7-1© 2006 by Nelson, a division of Thomson Canada Limited. Corporate-Level Strategy Chapter Seven

7-2© 2006 by Nelson, a division of Thomson Canada Limited. Chapter 5 Bus. - Level Strategy Chapter 6 Competitive Dynamics Chapter 9 International Strategy Chapter 10 Cooperative Strategies Chapter 8 Acquisitions & Restructuring Chapter 11 Corporate Governance Chapter 12 Structure & Control Chapter 13 Strategic Leadership Chapter 14 Entrepreneurship & Innovation Strategic Inputs Strategic Actions Strategic Outcomes Chapter 4 Internal Environment Chapter 3 External Environment Strat. Intent Strat. Mission The Strategic. Management. Process Strategy Formulation Strategy Implementation Strategic Competitiveness Chapter 1 Above Average Returns Chapter 2 Feedback Strategic Competitiveness Chapter 1 Chapter 7 Corp. - Level Strategy Chapter 5 Bus. - Level Strategy Chapter 6 Competitive Dynamics

7-3© 2006 by Nelson, a division of Thomson Canada Limited. Corporate–Level Strategy Knowledge Objectives: 1.Define corporate-level strategy and discuss its importance to the diversified firm. 2.Describe the advantages and disadvantages of single-business strategies and dominant-business strategies. 3.Explain three primary reasons why firms move from single-business strategies and dominant-business strategies to more diversified strategies. 4.Describe how related-diversified firms create value by sharing or transferring core competencies.

7-4© 2006 by Nelson, a division of Thomson Canada Limited. Corporate – Level Strategy Knowledge Objectives – continued… 5. Explain the two ways value can be treated with an unrelated-diversification strategy. 6. Discuss the incentives and resources that encourage diversification. 7. Describe motives that can encourage managers to overdiversify a firm.

7-5© 2006 by Nelson, a division of Thomson Canada Limited. Corporate-level strategy specifies actions to be taken by the firm to gain a competitive advantage by selecting & managing a group of different businesses competing in several industries & product markets Corporate Strategy concerns 2 key questions: 1. What businesses should the firm in? 2. How should the corporate office manage the array of business units?

7-6© 2006 by Nelson, a division of Thomson Canada Limited. Firms Vary by Degree of Diversification Single-business > 95% of revenues from a single business unit Low Levels of Diversification AA Dominant-business Between 70% & 95% of revenues from a single business unit BBAA Unrelated-Diversified Business units not closely related High Levels of Diversification AA BBCC Moderate to High Levels of Diversification < 70% of revenues from dominant business; bus.s share product, technological & distribution links Related constrained Related linked (mixed) < 70% of revenues from dominant business, only limited links exist AABBCC BB AA CC

7-7© 2006 by Nelson, a division of Thomson Canada Limited. Motives to Enhance Strategic Competitiveness Economies of ScopeEconomies of Scope Market PowerMarket Power Financial EconomiesFinancial Economies Resources Incentives ManagerialMotives Reasons for Diversification *

7-8© 2006 by Nelson, a division of Thomson Canada Limited. Incentives & Resources with Neutral Effects of Strategic Competitiveness Resources Incentives ManagerialMotives Reasons for Diversification Anti-Competition RegulationAnti-Competition 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

7-9© 2006 by Nelson, a division of Thomson Canada Limited. Managerial Motives Causing Value ReductionManagerial Motives Causing Value Reduction Diversifying ManagerialDiversifying Managerial Employment Risk Increasing Managerial CompensationIncreasing Managerial Compensation Reasons for Diversification Resources Incentives ManagerialMotives *

7-10© 2006 by Nelson, a division of Thomson Canada Limited. Summary Model of the Relationship between Firm Performance & Diversification Resources Incentives ManagerialMotives Diversification Strategy

7-11© 2006 by Nelson, a division of Thomson Canada Limited. Value-creating Strategies of Diversification Operational and Corporate Relatedness Corporate Relatedness: Transferring Skills Into Business Through Corporate Headquarters LowHigh Sharing: Operational Relatedness Between Business High Low Related Linked Diversification (Economies of Scope) Unrelated Diversification (Financial Economies) Both Operational and Corporate Relatedness (Rare & can create diseconomies of scope) Related Constrained Diversification Vertical Integration (Market Power)

