©2003 Southwestern Publishing Company 1 Corporate-Level Strategy Michael A. Hitt R. Duane Ireland...

transcript

Corporate-Level StrategyCorporate-Level Strategy

Michael A. Hitt

R. Duane Ireland

Robert E. Hoskisson

Chapter 6Chapter 6

Strategy ImplementationStrategy Implementation

Chapter 11Chapter 11OrganizationalOrganizationalStructure and Structure and

ControlsControls

Chapter 10Chapter 10CorporateCorporate

GovernanceGovernance

Chapter 12Chapter 12StrategicStrategic

LeadershipLeadership

Strategy FormulationStrategy Formulation

StrategicStrategicCompetitivenessCompetitivenessAbove-AverageAbove-Average

ReturnsReturns

Strategic IntentStrategic IntentStrategic MissionStrategic Mission

Chapter 2Chapter 2The ExternalThe ExternalEnvironmentEnvironment

Chapter 3Chapter 3The InternalThe InternalEnvironmentEnvironment

The Strategic The Strategic Management Management ProcessProcess

Chapter 6Chapter 6Corporate-Corporate-

Level StrategyLevel Strategy

FeedbackFeedback

Chapter 13Chapter 13StrategicStrategic

EntrepreneurshipEntrepreneurship

Chapter 5Chapter 5Competitive RivalryCompetitive Rivalry

and Competitiveand CompetitiveDynamics Dynamics

Chapter 4Chapter 4Business-LevelBusiness-Level

StrategyStrategy

Two Levels of StrategyTwo Levels of StrategyA diversified company has two levels of strategyA diversified company has two levels of strategy1. Business-Level Strategy1. Business-Level Strategy (Competitive Strategy)(Competitive Strategy)

How to create competitive advantage in each How to create competitive advantage in each business in which the company competesbusiness in which the company competes

- low cost- low cost - differentiation - differentiation- focused low cost- focused low cost - focused differentiation - focused differentiation

- integrated low cost/- integrated low cost/ differentiationdifferentiation

2. Corporate-Level Strategy2. Corporate-Level Strategy (Company-wide Strategy)(Company-wide Strategy)

How to create value for the corporation as a wholeHow to create value for the corporation as a whole

Key Questions in Key Questions in Corporate StrategyCorporate Strategy1. What businesses should the corporation 1. What businesses should the corporation

be in?be in?

2. How should the corporate office manage 2. How should the corporate office manage the array of business units?the array of business units?

Corporate StrategyCorporate Strategy is is what makes the what makes the corporate whole add up corporate whole add up to more than the sum of to more than the sum of its business unit partsits business unit parts

Levels and Types of DiversificationLevels and Types of Diversification

Low Levels of DiversificationLow Levels of DiversificationSingle BusinessSingle Business> 95% of business from a single > 95% of business from a single business unitbusiness unit

Dominant BusinessDominant BusinessBetween 70 and 95% of business Between 70 and 95% of business from a single business unitfrom a single business unit

Related ConstrainedRelated Constrained<70% of revenues from dominant <70% of revenues from dominant business; all businesses share business; all businesses share product, technological and product, technological and distribution linkagesdistribution linkages

Moderate to High Levels of DiversificationModerate to High Levels of Diversification

Related Linked (Mixed)Related Linked (Mixed)< 70% of revenues from dominant < 70% of revenues from dominant business, and only limited links business, and only limited links existexist

Moderate to High Levels of DiversificationModerate to High Levels of Diversification

Levels and Types of Levels and Types of DiversificationDiversification

UnrelatedUnrelated< 70% of revenue comes from the < 70% of revenue comes from the dominant business, and there are dominant business, and there are no common links between no common links between businessesbusinesses

Very High Levels of DiversificationVery High Levels of Diversification

Reasons for DiversificationReasons for Diversification

Reasons to Enhance Strategic Reasons to Enhance Strategic CompetitivenessCompetitiveness

• Economies of scope

• Market power

• Financial economics

IncentivesIncentives

ResourcesResources

ManagerialManagerialMotivesMotives

Incentives with Neutral Incentives with Neutral Effects on Strategic Effects on Strategic CompetitivenessCompetitiveness

• Anti-trust regulation

• Tax laws

• Low performance

• Uncertain future cash flows

• Firm risk reduction

ResourcesResources

Resources with varying Resources with varying effects on value creation and effects on value creation and strategic competitivenessstrategic competitiveness

• Tangible resources financial resources physical assets

• Intangible resources tacit knowledge customer relations image and reputation

ResourcesResources

Managerial Motives (Value Managerial Motives (Value Reduction)Reduction)

