corporate-level strategy

Ch6-1
Chapter 6
Corporate-Level Strategy
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
©2000 South-Western College Publishing
Ch6-2
Chapter 3
Internal
Environment
Chapter 2
External
Environment
The Strategic
The Strategic
Management
Management
Process
Process
The Strategic
The Strategic
Management
Management
Process
Process
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
Strategic
Inputs
Strategic
Actions
Strategic
Outcomes
Ch6-3
How to create value for the corporation as a whole
How to create value for the corporation as a whole
2. Corporate-Level Strategy
2. Corporate-Level Strategy


(Companywide Strategy)
(Companywide Strategy)
- low cost
- low cost
- differentiation
- differentiation
- integrated low cost/differentiation
- integrated low cost/differentiation
- focused low cost
- focused low cost
- focused differentiation
- focused differentiation
How to create competitive advantage in each

How to create competitive advantage in each
business in which the company competes
business in which the company competes
1. Business-Level Strategy
1. Business-Level Strategy


(Competitive Strategy)
(Competitive Strategy)
A Diversified Company
A Diversified Company
Has Two Levels of Strategy
Has Two Levels of Strategy
Ch6-4
1. 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 Strategy
Corporate Strategy
is what makes the corporate whole
is what makes the corporate whole
add up to more than the sum of its business unit parts
add up to more than the sum of its business unit parts
Key Questions of Corporate Strategy
Key Questions of Corporate Strategy

Levels and Types of Diversification
Levels and Types of Diversification
Low Levels of Diversification
Low Levels of Diversification
Moderate to High Levels of Diversification
Moderate to High Levels of Diversification
Very High Levels of Diversification
Very 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 exist
business, and only limited links exist
A
A
A
A
B
B
B
B
C
C
C
C
Single business
Single business
> 95% of revenues from a single
> 95% of revenues from a single

business unit
business unit
A
A
A
A
Dominant business
Dominant business
Between 70% and 95% of
Between 70% and 95% of
revenues from a single business
revenues from a single business
unit
unit
B
B
B
B
A
A
A
A
Unrelated-Diversified Business units not closely related
Business units not closely related
A
A
A
A
B
B

B
B
C
C
C
C
< 70% of revenues from dominant
< 70% of revenues from dominant
business; all businesses share product,
business; all businesses share product,
technological and distribution linkages
technological and distribution linkages
Related constrained
Related constrained
A
A
A
A
B
B
B
B
C
C
C
C
Ch6-6
Motives, Incentives, and Resources
Motives, Incentives, and Resources
for Diversification

for Diversification
Motives to Enhance
Motives to Enhance
Strategic Competitiveness
Strategic Competitiveness
Economies of Scope
Economies of Scope
Market Power
Market Power
Financial Economies
Financial Economies
Resources
Resources
Managerial
Managerial
Motives
Motives
Incentives
Incentives
Ch6-7
Incentives and Resources
Incentives and Resources
with Neutral Effects of
with Neutral Effects of
Strategic Competitiveness
Strategic Competitiveness
Anti-Trust Regulation
Anti-Trust Regulation
Tax Laws
Tax Laws

Low Performance
Low Performance
Uncertain Future Cash Flows
Uncertain Future Cash Flows
Firm Risk Reduction
Firm Risk Reduction
Tangible Resources
Tangible Resources
Intangible Resources
Intangible Resources
Managerial
Managerial
Motives
Motives
Resources
Resources
Incentives
Incentives
Motives, Incentives, and Resources
Motives, Incentives, and Resources
for Diversification
for Diversification
Ch6-8
Managerial Motives
Managerial Motives
Causing Value Reduction
Causing Value Reduction
Diversifying Managerial
Diversifying Managerial
Employment Risk

Employment Risk
Increasing Managerial
Increasing Managerial
Compensation
Compensation
Managerial
Managerial
Motives
Motives
Resources
Resources
Incentives
Incentives
Motives, Incentives, and Resources
Motives, Incentives, and Resources
for Diversification
for Diversification
Ch6-9
Summary Model of the
Summary Model of the
Relationship Between Firm
Relationship Between Firm
Performance and Diversification
Performance and Diversification
Diversification
Diversification
Strategy
Strategy
Managerial
Managerial