7-12© 2006 by Nelson, a division of Thomson Canada Limited. Transferring Core Competencies 2 Efficient Internal Capital Market Allocation Unrelated Diversification Strategies 3 Restructuring 4 Sharing Activities 1 Related Diversification Strategies Alternative Diversification Strategies

7-13© 2006 by Nelson, a division of Thomson Canada Limited. Sharing Activities can lower costs if it: Example: Laboratory costs forcing drug companies to merge in order to continue R&D efforts. * Achieves economies of scale* Boosts efficiency of utilization * Helps move more rapidly down Learning Curve. Sharing Activities can enhance differentiation if it: Example: Shared order processing system may allow the firm to discover new features customers value from a group of products. 1 Sharing Activities Involves activities crucial to competitive advantage.* Key Characteristics

7-14© 2006 by Nelson, a division of Thomson Canada Limited. * * Incentive system that rewards more than just business unit performance Strong sense of corporate identity * * Assumptions 1 Sharing Activities Clear corporate mission that emphasizes the importance of integrating business units * * *

7-15© 2006 by Nelson, a division of Thomson Canada Limited. Transferring Core Competencies 2 Sharing Activities 1 Related Diversification Strategies Alternative Diversification Strategies Efficient Internal Capital Market Allocation Unrelated Diversification Strategies 3 Restructuring4

7-16© 2006 by Nelson, a division of Thomson Canada Limited.* Exploits Interrelationships among divisions* Start with Value Chain analysis Identify ability to transfer skills or expertise among similar value chains Exploit ability to share activities Two firms can share the same sales force, logistics network or distribution channels. Key Characteristics 2 Transferring Core Competencies

7-17© 2006 by Nelson, a division of Thomson Canada Limited. Assumptions Transferring Core Competencies leads to competitive advantage only if the similarities among business units meet the following conditions: 2 Transferring Core Competencies 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.*

7-18© 2006 by Nelson, a division of Thomson Canada Limited. Transferring Core Competencies 2 Efficient Internal Capital Market Allocation Unrelated Diversification Strategies 3 Restructuring4 Alternative Diversification Strategies Sharing Activities 1 Related Diversification Strategies

7-19© 2006 by Nelson, a division of Thomson Canada Limited. 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. Key CharacteristicsFirms using this strategy often diversify by acquisition: 3 Efficient Internal Capital Market Allocation

7-20© 2006 by Nelson, a division of Thomson Canada Limited. Assumptions Managers have more detailed knowledge of firm relative to outside investors. Firm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their own. Firm need not risk competitive edge by disclosing sensitive competitive information to investors. Efficient Internal Capital Market Allocation 3

7-21© 2006 by Nelson, a division of Thomson Canada Limited. Efficient Internal Capital Market Allocation Unrelated Diversification Strategies 3 Restructuring4 Alternative Diversification Strategies Transferring Core Competencies 2 Sharing Activities 1 Related Diversification Strategies

7-22© 2006 by Nelson, a division of Thomson Canada Limited. Key Characteristics Seek out undeveloped, sick or threatened organizations or industries Often sells unit after making one-time changes since parent no longer adds value to ongoing operations. Parent firm (acquirer) intervenes & frequently: - Changes sub-unit management team - Shifts strategy - Divests part of firm - Makes additional acquisitions to achieve critical mass - Infuses firm with new technology - Enhances discipline by changing control systems 4 Restructuring

7-23© 2006 by Nelson, a division of Thomson Canada Limited. 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. 4 Restructuring *

7-24© 2006 by Nelson, a division of Thomson Canada Limited. Performance Level of Diversification Dominant Business Unrelated Business Related Constrained Diversification & Firm Performance

7-25© 2006 by Nelson, a division of Thomson Canada Limited. External Incentives Relaxation of Anti-Competition regulation allows more related acquisitions than in the past. Incentives to Diversify Poor performance may lead some firms to diversify to attempt to achieve better returns in new industries. Firms may diversify into different businesses in order to reduce risk. Internal Incentives Firms may diversify to balance uncertain future cash flows. Managers often have incentives to diversify to raise their compensation & reduce employment risk. (Effective governance mechanisms may restrict such abuses)

7-26© 2006 by Nelson, a division of Thomson Canada Limited. FirmPerformance Summary Model of the Relationship between Firm Performance & Diversification Resources Incentives ManagerialMotives DiversificationStrategy Capital Market Intervention and Market for Managerial Talent InternalGovernance StrategyImplementation