PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie CookThe University of West AlabamaThe University of West Alabama
Strategic Strategic ManagementManagementCompetitiveness and Globalization: Competitiveness and Globalization: Concepts and CasesConcepts and Cases Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson
Seventh edition
STRATEGIC
ACTIONS:
STRATEGY
FORMULATION
STRATEGIC
ACTIONS:
STRATEGY
FORMULATION
CHAPTER 6CHAPTER 6
Strategy at the Strategy at the Corporate LevelCorporate Level
Management of StrategyManagement of StrategyConcepts and CasesConcepts and Cases
1.1. Define corporate-level strategy and discuss its purpose.Define corporate-level strategy and discuss its purpose.
2.2. Describe different levels of diversification with different corporate-Describe different levels of diversification with different corporate-level strategies.level strategies.
3.3. Explain three primary reasons firms diversify.Explain three primary reasons firms diversify.
4.4. Describe how firms can create value by using a related Describe how firms can create value by using a related diversification strategy.diversification strategy.
5.5. Explain the two ways value can be created with an unrelated Explain the two ways value can be created with an unrelated diversification strategy.diversification strategy.
6.6. Discuss the incentives and resources that encourage Discuss the incentives and resources that encourage diversification.diversification.
7.7. Describe motives that can encourage managers to overdiversify a Describe motives that can encourage managers to overdiversify a firm.firm.
Studying this chapter should provide you with the strategic management knowledge needed to:
The Role of DiversificationThe Role of Diversification
• Diversification strategies play a major role in the Diversification strategies play a major role in the behavior of large firms.behavior of large firms.
The scope of the industries and markets in which the The scope of the industries and markets in which the firm competes.firm competes.
How managers buy, create and sell different How managers buy, create and sell different businesses to match skills and strengths with businesses to match skills and strengths with opportunities presented to the firm.opportunities presented to the firm.
Each business unit in a diversified firm chooses a Each business unit in a diversified firm chooses a business-level strategy as its means of competing in business-level strategy as its means of competing in individual product markets.individual product markets.
Specifies actions taken by the firm to gain a Specifies actions taken by the firm to gain a competitive advantage by selecting and managing a competitive advantage by selecting and managing a group of different businesses competing in several group of different businesses competing in several industries and product markets.industries and product markets.
The degree to which the businesses in the portfolio The degree to which the businesses in the portfolio are worth more under the management of the are worth more under the management of the company than they would be under other ownership.company than they would be under other ownership.
What businesses should What businesses should the firm be in?the firm be in?
How should the corporate How should the corporate office manage the office manage the group of businesses?group of businesses?
Levels of Diversification: Moderate to Levels of Diversification: Moderate to HighHigh• Related ConstrainedRelated Constrained
Less than 70% of revenue Less than 70% of revenue comes from a single comes from a single business and all business and all businesses share businesses share product, technological product, technological and distribution linkages.and distribution linkages.
• Related Linked (mixed Related Linked (mixed related and unrelated)related and unrelated)Less than 70% of revenue Less than 70% of revenue
comes from the dominant comes from the dominant business, and there are only business, and there are only limited links between limited links between businesses.businesses.
Levels of Diversification: Very High Levels of Diversification: Very High Levels Levels • Unrelated DiversificationUnrelated Diversification
Less than 70% of revenue comes from the dominant Less than 70% of revenue comes from the dominant business, and there are no common links between business, and there are no common links between businesses.businesses.
• Firm creates value by building upon or Firm creates value by building upon or extending:extending: ResourcesResources CapabilitiesCapabilities Core competenciesCore competencies
• Economies of ScopeEconomies of Scope Cost savings that occur when a firm transfers Cost savings that occur when a firm transfers
capabilities and competencies developed in one of its capabilities and competencies developed in one of its businesses to another of its businesses.businesses to another of its businesses.
Related Diversification: Economies of Related Diversification: Economies of ScopeScope• Value is created from economies of scope Value is created from economies of scope
through:through:
Operational relatedness in sharing activitiesOperational relatedness in sharing activities
Corporate relatedness in transferring skills or Corporate relatedness in transferring skills or corporate core competencies among units.corporate core competencies among units.
• The difference between sharing activities and The difference between sharing activities and transferring competencies is based on how the transferring competencies is based on how the resources are jointly used to create economies resources are jointly used to create economies of scope.of scope.
Created by sharing either a primary activity such as Created by sharing either a primary activity such as inventory delivery systems, or a support activity such inventory delivery systems, or a support activity such as purchasing.as purchasing.
Activity sharing requires sharing strategic control over Activity sharing requires sharing strategic control over business units.business units.
Activity sharing may create risk because business-Activity sharing may create risk because business-unit ties create links between outcomes. unit ties create links between outcomes.
• Corporate RelatednessCorporate Relatedness Using complex sets of resources and capabilities to Using complex sets of resources and capabilities to
link different businesses through managerial and link different businesses through managerial and technological knowledge, experience, and expertise.technological knowledge, experience, and expertise.
• Creates value in two ways:Creates value in two ways:
Eliminates resource duplication in the need to allocate Eliminates resource duplication in the need to allocate resources for a second unit to develop a competence resources for a second unit to develop a competence that already exists in another unit.that already exists in another unit.
Provides intangible resources (resource intangibility) Provides intangible resources (resource intangibility) that are difficult for competitors to understand and that are difficult for competitors to understand and imitate.imitate.
• A transferred intangible resource gives the unit receiving it an A transferred intangible resource gives the unit receiving it an immediate competitive advantage over its rivals.immediate competitive advantage over its rivals.
