strategic managment-corporate level strategy

8/12/2019 Strategic MAnagment-Corporate level strategy

1/20

PowerPoint Presentation by Charlie Cook

The University of West Alabama

Strategic ManagementCompetitiveness and Globalization:

Concepts and CasesMichael A. Hitt R. Duane Ireland Robert E. Hoskisson

Seventh edition

STRATEGIC

ACTIONS:

STRATEGY

FORMULATION

Student Version

2007 Thomson/South-Western.

All rights reserved.

CHAPTER 6

Corporate-Level Strategy


2/20

2007 Thomson/South-Western. All rights reserved. 62

The Role of Diversification

Diversification strategies play a major role in thebehavior of large firms.

Product diversification concerns:

The scope of the industries and markets in which thefirm competes.

How managers buy, create and sell different

businesses to match skills and strengths with

opportunities presented to the firm.


3/20


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 severalindustries and product markets.


4/20


Levels of Diversification: Low Level

Dominant Business

Between 70% and 95% of

revenue comes from a singlebusiness.

A

A

B

Single Business

More than 95% of revenue

comes from a single business.


5/20


Levels of Diversification: Moderate to High

Related Constrained Less than 70% of revenue

comes from a single

business and all

businesses share

product, technologicaland distribution linkages.

Related Linked (mixedrelated and unrelated)

Less than 70% of revenue

comes from the dominant

business, and there are only

limited links betweenbusinesses.

C

A

BC

A

B


6/20


Levels of Diversification: Very High Levels

Unrelated DiversificationLess than 70% of revenue comes from the dominant

business, and there are no common links between

businesses.

CB

A


7/20


High Low

Value-Creating Strategies of Diversification

Operational and Corporate Relatedness

Corporate Relatedness: Transferring Skills into

Businesses through Corporate Headquarters

Operational

Relatedness:

Sharing

Activities

between

Businesses

High

Low

Related Constrained

Diversification

Vertical Integration

(Market Power)

Unrelated

Diversification(Financial Economies)

Related Linked

Diversification

(Economies of Scope)

Both Operational and

Corporate Relatedness(Rare capability that creates

diseconomies of scope)


8/20


Related Diversification

Firm creates value by building upon orextending:

Resources

Capabilities

Core competencies

Economies of Scope

Cost savings that occur when a firm transfers

capabilities and competencies developed in one of its

businesses to another of its businesses.


9/20


Related Diversification: Economies of Scope

Value is created from economies of scopethrough:

Operational relatedness in sharing activities

Corporate relatedness in transferring skills or

corporate core competencies among units.

The difference between sharing activities and

transferring competencies is based on how the

resources are jointly used to create economiesof scope.


10/20


Related Diversification: Market Power

Market power exists when a firm can:Sell its products above the existing competitive level

and/or

Reduce the costs of its primary and support activities

below the competitive level.


11/20


Related Diversification: Market Power(contd)

Multipoint Competition

Two or more diversified firms simultaneously compete

in the same product areas or geographic markets.

Vertical Integration

Backward integrationa firm produces its own inputs.

Forward integrationa firm operates its own

distribution system for delivering its outputs.


12/20


Related Diversification: Complexity

Simultaneous Operational Relatedness andCorporate Relatedness

Involves managing two sources of knowledge

simultaneously:

Operational forms of economies of scope

Corporate forms of economies of scope

Many such efforts often fail because of

implementation difficulties.


13/20


Unrelated Diversification

Financial EconomiesAre cost savings realized through improved

allocations of financial resources.

Based on investments inside or outside the firm

Create value through two types of financial

economies:

Efficient internal capital allocations

Purchase of other corporations and the restructuring theirassets


14/20


Unrelated Diversification (contd)

Efficient Internal Capital Market AllocationCorporate office distributes capital to business

divisions to create value for overall company.

Corporate office gains access to information about those

businesses actual and prospective performance.

Conglomerates have a fairly short life cycle because

financial economies are more easily duplicated by

competitors than are gains from operational and

corporate relatedness.


15/20


Unrelated Diversification: Restructuring

Restructuring creates financial economiesA firm creates value by buying and selling other firms

assets in the external market.

Resource allocation decisions may becomecomplex, so success often requires:

Focus on mature, low-technology businesses.

Focus on businesses not reliant on a client

orientation.


16/20


External Incentives to Diversify

Antitrust laws in 1960s and 1970sdiscouraged mergers that created

increased market power (vertical or

horizontal integration.

Mergers in the 1960s and 1970s thus

tended to be unrelated.

Relaxation of antitrust enforcement

results in more and larger horizontal

mergers.

Early 2000: antitrust concerns seem tobe emerging and mergers now more

closely scrutinized.

Anti-trustLegislation


17/20


External Incentives to Diversify (contd)

High tax rates on dividends cause acorporate shift from dividends to

buying and building companies in high-

performance industries.

1986 Tax Reform Act

Reduced individual ordinary income tax

rate from 50 to 28 percent.

Treated capital gains as ordinary

income.

Thus created incentive for shareholdersto prefer dividends to acquisition

investments.

Anti-trustLegislation

Tax Laws


18/20


Internal Incentives to Diversify

High performance eliminates theneed for greater diversification.

Low performance acts as

incentive for diversification.

Firms plagued by poor

performance often take higher

risks (diversification is risky).

LowPerformance


19/20


Internal Incentives to Diversify (contd)

Diversification may bedefensive strategy if:

Product line matures.

Product line is threatened.

Firm is small and is in mature

or maturing industry.

LowPerformance

UncertainFuture Cash

Flows


20/20

strategic managment-corporate level strategy

Documents