1. Corporate-Level Strategy

2. The Strategic Management Process Strategy Formulation
Strategic Intent
External
Environment
Internal Environment
Strategic Mission
The Strategic
Management
Process
Strategic
Outcomes
Actions
Strategic
Inputs
Strategy Formulation
Strategy Implementation
Corporate Governance
Structure & Control
Business-level Strategy
Competitive Dynamics
Corporate-Level Strategy
International Strategy
Strategic
Competitiveness
Above Average
Returns
Feedback 10

3. Has Two Levels of Strategy
A Diversified Company
Has Two Levels of Strategy
- low cost
- differentiation
- integrated low cost/differentiation
- focused low cost
- focused differentiation
How to create competitive advantage in each business in which the company competes
1. Business-Level Strategy (Competitive Strategy)
How to create value for the corporation as a whole
2. Corporate-Level Strategy (Companywide Strategy) 7

4. Key Questions of Corporate Strategy
1. What businesses should the corporation be in?
2. How should the corporate office manage the array of business units?
Corporate Strategy is what makes the corporate whole add up to more than the sum of its business unit parts 11

5. Levels and Types of Diversification
Low Levels of Diversification
Single business
> 95% of revenues from a single business unit A
Dominant business
Between 70% and 95% of revenues from a single business unit B A
Moderate to High Levels of Diversification
< 70% of revenues from dominant business; all businesses share product, technological and distribution linkages
Related constrained A B C
Related linked (mixed)
< 70% of revenues from dominant business, and only limited links exist A B C
Very High Levels of Diversification
Unrelated-Diversified
Business units not closely related A B C 15

6. Motives, Incentives, and Resources
for Diversification
Motives to Enhance Strategic Competitiveness
Economies of Scope
Market Power
Financial Economies
Resources
Managerial
Motives
Incentives 17

7. Motives, Incentives, and Resources
for Diversification
Incentives and Resources with Neutral Effects of Strategic Competitiveness
Anti-Trust Regulation
Tax Laws
Low Performance
Uncertain Future Cash Flows
Firm Risk Reduction
Tangible Resources
Intangible Resources
Resources
Incentives
Managerial
Motives 18

8. Motives, Incentives, and Resources
for Diversification
Resources
Incentives
Managerial Motives Causing Value Reduction
Diversifying Managerial
Employment Risk
Increasing Managerial Compensation
Managerial
Motives 19

9. Relationship Between Firm Performance and Diversification
Summary Model of the
Relationship Between Firm
Performance and Diversification
Resources
Diversification
Strategy
Incentives
Managerial
Motives 20

10. Adding Value by Diversification
Diversification most effectively adds value by either of two mechanisms:
By developing economies of scope between business units in the firms which leads to synergistic benefits
By developing market power which leads to greater returns 23

11. Alternative Diversification Strategies
Related Diversification Strategies
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
Efficient Internal Capital Market Allocation
Restructuring 24

12. Alternative Diversification Strategies
Sharing Activities
Key Characteristics:
Sharing Activities often lowers costs or raises differentiation
Example: Using a common physical distribution system and sales force such as Procter & Gamble’s disposable diaper and paper towel divisions
Sharing Activities can lower costs if it:
Achieves economies of scale
Boosts efficiency of utilization
Helps move more rapidly down Learning Curve
Example: General Electric’s costs to advertise, sell and service major appliances are spread over many different products 29

13. Alternative Diversification Strategies
Sharing Activities
Key Characteristics:
Sharing Activities can enhance potential for or reduce the cost of differentiation
Example: Shared order processing system may allow new features customers value or make more advanced remote sensing technology available
Must involve activities that are crucial to competitive advantage
Example: Procter & Gamble’s sharing of sales and physical distribution for disposable diapers and paper towels is effective because these items are so bulky and costly to ship 33

14. Alternative Diversification Strategies
Sharing Activities
Assumptions:
Strong sense of corporate identity
Clear corporate mission that emphasizes the importance of integrating business units
Incentive system that rewards more than just business unit performance 36