Related Diversification: Market PowerRelated Diversification: Market Power
• Market power exists when a firm can:Market power exists when a firm can: Sell its products above the existing competitive level Sell its products above the existing competitive level
and/or and/or Reduce the costs of its primary and support activities Reduce the costs of its primary and support activities
below the competitive level.below the competitive level.
Related Diversification: Market Power Related Diversification: Market Power (cont’d)(cont’d)• Multipoint CompetitionMultipoint Competition
Two or more diversified firms simultaneously compete Two or more diversified firms simultaneously compete in the same product areas or geographic markets.in the same product areas or geographic markets.
• Vertical IntegrationVertical Integration
Backward integrationBackward integration—a firm produces its own inputs.—a firm produces its own inputs.
Forward integrationForward integration—a firm operates its own —a firm operates its own distribution system for delivering its outputs.distribution system for delivering its outputs.
Are cost savings realized through improved Are cost savings realized through improved allocations of financial resources.allocations of financial resources.
• Based on investments inside or outside the firmBased on investments inside or outside the firm
Create value through two types of financial Create value through two types of financial economies:economies:
• Efficient internal capital allocationsEfficient internal capital allocations
• Purchase of other corporations and the restructuring their Purchase of other corporations and the restructuring their assetsassets
• Efficient Internal Capital Market AllocationEfficient Internal Capital Market Allocation
Corporate office distributes capital to business Corporate office distributes capital to business divisions to create value for overall company.divisions to create value for overall company.
• Corporate office gains access to information about those Corporate office gains access to information about those businesses’ actual and prospective performance.businesses’ actual and prospective performance.
Conglomerates have a fairly short life cycle because Conglomerates have a fairly short life cycle because financial economies are more easily duplicated by financial economies are more easily duplicated by competitors than are gains from operational and competitors than are gains from operational and corporate relatedness.corporate relatedness.
A firm creates value by buying and selling other firms’ A firm creates value by buying and selling other firms’ assets in the external market.assets in the external market.
• Resource allocation decisions may become Resource allocation decisions may become complex, so success often requires:complex, so success often requires:
Focus on mature, low-technology businesses.Focus on mature, low-technology businesses.
Focus on businesses not reliant on a client Focus on businesses not reliant on a client orientation.orientation.
External Incentives to DiversifyExternal Incentives to Diversify
• Antitrust laws in 1960s and 1970s Antitrust laws in 1960s and 1970s discouraged mergers that created discouraged mergers that created increased market power (vertical or increased market power (vertical or horizontal integration.horizontal integration.
• Mergers in the 1960s and 1970s thus Mergers in the 1960s and 1970s thus tended to be unrelated.tended to be unrelated.
• Relaxation of antitrust enforcement Relaxation of antitrust enforcement results in more and larger horizontal results in more and larger horizontal mergers.mergers.
• Early 2000: antitrust concerns seem to Early 2000: antitrust concerns seem to be emerging and mergers now more be emerging and mergers now more closely scrutinized.closely scrutinized.
External Incentives to Diversify (cont’d)External Incentives to Diversify (cont’d)
• High tax rates on dividends cause a High tax rates on dividends cause a corporate shift from dividends to corporate shift from dividends to buying and building companies in high-buying and building companies in high-performance industries.performance industries.
• 1986 Tax Reform Act1986 Tax Reform Act
Reduced individual ordinary income tax Reduced individual ordinary income tax rate from 50 to 28 percent.rate from 50 to 28 percent.
Treated capital gains as ordinary Treated capital gains as ordinary income. income.
Thus created incentive for shareholders Thus created incentive for shareholders to prefer dividends to acquisition to prefer dividends to acquisition investments.investments.
Internal Incentives to DiversifyInternal Incentives to Diversify
• High performance eliminates the High performance eliminates the need for greater diversification.need for greater diversification.
• Low performance acts as Low performance acts as incentive for diversification.incentive for diversification.
• Firms plagued by poor Firms plagued by poor performance often take higher performance often take higher risks (diversification is risky).risks (diversification is risky).
FIGUREFIGURE 6.36.3 The Curvilinear Relationship between The Curvilinear Relationship between Diversification and PerformanceDiversification and Performance
Internal Incentives to Diversify (cont’d)Internal Incentives to Diversify (cont’d)
• Synergy exists when the value created Synergy exists when the value created by businesses working together by businesses working together exceedsexceeds the value created by them the value created by them working independentlyworking independently
• … … but synergy creates joint but synergy creates joint interdependence between business interdependence between business units.units.
• A firm may become risk averse and A firm may become risk averse and constrain its level of activity sharing.constrain its level of activity sharing.
• A firm may reduce level of technological A firm may reduce level of technological change by operating in more certain change by operating in more certain environments.environments.
Resources and DiversificationResources and Diversification
• A firm must have both:A firm must have both: Incentives to diversifyIncentives to diversify The resources required to create value through The resources required to create value through
diversification—cash and tangible resources (e.g., diversification—cash and tangible resources (e.g., plant and equipment)plant and equipment)
• Value creation is determined more by Value creation is determined more by appropriate use of resources than by incentives appropriate use of resources than by incentives to diversify.to diversify.
• Managerial Motives to DiversifyManagerial Motives to Diversify Managerial risk reductionManagerial risk reduction Desire for increased compensationDesire for increased compensation
Summary Model of Summary Model of the Relationship the Relationship between Firm between Firm Performance and Performance and DiversificationDiversification
Source: R. E. Hoskisson & M. A. Hitt, 1990, Antecedents and performance outcomes of diversification: A review and critique of theoretical perspectives, Journal of Management, 16: 498.