• Diversifying managerial employment risk

• Increasing managerial compensation

ResourcesResources

Value-creating Strategies of Diversification:Value-creating Strategies of Diversification: Operational and Corporate ReadinessOperational and Corporate Readiness

Related ConstrainedRelated ConstrainedDiversificationDiversification

Vertical IntegrationVertical Integration(Market Power)(Market Power)

UnrelatedUnrelatedDiversificationDiversification

(Financial Economies)(Financial Economies)

Both Operational andBoth Operational andCorporate RelatednessCorporate Relatedness

(Rare Capability(Rare Capabilityand can Createand can CreateDiseconomies ofDiseconomies of

Scope)Scope)

Related LinkedRelated LinkedDiversificationDiversification(Economies of(Economies of

Scope)Scope)

Corporate Readiness: Transferring Skills into Corporate Readiness: Transferring Skills into Businesses Through Corporate HeadquartersBusinesses Through Corporate Headquarters

LowLow HighHigh

LowLow

HighHigh

Adding Value by DiversificationAdding Value by Diversification

Diversification most effectively adds value Diversification most effectively adds value by either of two mechanisms:by either of two mechanisms:– Economies of scope:Economies of scope: cost savings attributed cost savings attributed

to transferring the capabilities and competencies to transferring the capabilities and competencies developed in one business to a new businessdeveloped in one business to a new business

– Market power:Market power: when a firm is able to sell its when a firm is able to sell its products above the existing competitive level or products above the existing competitive level or reduce the costs of its primary and support reduce the costs of its primary and support activities below the competitive level, or bothactivities below the competitive level, or both

Alternative Diversification Alternative Diversification StrategiesStrategiesRelated Diversification StrategiesRelated Diversification Strategies

– sharing activitiessharing activities

– transferring core competenciestransferring core competencies

Unrelated Diversification StrategiesUnrelated Diversification Strategies

– efficient internal capital market allocationefficient internal capital market allocation

– restructuringrestructuring

Alternative Diversification Alternative Diversification StrategiesStrategiesRelated Diversification StrategiesRelated Diversification Strategies

Sharing Activities:Sharing Activities: Sharing activities often lowers costs or raises Sharing activities often lowers costs or raises

differentiationdifferentiation Sharing activities can lower costs if it:Sharing activities can lower costs if it:

– achieves economies of scaleachieves economies of scale– boosts efficiency of utilizationboosts efficiency of utilization– helps move more rapidly down the Learning Curvehelps move more rapidly down the Learning Curve

Sharing activities can enhance potential for or Sharing activities can enhance potential for or reduce the cost of differentiationreduce the cost of differentiation

Must involve activities that are crucial to Must involve activities that are crucial to competitive advantagecompetitive advantage

Key CharacteristicsKey Characteristics

Sharing Activities:Sharing Activities: Strong sense of corporate identityStrong sense of corporate identity Clear corporate mission that emphasizes Clear corporate mission that emphasizes

the importance of integrating business the importance of integrating business unitsunits

Incentive system that rewards more than Incentive system that rewards more than just business unit performancejust business unit performance

AssumptionsAssumptions

Related Diversification StrategiesRelated Diversification Strategies

Alternative Diversification Alternative Diversification StrategiesStrategies

Transferring Core Competencies:Transferring Core Competencies:

Exploits interrelationships among Exploits interrelationships among divisionsdivisions

Start with value chain analysisStart with value chain analysis– identify ability to transfer skills or expertise identify ability to transfer skills or expertise

among similar value chainsamong similar value chains– exploit ability to transfer activitiesexploit ability to transfer activities

Transferring Core Competencies: Transferring Core Competencies:

Transferring core competencies leads to Transferring core competencies leads to competitive advantage only if the competitive advantage only if the similarities among business units meet the similarities among business units meet the following conditions:following conditions:– activities involved in the businesses are similar activities involved in the businesses are similar

enough that sharing expertise is meaningfulenough that sharing expertise is meaningful– transfer of skills involves activities which are transfer of skills involves activities which are

important to competitive advantageimportant to competitive advantage– the skills transferred represent significant the skills transferred represent significant

sources of competitive advantage for the sources of competitive advantage for the receiving unitreceiving unit

Efficient Internal Capital Market Efficient Internal Capital Market Allocation:Allocation: Firms pursuing this strategy frequently Firms pursuing this strategy frequently

diversify by acquisition:diversify by acquisition:– acquire sound, attractive companiesacquire sound, attractive companies– acquired units are autonomousacquired units are autonomous– acquiring corporation supplies needed capitalacquiring corporation supplies needed capital– portfolio managers transfer resources from units portfolio managers transfer resources from units

that generate cash to those with high growth that generate cash to those with high growth potential and substantial cash needspotential and substantial cash needs