Motives
Motives
Resources
Resources
Incentives
Incentives
Ch6-10
Adding Value by Diversification
Adding Value by Diversification
Diversification most effectively adds value
Diversification most effectively adds value
by either of two mechanisms:
by either of two mechanisms:
By developing economies of scope between
By developing economies of scope between
business units in the firms which leads to
business units in the firms which leads to
synergistic benefits
synergistic benefits
By developing market power which leads to
By developing market power which leads to
greater returns
greater returns
Ch6-11
Alternative Diversification Strategies
Alternative Diversification Strategies
Related Diversification Strategies
Unrelated Diversification Strategies
Sharing Activities
Sharing Activities

Transferring Core Competencies
Transferring Core Competencies
Efficient Internal Capital Market Allocation
Efficient Internal Capital Market Allocation
Restructuring
Restructuring
Ch6-12
Key Characteristics:
Example:
Example:
Using a common physical distribution system
Using a common physical distribution system
and sales force such as Procter & Gamble’s disposable
and sales force such as Procter & Gamble’s disposable
diaper and paper towel divisions
diaper and paper towel divisions
Example:
Example:


General Electric’s costs to advertise, sell and
General Electric’s costs to advertise, sell and
service major appliances are spread over many different
service major appliances are spread over many different
products
products
Sharing Activities
Sharing Activities
Alternative Diversification Strategies
Alternative Diversification Strategies

Achieves economies of scale
Achieves economies of scale
Boosts efficiency of utilization
Boosts efficiency of utilization
Helps move more rapidly down Learning Curve
Helps move more rapidly down Learning Curve
Sharing Activities often lowers costs or
Sharing Activities often lowers costs or
raises differentiation
raises differentiation
Sharing Activities can lower costs if it:
Sharing Activities can lower costs if it:
Ch6-13
Example:
Example:


Shared order processing system may allow new
Shared order processing system may allow new
features customers value or make more advanced remote
features customers value or make more advanced remote
sensing technology available
sensing technology available
Example:
Example:


Procter & Gamble’s sharing of sales and
Procter & Gamble’s sharing of sales and
physical distribution for disposable diapers and paper

physical distribution for disposable diapers and paper
towels is effective because these items are so bulky and
towels is effective because these items are so bulky and
costly to ship
costly to ship
Key Characteristics:
Sharing Activities
Sharing Activities
Alternative Diversification Strategies
Alternative Diversification Strategies
Sharing Activities can enhance potential for or
Sharing Activities can enhance potential for or
reduce the cost of differentiation
reduce the cost of differentiation
Must involve activities that are crucial to
Must involve activities that are crucial to
competitive advantage
competitive advantage
Ch6-14
Assumptions:
Sharing Activities
Sharing Activities
Alternative Diversification Strategies
Alternative Diversification Strategies
Strong sense of corporate identity
Strong sense of corporate identity
Clear corporate mission that emphasizes the
Clear corporate mission that emphasizes the
importance of integrating business units
importance of integrating business units

Incentive system that rewards more than just
Incentive system that rewards more than just
business unit performance
business unit performance
Ch6-15
Alternative Diversification Strategies
Alternative Diversification Strategies
Related Diversification Strategies
Unrelated Diversification Strategies
Sharing Activities
Sharing Activities
Transferring Core Competencies
Transferring Core Competencies
Efficient Internal Capital Market Allocation
Efficient Internal Capital Market Allocation
Restructuring
Restructuring
Ch6-16
Key Characteristics:
Transferring Core Competencies
Transferring Core Competencies
Alternative Diversification Strategies
Alternative Diversification Strategies
Identify ability to transfer skills or
Identify ability to transfer skills or
expertise among similar value chains
expertise among similar value chains
Exploit ability to
Exploit ability to
transfer activities

transfer activities
Exploits
Exploits
Interrelationships
Interrelationships
among divisions
among divisions
Start with
Start with
Value Chain
Value Chain


analysis
analysis
Ch6-17
Assumptions:
Transferring Core Competencies leads to competitive
Transferring Core Competencies leads to competitive
advantage only if the similarities among business units
advantage only if the similarities among business units
meet the following conditions:
meet the following conditions:
Activities involved in the businesses are similar
Activities involved in the businesses are similar
enough that sharing expertise is meaningful
enough that sharing expertise is meaningful
Transfer of skills involves activities which are
Transfer of skills involves activities which are
important to competitive advantage

important to competitive advantage
The skills transferred represent significant sources
The skills transferred represent significant sources
of competitive advantage for the receiving unit
of competitive advantage for the receiving unit
Transferring Core Competencies
Transferring Core Competencies
Alternative Diversification Strategies
Alternative Diversification Strategies
Ch6-18
Alternative Diversification Strategies
Alternative Diversification Strategies
Related Diversification Strategies
Unrelated Diversification Strategies
Sharing Activities
Sharing Activities
Transferring Core Competencies
Transferring Core Competencies
Efficient Internal Capital Market Allocation
Efficient Internal Capital Market Allocation
Restructuring
Restructuring
Ch6-19
Key Characteristics:
Firms pursuing this strategy frequently diversify by
Firms pursuing this strategy frequently diversify by
acquisition:
acquisition:
Efficient Internal Capital Market Allocation
Efficient Internal Capital Market Allocation

