Copyright © 2004 South-Western. All rights reserved.6–1 Chapter 5 Review: Factors affecting the likelihood of competitive response... The factor listed below increasesdecreases the likelihood of competitive response poor competitive intelligence first mover incentives strategic action required corporate arrogance high emotional/ego involvement actor is reputable/credible

Copyright © 2004 South-Western. All rights reserved.6–2 Figure 1.1 The Strategic Management Process

Copyright © 2004 South-Western. All rights reserved.6–3 Chapter 6: Corporate-Level Strategies Corporate-level strategies; advantages and disadvantages of each - single business - dominant business - vertical integration - related diversification (activity sharing and skill transfer) - unrelated diversification (capital reallocation; restructuring) Core business

Copyright © 2004 South-Western. All rights reserved.6–4 Corporate-level strategy encompasses the entire organization; Business-level strategy is at the ____________ level

Copyright © 2004 South-Western. All rights reserved.6–5 Two Strategy Levels Business-level Strategy (Competitive)  Each business unit in a diversified firm chooses a business-level strategy as its means of competing in individual product markets Corporate-level Strategy (Companywide)  Specifies actions taken by the firm to gain a competitive advantage by selecting and managing a group of different businesses competing in several industries and product markets

Copyright © 2004 South-Western. All rights reserved.6–6 Corporate-Level Strategy: Key Questions Corporate-level Strategy’s Value  The degree to which the businesses in the portfolio are worth more under the management of the company than they would be under other ownership  What businesses should the firm be in?  How should the corporate office manage the group of businesses? Business Units

Copyright © 2004 South-Western. All rights reserved.6–7 Some Corporate-Level Strategy Questions: McDonald’s - Chipotle Grill? C-stores? hotel? rec center? Ebay - purchase of Skype internet phone provider? John Deere & Company - wholesale landscaping business? Ford Motor Company - Hertz Rent-A-Car? New York Times - ownership of papermills?

Copyright © 2004 South-Western. All rights reserved.6–8 “few corporate-level strategies actually create value... “ - pg. 170 Yet again, strategy formulation might be easier than strategy implementation! Synergies (where the whole is greater than the sum of the parts) are easier to conceptualize than to actually realize.

Copyright © 2004 South-Western. All rights reserved.6–9 Levels and Types of Diversification SOURCE: Adapted from R. P. Rumelt, 1974, Strategy, Structure and Economic Performance, Boston: Harvard Business School. Figure 6.1

Copyright © 2004 South-Western. All rights reserved.6–10 Common evolution pattern of corporate-level strategies Single business Dominant business Vertical integration Vertical integration with by-products diversification Related-constrained diversification Related-linked diversification Unrelated diversification Related-constrained diversification

Copyright © 2004 South-Western. All rights reserved.6–11 Single- and Dominant- Business Strategy AdvantagesDisadvantages (Why move away from these strategies toward diversification?)

Copyright © 2004 South-Western. All rights reserved.6–12 Vertical Integration Strategy When a firm produces its own inputs = __________________ integration When a firm owns its own means of distribution = ________________ integration

Copyright © 2004 South-Western. All rights reserved.6–13 Forward and Backward Vertical Integration Forward vertical integration supplies manufacturing distribution retail Backward vertical integration

Copyright © 2004 South-Western. All rights reserved.6–14 Vertical Integration Strategy Advantages/ Reasons for Use Disadvantages/Hazards

Copyright © 2004 South-Western. All rights reserved.6–15 Alternatives to Vertical Integration?