– add professional management & control to sub-add professional management & control to sub-unitsunits

– sub-unit managers compensation based on unit sub-unit managers compensation based on unit resultsresults

Efficient Internal Capital Market Efficient Internal Capital Market Allocation:Allocation: Managers have more detailed knowledge Managers have more detailed knowledge

of firm relative to outside investorsof firm relative to outside investors Firm need not risk competitive edge by Firm need not risk competitive edge by

disclosing sensitive competitive disclosing sensitive competitive information to investorsinformation to investors

Firm can reduce risk by allocating Firm can reduce risk by allocating resources among diversified businesses, resources among diversified businesses, although shareholders can generally although shareholders can generally diversify more economically on their owndiversify more economically on their own

– restructuringrestructuring

Restructuring:Restructuring: Seek out undeveloped, sick or threatened Seek out undeveloped, sick or threatened

organizations or industriesorganizations or industries Parent company (acquirer) intervenes and Parent company (acquirer) intervenes and

frequently:frequently:– changes sub-unit management teamchanges sub-unit management team– shifts strategyshifts strategy– infuses firm with new technologyinfuses firm with new technology– enhances discipline by changing control enhances discipline by changing control

systemssystems– divests part of firmdivests part of firm– makes additional acquisitions to achieve makes additional acquisitions to achieve

critical masscritical mass

Restructuring:Restructuring: Frequently sell unit after making one-time Frequently sell unit after making one-time

changes since parent no longer adds changes since parent no longer adds value to ongoing operationsvalue to ongoing operations

Restructuring:Restructuring: Requires keen management insight in Requires keen management insight in

selecting firms with depressed values or selecting firms with depressed values or unforeseen potentialunforeseen potential

Must do more than restructure companiesMust do more than restructure companies Need to initiate restructuring of industries Need to initiate restructuring of industries

to create a more attractive environmentto create a more attractive environment

Incentives to DiversifyIncentives to Diversify

External Incentives:External Incentives: Relaxation of anti-trust regulation allows more Relaxation of anti-trust regulation allows more

related acquisitions than in the pastrelated acquisitions than in the past Before 1986, higher taxes on dividends favored Before 1986, higher taxes on dividends favored

spending retained earnings on acquisitionsspending retained earnings on acquisitions After 1986, firms made fewer acquisitions with After 1986, firms made fewer acquisitions with

retained earnings, shifting to the use of debt to retained earnings, shifting to the use of debt to take advantage of tax deductible interest take advantage of tax deductible interest paymentspayments

Incentives to DiversifyIncentives to DiversifyInternal Incentives:Internal Incentives: Poor performance may lead some firms to Poor performance may lead some firms to

diversify to attempt to achieve better returnsdiversify to attempt to achieve better returns Firms may diversify to balance uncertain future Firms may diversify to balance uncertain future

cash flowscash flows Firms may diversify into different businesses in Firms may diversify into different businesses in

order to reduce riskorder to reduce risk

Resources and DiversificationResources and Diversification Besides strong incentives, firms are more Besides strong incentives, firms are more

likely to diversify if they have the likely to diversify if they have the resources to do soresources to do so

Value creation is determined more by Value creation is determined more by appropriate use of resources than appropriate use of resources than incentives to diversifyincentives to diversify

Managerial Motives to DiversifyManagerial Motives to DiversifyManagers have motives to diversifyManagers have motives to diversify

– diversification increases size; size is diversification increases size; size is associated with executive compensationassociated with executive compensation

– diversification reduces employment riskdiversification reduces employment risk– effective governance mechanisms may restrict effective governance mechanisms may restrict

such motivessuch motives

Relationship Between Relationship Between Diversification and PerformanceDiversification and Performance

Level of DiversificationLevel of Diversification

DominantBusiness

UnrelatedBusiness

RelatedConstrained

Relationship Between Firm Relationship Between Firm Performance and DiversificationPerformance and Diversification

ResourcesResources DiversificationDiversificationStrategyStrategy

FirmFirmPerformancePerformance

InternalInternalGovernanceGovernance

StrategyStrategyImplementationImplementation

Capital MarketCapital MarketIntervention and theIntervention and theMarket forMarket forManagerial TalentManagerial Talent

©2003 Southwestern Publishing Company 1 Corporate-Level Strategy Michael A. Hitt R. Duane Ireland...

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