15. Alternative Diversification Strategies
Related Diversification Strategies
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
Efficient Internal Capital Market Allocation
Restructuring 24

16. Alternative Diversification Strategies
Transferring Core Competencies
Key Characteristics:
Exploits Interrelationships among divisions
Start with Value Chain analysis
Identify ability to transfer skills or expertise among similar value chains
Exploit ability to transfer activities 41

17. Alternative Diversification Strategies
Transferring Core Competencies
Assumptions:
Transferring Core Competencies leads to competitive advantage only if the similarities among business units meet the following conditions:
Activities involved in the businesses are similar enough that sharing expertise is meaningful
Transfer of skills involves activities which are important to competitive advantage
The skills transferred represent significant sources of competitive advantage for the receiving unit 44

18. Alternative Diversification Strategies
Related Diversification Strategies
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
Efficient Internal Capital Market Allocation
Restructuring 24

19. Alternative Diversification Strategies
Efficient Internal Capital Market Allocation
Key Characteristics:
Firms pursuing this strategy frequently diversify by acquisition:
Acquire sound, attractive companies
Acquired units are autonomous
Acquiring corporation supplies needed capital
Portfolio managers transfer resources from units that generate cash to those with high growth potential and substantial cash needs
Add professional management & control to sub-units
Sub-unit managers compensation based on unit results 51

20. Alternative Diversification Strategies
Efficient Internal Capital Market Allocation
Assumptions:
Managers have more detailed knowledge of firm relative to outside investors
Firm need not risk competitive edge by disclosing sensitive competitive information to investors
Firm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their own 54

21. Alternative Diversification Strategies
Related Diversification Strategies
Sharing Activities
Transferring Core Competencies
Unrelated Diversification Strategies
Efficient Internal Capital Market Allocation
Restructuring 24

22. Alternative Diversification Strategies
Restructuring
Key Characteristics:
Seek out undeveloped, sick or threatened organizations or industries
Parent company (acquirer) intervenes and frequently:
- Changes sub-unit management team
- Shifts strategy
- Infuses firm with new technology
- Divests part of firm
- Makes additional acquisitions to achieve critical mass
- Enhances discipline by changing control systems
Frequently sell unit after making one-time changes since parent no longer adds value to ongoing operations 58

23. Alternative Diversification Strategies
Restructuring
Assumptions:
Requires keen management insight in selecting firms with depressed values or unforeseen potential
Must do more than restructure companies
Need to initiate restructuring of industries to create a more attractive environment 60

24. Incentives to Diversify
External Incentives:
Relaxation of Anti-Trust regulation allows more related acquisitions than in the past
Before 1986, higher taxes on dividends favored spending retained earnings on acquisitions
After 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of tax deductible interest payments
Internal Incentives:
Poor performance may lead some firms to diversify to attempt to achieve better returns 63

25. Value-creating Strategies of Diversification
Operational and Corporate Relatedness
Related Constrained
Diversification
Vertical Integration
(Market Power)
Both Operational and Corporate Relatedness
(Rare Capability and Can Create Diseconomies of Scope)
High
Sharing:
Operational
Relatedness
Between
Business
Unrelated
Diversification
(Financial Economies)
Related Linked
Diversification
(Economies of Scope)
Low
Low
High
Corporate Relatedness: Transferring Skills Into Business Through Corporate Headquarters 63

26. Diversification and Firm Performance Level of Diversification
Dominant
Business
Related
Constrained
Unrelated
Business
Level of Diversification 67

27. Incentives to Diversify
Internal Incentives:
Poor performance may lead some firms to diversify to attempt to achieve better returns
Firms may diversify to balance uncertain future cash flows
Firm may diversify into different businesses in order to reduce risk
Managers often have incentives to diversify in order to increase their compensation and reduce employment risk, although effective governance mechanisms may restrict such abuses 70

28. Capital Market Intervention and Market for Managerial Talent
Summary Model of the Relationship Between Firm Performance and Diversification
Capital Market Intervention and Market for Managerial Talent
Resources
Diversification
Strategy
Firm
Performance
Incentives
Internal
Governance
Strategy
Implementation
Managerial
Motives 73