Copyright © 2004 South-Western. All rights reserved.6–16 Diversification Strategy = participation in >1 industry (segment), structuring into separate divisions, with no single division contributing >70% of sales revenue

Copyright © 2004 South-Western. All rights reserved.6–17 Diversification Strategy AdvantagesDisadvantages/Pitfalls

Copyright © 2004 South-Western. All rights reserved.6–18 Strategic Motives for Diversification To Enhance Strategic Competitiveness: Economies of scope (related diversification) Sharing activities Transferring core competencies Market power (related diversification) Blocking competitors through multipoint competition (Vertical integration) Financial economies (unrelated diversification) Efficient internal capital allocation Business restructuring Table 6.1a

Copyright © 2004 South-Western. All rights reserved.6–19 Incentives and Resources for Diversification Incentives and Resources with Neutral Effects on Strategic Competitiveness Antitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Tangible resources Intangible resources So - these are not the best reasons to diversify! Table 6.1b

Copyright © 2004 South-Western. All rights reserved.6–20 Managerial Motives for Diversification Managerial Motives (Value Reduction) Diversifying managerial employment risk Increasing managerial compensation “managerial opportunism” (Chapter 10) Table 6.1c

Copyright © 2004 South-Western. All rights reserved.6–21 The Curvilinear Relationship between Diversification and Performance Figure 6.3

Copyright © 2004 South-Western. All rights reserved.6–22 Related Diversification Firm creates value by building upon or extending its:  Resources  Capabilities  Core competencies

Copyright © 2004 South-Western. All rights reserved.6–23 Best resource/capabilities for diversification are typically found in a firm’s core business: “Core business” represents the business unit or division containing the firm’s most developed skills; often can be identified by high proportion of firm’s profit high proportion of a firm’s assets original business of the firm division serving primary target markets

Copyright © 2004 South-Western. All rights reserved.6–24 Related Diversification - Economies of Scope Value is created by extending important resources/capabilities/core competencies through:  Operational relatedness in sharing activities - value chain activities are shared among units  Corporate relatedness in transferring skills - competencies are transferred across units

Copyright © 2004 South-Western. All rights reserved.6–25 In related diversification: implementation to realize synergies - Example of PepsiCo Shared Activities (operational relatedness) distribution sales market research Skill Transfer (corporate relatedness) product development brand development brand excitement

Copyright © 2004 South-Western. All rights reserved.6–26 Activity sharing and skill transfer.. can create efficiencies (especially activity sharing) can provide competitive advantages that are valuable, rare, and difficult to imitate due to complexity and combining tangible and intangible resources can fail due to implementation complications - managed interactions across business units are required

Copyright © 2004 South-Western. All rights reserved.6–27 Advice for sharing activities or transferring skills Since sharing activities and transferring skills adds management complications, only select those that are competitively meaningful, with strong potential to add competitive advantage, or it generally isn’t going to be worth the trouble!

Copyright © 2004 South-Western. All rights reserved.6–28 Unrelated Diversification Financial Economies  Are cost savings realized through improved allocation of financial resources  Create value through two types of financial economies:  Efficient internal capital allocation  Purchasing other corporations and restructuring their assets

Copyright © 2004 South-Western. All rights reserved.6–29 Unrelated Diversification - Efficient Internal Capital Market Allocation  Acquire sound, attractive autonomous companies that need growth capital  Corporate office distributes capital from low growth divisions to high growth divisions to create value for overall company  Operation like an “internal capital market”  Corporate office gains proprietary access to information about those businesses’ actual and prospective performance

Copyright © 2004 South-Western. All rights reserved.6–30 Otter Tail Corporation - partial view

Copyright © 2004 South-Western. All rights reserved.6–31 Unrelated Diversification: Restructuring Restructuring creates financial economies  A firm creates value by buying and selling other firms’ assets in the external market  The idea is basically, “buy low, sell high”  “The corporate fixer-upper” - buy underperforming firms or units, fix the problems, and sell for a higher price

Copyright © 2004 South-Western. All rights reserved.6–32 Unrelated Diversification - Implementation Considerations Can be considered easier to implement than related diversification No required commonalities and/or interactions between units Each unit is basically “stand-alone”, and operates independently of the other units, except for centralized resource allocation

Copyright © 2004 South-Western. All rights reserved.6–33 Unrelated Diversification: Performance Reputation “diversifiction” “diworseification” the conglomerate discount conclusion = unrelated diversification generally produces poor performance