Alternative Diversification Strategies
Alternative Diversification Strategies
Acquire sound, attractive companies
Acquire sound, attractive companies
Acquired units are autonomous
Acquired units are autonomous
Acquiring corporation supplies needed capital
Acquiring corporation supplies needed capital
Portfolio managers transfer resources from units that
Portfolio managers transfer resources from units that
generate cash to those with high growth potential and
generate cash to those with high growth potential and
substantial cash needs
substantial cash needs
Add professional management & control to sub-units
Add professional management & control to sub-units
Sub-unit managers compensation based on unit results
Sub-unit managers compensation based on unit results
Ch6-20
Assumptions:
Efficient Internal Capital Market Allocation
Efficient Internal Capital Market Allocation
Alternative Diversification Strategies
Alternative Diversification Strategies
Managers have more detailed knowledge of firm
Managers have more detailed knowledge of firm
relative to outside investors
relative to outside investors
Firm need not risk competitive edge by disclosing
Firm need not risk competitive edge by disclosing

sensitive competitive information to investors
sensitive competitive information to investors
Firm can reduce risk by allocating resources among
Firm can reduce risk by allocating resources among
diversified businesses, although shareholders can
diversified businesses, although shareholders can
generally diversify more economically on their own
generally diversify more economically on their own
Ch6-21
Alternative Diversification Strategies
Alternative Diversification Strategies
Related Diversification Strategies
Unrelated Diversification Strategies
Sharing Activities
Sharing Activities
Transferring Core Competencies
Transferring Core Competencies
Efficient Internal Capital Market Allocation
Efficient Internal Capital Market Allocation
Restructuring
Restructuring
Ch6-22
Key Characteristics:
Restructuring
Restructuring
-
-
Changes sub-unit management team
Changes sub-unit management team
-

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

parent no longer adds value to ongoing operations
Ch6-23
Assumptions:
Restructuring
Restructuring
Alternative Diversification Strategies
Alternative Diversification Strategies
Requires keen management insight in selecting
Requires keen management insight in selecting
firms with depressed values or unforeseen potential
firms with depressed values or unforeseen potential
Must do more than restructure companies
Must do more than restructure companies
Need to initiate restructuring of industries to
Need to initiate restructuring of industries to
create a more attractive environment
create a more attractive environment
Ch6-24
Internal Incentives:
Incentives to Diversify
Incentives to Diversify
Relaxation of Anti-Trust regulation allows more
Relaxation of Anti-Trust regulation allows more
related acquisitions than in the past
related acquisitions than in the past
Before 1986, higher taxes on dividends favored
Before 1986, higher taxes on dividends favored
spending retained earnings on acquisitions
spending 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 take
retained earnings, shifting to the use of debt to take
advantage of tax deductible interest payments
advantage of tax deductible interest payments
External Incentives:
Poor performance may lead some firms to
Poor performance may lead some firms to
diversify to attempt to achieve better returns
diversify to attempt to achieve better returns
Ch6-25
Value-creating Strategies of Diversification
Value-creating Strategies of Diversification
Operational and Corporate Relatedness
Operational and Corporate Relatedness
Sharing:
Sharing:
Operational
Operational
Relatedness
Relatedness
Between
Between
Business
Business
Corporate Relatedness:
Corporate Relatedness:
Transferring Skills Into
Transferring Skills Into
Business Through Corporate Headquarters

Business Through Corporate Headquarters
Low
Low
High
High
High
High
Low
Low
Related Linked
Related Linked
Diversification
Diversification
(Economies of Scope)
(Economies of Scope)
Unrelated
Unrelated
Diversification
Diversification
(Financial Economies)
(Financial Economies)
Both Operational and
Both Operational and
Corporate Relatedness
Corporate Relatedness
(Rare Capability and
(Rare Capability and
Can Create Diseconomies
Can Create Diseconomies
of Scope)

of Scope)
Related Constrained
Related Constrained
Diversification
Diversification
Vertical Integration
Vertical Integration
(Market Power)
(Market Power)