Ch6-1 Chapter 6 Corporate-Level Strategy Dr. Mubarak Ali

Ch6-2 Chapter 3 Internal Environment Chapter 2 External Environment The Strategic ManagementProcess ManagementProcess Strategic Intent Strategic Mission Strategic Competitiveness Above Average Returns Feedback Strategy Formulation Chapter 4 Business-Level Strategy Chapter 5 Competitive Dynamics Chapter 6 Corporate-Level Strategy Chapter 8 International Strategy Chapter 9 Cooperative Strategies Chapter 7 Acquisitions & Restructuring Strategy Implementation Chapter 10 Corporate Governance Chapter 11 Structure & Control Chapter 12 Strategic Leadership Chapter 13 Entrepreneurship & Innovation Entrepreneurship & Innovation Strategic Inputs Strategic Actions Strategic Outcomes

Ch6-3 How to create value for the corporation as a whole 2. Corporate-Level Strategy (Companywide Strategy) - low cost - differentiation - integrated low cost/differentiation - focused low cost - focused differentiation How to create competitive advantage in each business in which the company competes 1. Business-Level Strategy (Competitive Strategy) A Diversified Company Has Two Levels of Strategy

Ch What businesses should the corporation be in? 2. How should the corporate office manage the array of business units? Corporate Strategy is what makes the corporate whole add up to more than the sum of its business unit parts Key Questions of Corporate Strategy

Levels and Types of Diversification Low Levels of Diversification Moderate to High Levels of Diversification Very High Levels of Diversification Related linked (mixed) < 70% of revenues from dominant business, and only limited links exist AABBCC Single business > 95% of revenues from a single business unit AA Dominant business Between 70% and 95% of revenues from a single business unit BB AA Unrelated-Diversified Business units not closely related AABBCC < 70% of revenues from dominant business; all businesses share product, technological and distribution linkages Related constrained AA BBCC

Ch6-6 Motives, Incentives, and Resources for Diversification Motives to Enhance Strategic Competitiveness Economies of Scope Market Power Financial Economies Resources ManagerialMotives Incentives

Ch6-7 Incentives and Resources with Neutral Effects of Strategic Competitiveness Anti-Trust Regulation Tax Laws Low Performance Uncertain Future Cash Flows Firm Risk Reduction Tangible Resources Intangible Resources ManagerialMotives Resources Incentives Motives, Incentives, and Resources for Diversification

Ch6-8 Managerial Motives Causing Value Reduction Diversifying Managerial Employment Risk Increasing Managerial Compensation ManagerialMotives Resources Incentives Motives, Incentives, and Resources for Diversification

Ch6-9 Summary Model of the Relationship Between Firm Performance and Diversification DiversificationStrategy ManagerialMotives Resources Incentives

Ch6-10 Adding Value by Diversification Diversification most effectively adds value by either of two mechanisms: By developing economies of scope between business units in the firms which leads to synergistic benefits By developing market power which leads to greater returns

Ch6-11 Alternative Diversification Strategies Related Diversification Strategies Unrelated Diversification Strategies Sharing Activities Transferring Core Competencies Efficient Internal Capital Market Allocation Restructuring

Ch6-12 Key Characteristics: Example: Using a common physical distribution system and sales force such as Procter & Gamble’s disposable diaper and paper towel divisions Example: General Electric’s costs to advertise, sell and service major appliances are spread over many different products Sharing Activities Alternative Diversification Strategies Achieves economies of scale Boosts efficiency of utilization Helps move more rapidly down Learning Curve Sharing Activities often lowers costs or raises differentiation Sharing Activities can lower costs if it:

Ch6-13 Example: Shared order processing system may allow new features customers value or make more advanced remote sensing technology available Example: Procter & Gamble’s sharing of sales and physical distribution for disposable diapers and paper towels is effective because these items are so bulky and costly to ship Key Characteristics: Sharing Activities Alternative Diversification Strategies Sharing Activities can enhance potential for or reduce the cost of differentiation Must involve activities that are crucial to competitive advantage

Ch6-14 Assumptions: Sharing Activities Alternative Diversification Strategies 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

Ch6-15 Alternative Diversification Strategies Related Diversification Strategies Unrelated Diversification Strategies Sharing Activities Transferring Core Competencies Efficient Internal Capital Market Allocation Restructuring

Ch6-16 Key Characteristics: Transferring Core Competencies Alternative Diversification Strategies Identify ability to transfer skills or expertise among similar value chains Exploit ability to transfer activities Exploits Interrelationships among divisions Start with Value Chain analysis

Ch6-17 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 Transferring Core Competencies Alternative Diversification Strategies

Ch6-18 Alternative Diversification Strategies Related Diversification Strategies Unrelated Diversification Strategies Sharing Activities Transferring Core Competencies Efficient Internal Capital Market Allocation Restructuring

Ch6-19 Key Characteristics: Firms pursuing this strategy frequently diversify by acquisition: Efficient Internal Capital Market Allocation Alternative Diversification Strategies 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

Ch6-20 Assumptions: Efficient Internal Capital Market Allocation Alternative Diversification Strategies 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

Ch6-21 Alternative Diversification Strategies Related Diversification Strategies Unrelated Diversification Strategies Sharing Activities Transferring Core Competencies Efficient Internal Capital Market Allocation Restructuring

Ch6-22 Key Characteristics: Restructuring - Changes sub-unit management team - Shifts strategy - Infuses firm with new technology - Divests part of firm - Makes additional acquisitions to achieve critical mass - Enhances discipline by changing control systems Alternative Diversification Strategies Seek out undeveloped, sick or threatened organizations or industries Parent company (acquirer) intervenes and frequently: Frequently sell unit after making one-time changes since parent no longer adds value to ongoing operations

Ch6-23 Assumptions: Restructuring Alternative Diversification Strategies 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

Ch6-24 Internal Incentives: Incentives to Diversify 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 External Incentives: Poor performance may lead some firms to diversify to attempt to achieve better returns

Ch6-25 Value-creating Strategies of Diversification Operational and Corporate Relatedness Sharing:OperationalRelatednessBetweenBusiness Corporate Relatedness: Transferring Skills Into Business Through Corporate Headquarters LowHigh High Low Related Linked Diversification (Economies of Scope) UnrelatedDiversification (Financial Economies) Both Operational and Corporate Relatedness (Rare Capability and Can Create Diseconomies of Scope) Related Constrained Diversification Vertical Integration (Market Power)

Ch6-26 Performance Level of Diversification Diversification and Firm Performance DominantBusinessUnrelatedBusinessRelatedConstrained

Ch6-27 Incentives to Diversify Internal Incentives: Poor performance may lead some firms to diversify to attempt to achieve better returns Firms may diversify to balance uncertain future cash flows Firm may diversify into different businesses in order to reduce risk Managers often have incentives to diversify in order to increase their compensation and reduce employment risk, although effective governance mechanisms may restrict such abuses

Ch6-28 Summary Model of the Relationship Between Firm Performance and Diversification Resources DiversificationStrategyFirmPerformance InternalGovernanceStrategyImplementation Capital Market Intervention and Market for Managerial Talent Incentives ManagerialMotives