – sharing activities – transferring core competencies Unrelated Diversification Strategies – efficient internal capital market allocation 19
Efficient Internal Capital Market Allocation: Key Characteristics l 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 20
Efficient Internal Capital Market Allocation: Assumptions Managers have more detailed knowledge of firm relative to outside investors l Firm need not risk competitive edge by disclosing sensitive competitive information to investors l Firm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their own l 21
Alternative Diversification Strategies Related Diversification Strategies – sharing activities – transferring core competencies Unrelated Diversification Strategies – efficient internal capital market allocation – restructuring 22
Restructuring: Key Characteristics Seek out undeveloped, sick or threatened organizations or industries l Parent company (acquirer) intervenes and frequently: l – – 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 23
Restructuring: Key Characteristics l Frequently sell unit after making one-time changes since parent no longer adds value to ongoing operations 24
Restructuring: Assumptions Requires keen management insight in selecting firms with depressed values or unforeseen potential l Must do more than restructure companies l Need to initiate restructuring of industries to create a more attractive environment l 25
Strategy and Structure Growth Pattern: Multidivisional Structure Simple Structure Efficient implementation of formulated strategy Multidivisional Structure Sales Growth. Coordination and Control Problems Functional Structure Efficient implementation of formulated strategy Sales Growth. Coordination and Control Problems 26
Strategy and Structure Growth Pattern: Multidivisional Structure l Strategic control – operating divisions – each division is separate business or profit center l Top corporate officer delegates responsibilities to division managers – for day-to-day operations – for business-unit strategy l Appropriate when the firm grows through diversification 27
Strategy and Structure Growth Pattern: Multidivisional Structure l 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 28
Multidivisional Structure l 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 l The decision-making of managers in a multidivisional structure may be: l – centralized or decentralized – bureaucratic or non-bureaucratic 29
Multidivisional Structure Balance on these dimensions may change over time l Structure will evolve over time with: l – – changes in strategy degree of diversification geographic scope nature of competition 30
Three Variations of the Multidivisional Structure (M-form) Cooperative Form Competitive Form Strategic Business-Unit (SBU) Form 31
Cooperative Form of Multidivisional Structure: Related-Constrained Strategy Headquarters Office President Government Affairs Legal Affairs Corporate R&D Lab Strategic Planning Corporate Human Resources Product Division Corporate Marketing Corporate Finance Product Division 32
Cooperative Form of Multidivisional Structure: Related-Constrained Strategy l l l 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 33
SBU Form of Multidivisional Structure: Related-Linked Strategy Headquarters Office Corporate R&D Lab President Strategic Planning Corporate HRM SBU Division Corporate Marketing Corporate Finance SBU Division Division 34
SBU Form of Multidivisional Structure: Related-Linked Strategy l l l 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 35
Market Power l Multipoint competition – two or more diversified firms simultaneously compete in the same product areas or geographic markets l Vertical integration – company produces its own inputs (backward integration) or owns its own source of distribution of outputs (forward integration) 36
Simultaneous Operational Relatedness and Corporate Relatedness l Simultaneously managing two sources of knowledge is difficult and such efforts often fail l Either cooperative or SBU M-form structures would likely be implemented with this dual strategy 37
Competitive Form of Multidivisional Structure: Unrelated Diversification Strategy Headquarters Office President Legal Affairs Finance Division Auditing Division 38
Competitive Form of Multidivisional Structure: Unrelated Diversification Strategy l l l 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 39
Characteristics of Various Structural Forms Structural Cooperative Characteristics M-Form SBU M-Form Competitive 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 Extensive Moderate Nonexistent Use of Integrating Mechanisms 40
Characteristics of Various Structural Forms Structural Cooperative Characteristics M-Form Divisional Performance Appraisal Subjective Strategic Criteria Divisional Incentive Compensation Linked to Corporate Performance SBU M-Form Competitive M-Form Strategic & Financial Criteria Objective Financial Criteria Linked to Corporate Divisional SBU & Division Performance 41
Reasons for Diversification Incentives Resources Managerial Motives Incentives with Neutral Effects on Strategic Competitiveness • • • Anti-trust regulation Tax laws Low performance Uncertain future cash flows Firm risk reduction 42
Incentives to Diversify External Incentives: Relaxation of anti-trust regulation allows more related acquisitions than in the past l Before 1986, higher taxes on dividends favored spending retained earnings on acquisitions l After 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of tax deductible interest payments l 43
Incentives to Diversify Internal Incentives: Poor performance may lead some firms to diversify an attempt to achieve better returns l Firms may diversify to balance uncertain future cash flows l Firms may diversify into different businesses in order to reduce risk l 44
Resources and Diversification Besides strong incentives, firms are more likely to diversify if they have the resources to do so l Value creation is determined more by appropriate use of resources than incentives to diversify l 45
Reasons for Diversification Incentives Resources Managerial Motives (Value Reduction) • Diversifying managerial employment risk • Increasing managerial compensation Managerial Motives 46
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 47
Performance Relationship Between Diversification and Performance Dominant Business Related Constrained Level of Diversification Unrelated Business 48
Relationship Between Firm Performance and Diversification Incentives Resources Managerial Motives Capital Market Intervention and the Market for Managerial Talent Diversification Strategy Internal Governance Firm Performance Strategy Implementation 49
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