1. ©2004 by South-Western/Thomson Learning 1 Corporate-Level Strategy Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Chapter 7

2. 2 Chapter 2 Chapter 2 Strategic Leadership Strategic Leadership Chapter 4 Chapter 4 The Internal The Internal Organization Chapter 6 Chapter 6 Competitive Rivalry and Competitive Rivalry and Competitive Dynamics Competitive Dynamics Chapter 9 Chapter 9 International Strategy International Strategy Chapter 1 Chapter 1 Introduction to Introduction to Strategic Management Strategic Management Chapter 3 Chapter 3 The External The External Environment Chapter 5 Chapter 5 Business-Level Strategy Chapter 8 Chapter 8 Acquisition and Acquisition and Restructuring Strategies Restructuring Strategies Chapter 11 Chapter 11 Corporate Governance Corporate Governance Strategic Intent Strategic Intent Strategic Mission Strategic Mission Chapter 7 Chapter 7 Corporate-Level Strategy Corporate-Level Strategy Chapter 10 Chapter 10 Cooperative Strategy Cooperative Strategy Chapter 12 Chapter 12 Strategic Entrepreneurship Strategic Entrepreneurship Strategic Analysis Strategic Thinking Creating Competitive Advantage Monitoring And Creating Entrepreneurial Opportunities The Strategic Management Process Chapter 5 Chapter 5 Business-Level Strategy Chapter 6 Chapter 6 Competitive Rivalry and Competitive Rivalry and Competitive Dynamics Competitive Dynamics Chapter 7 Chapter 7 Corporate-Level Strategy Corporate-Level Strategy

3. 3 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

4. 4 Related Constrained <70% of revenues from dominant business; all businesses share product, technological and distribution linkages Levels and Types of Diversification Moderate to High Levels of Diversification

5. 5 Related Linked (Mixed) < 70% of revenues from dominant business, and only limited links exist Levels and Types of Diversification Moderate to High Levels of Diversification

6. 6 Levels and Types of Diversification Unrelated < 70% of revenue comes from the dominant business, and there are no common links between businesses Very High Levels of Diversification

7. 7 Why Diversify? To create additional value (e.g. through economies of scope) To gain market power relative to competitors (e.g. vertical integration) To reduce managerial employment risk etc….

8. 8 Relationship Between Diversification and Performance Performance Level of Diversification Dominant Business Unrelated Business Related Constrained

9. 9 Value-creating Strategies of Diversification: Operational and Corporate Relatedness Related Constrained Diversification Vertical Integration (Market Power) UnrelatedDiversification (Financial Economies) Both Operational and Corporate Relatedness (Rare Capability and can Create Diseconomies of Scope) Related Linked Diversification (Economies of Scope) Corporate Relatedness: Transferring Skills into Businesses Through Corporate Headquarters LowHigh Sharing: Operational Relatedness Between Businesses LowHigh

10. 10 Types of Relatedness Operational relatedness Operational relatedness –sharing value chain activities –physical-base, involving tangible resources Corporate relatedness Corporate relatedness –transferring core competencies –skill-base, involving intangible resources

11. 11 Unrelated Diversification: Financial Economies Efficient internal capital market resource allocation Efficient internal capital market resource allocation –information asymmetry Purchase, restructure, and sell Purchase, restructure, and sell –slow or standard cycle markets –product-based

12. 12 Strategy and Structure Growth Patterns Single or Dominant Business Single or Dominant Business –Simple structure (for smaller firms) –Functional structure (for larger firms) Related or Unrelated Diversified Businesses Related or Unrelated Diversified Businesses –M-Form structure

13. 13 Three Variations of the Multidivisional Structure MultidivisionalStructure(M-form) Strategic Business-Unit (SBU) Form CooperativeFormCompetitiveForm

14. 14 Cooperative Form of Multidivisional Structure GovernmentAffairsLegalAffairs Corporate R&D Lab StrategicPlanningCorporateHumanResourcesCorporateMarketingCorporateFinance ProductDivisionProductDivisionProductDivisionProductDivisionProductDivision President Headquarters Office

15. 15 SBU Form of Multidivisional Structure President Corporate R&D Lab StrategicPlanningCorporateHRMCorporateMarketingCorporateFinance Headquarters Office Division Division Division SBUSBUSBU Division Division Division Division Division Division

16. 16 Competitive Form of Multidivisional Structure President LegalAffairsFinanceAuditing Headquarters Office DivisionDivisionDivisionDivisionDivisionDivision

17. 17 Characteristics of Various Structural Forms Structural Characteristics Cooperative M-Form SBU M-Form M-Form Competitive M-Form Degree of Centralization Centralized at Corporate Office Partially Centralized in SBUs Decentralized to Divisions Use of IntegratingMechanisms ExtensiveModerateNonexistent Type of StrategyRelated-ConstrainedRelated-LinkedUnrelatedDiversification

18. 18 Characteristics of Various Structural Forms DivisionalIncentive Compensation Compensation Linked to CorporatePerformance Corporate SBU & Division Performance Linked to DivisionalPerformance DivisionalPerformanceAppraisal Emphasis on Strategic Controls Balance of Strategic & FinancialControls Emphasis on Financial Controls Structural Characteristics Cooperative M-Form SBU M-Form M-Form Competitive M-Form

19. 19 Competitive Form of Multidivisional Structure: Unrelated Diversification President LegalAffairsFinanceAuditing Headquarters Office DivisionDivisionDivisionDivisionDivisionDivision Question: What are the divisions competing for since divisions are unrelated and independent?

20. 20 Three Major Benefits of the M- Form Structure Corporate officers able to more accurately monitor the performance of each business, which simplifies the problem of control 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 Facilitates comparisons between divisions, which improves the resource allocation process Stimulates managers of poorly performing divisions to look for ways of improving performance Stimulates managers of poorly performing divisions to look for ways of improving performance

21. 21 External Anti-trust regulation Tax laws Incentives Drivers of Diversification Internal Low performance Uncertain future cash flows Firm risk reduction Incentives (Lower Potential for Value Creation)

22. 22 Firms are more likely to diversify if they have the resources to do so. Value creation is determined more by appropriate use of resources than incentives to diversify. Incentives Resources Drivers of Diversification Resources (Higher Potential for Value Creation)

23. 23 Managerial Motives (Value Reduction) Diversifying managerial employment risk Increasing managerial compensation Incentives Resources ManagerialMotives Drivers of Diversification