1. Corporate-Level Strategy
Chapter 6
Corporate-Level Strategy
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
©2003 Southwestern Publishing Company

2. Strategy Implementation
The Strategic Management Process
Chapter 2
The External
Environment
Strategic Intent
Strategic Mission
Strategic Inputs
Chapter 3
The Internal
Environment
Strategy Formulation
Strategy Implementation
Chapter 4
Business-Level
Strategy
Chapter 5
Competitive Rivalry
and Competitive
Dynamics
Chapter 6
Corporate-
Level Strategy
Chapter 10
Corporate
Governance
Chapter 11
Organizational
Structure and
Controls
Strategic Actions
Chapter 12
Strategic
Leadership
Chapter 13
Strategic
Entrepreneurship
Strategic
Competitiveness
Above-Average
Returns
Strategic Outcomes
Feedback

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

4. Key Questions in 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
Business Unit
Business Unit

5. Levels and Types of Diversification
Low Levels of Diversification
Business Unit
Single Business
> 95% of business from a single business unit
Business Unit
Dominant Business
Between 70 and 95% of business from a single business unit

6. Levels and Types of Diversification
Moderate to High Levels of Diversification
Business Unit
Related Constrained
<70% of revenues from dominant business; all businesses share product, technological and distribution linkages
Business Unit
Business Unit

7. Levels and Types of Diversification
Moderate to High Levels of Diversification
Business Unit
Related Linked (Mixed)
< 70% of revenues from dominant business, and only limited links exist
Business Unit
Business Unit

8. Levels and Types of Diversification
Very High Levels of Diversification
Business Unit
Unrelated
< 70% of revenue comes from the dominant business, and there are no common links between businesses
Business Unit
Business Unit

9. Reasons for Diversification
Incentives
Reasons to Enhance Strategic Competitiveness
Economies of scope
Market power
Financial economics
Resources
Managerial
Motives

10. Reasons for Diversification
Incentives
Incentives with Neutral Effects on Strategic Competitiveness
Resources
Anti-trust regulation
Tax laws
Low performance
Uncertain future cash flows
Firm risk reduction
Managerial
Motives

11. Reasons for Diversification
Incentives
Resources with varying effects on value creation and strategic competitiveness
Resources
Tangible resources
financial resources
physical assets
Intangible resources
tacit knowledge
customer relations
image and reputation
Managerial
Motives

12. Reasons for Diversification
Incentives
Managerial Motives (Value Reduction)
Diversifying managerial employment risk
Increasing managerial compensation
Resources
Managerial
Motives

13. Corporate Relatedness
Value-creating Strategies of Diversification: Operational and Corporate Readiness
Related Constrained
Diversification
Vertical Integration
(Market Power)
Both Operational and
Corporate Relatedness
(Rare Capability
and can Create
Diseconomies of
Scope)
Low
High
Sharing: Operational Relatedness Between Businesses
Unrelated
Diversification
(Financial Economies)
Related Linked
Diversification
(Economies of
Scope)
Low
High
Corporate Readiness: Transferring Skills into Businesses Through Corporate Headquarters

14. Adding Value by Diversification
Diversification most effectively adds value by either of two mechanisms:
Economies of scope: cost savings attributed to transferring the capabilities and competencies developed in one business to a new business
Market power: when a firm is able to sell its products above the existing competitive level or reduce the costs of its primary and support activities below the competitive level, or both

15. Alternative Diversification Strategies
Related Diversification Strategies
sharing activities
transferring core competencies
Unrelated Diversification Strategies
efficient internal capital market allocation
restructuring

16. Alternative Diversification Strategies
Related Diversification Strategies
sharing activities

17. Sharing Activities: Key Characteristics
Sharing activities often lowers costs or raises differentiation
Sharing activities can lower costs if it:
achieves economies of scale
boosts efficiency of utilization
helps move more rapidly down the Learning Curve
Sharing activities can enhance potential for or reduce the cost of differentiation
Must involve activities that are crucial to competitive advantage

18. 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

19. Alternative Diversification Strategies
Related Diversification Strategies
sharing activities
transferring core competencies

20. 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

21. 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

22. Alternative Diversification Strategies
Related Diversification Strategies
sharing activities
transferring core competencies
Unrelated Diversification Strategies
efficient internal capital market allocation

23. 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

24. 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

25. Alternative Diversification Strategies
Related Diversification Strategies
sharing activities
transferring core competencies
Unrelated Diversification Strategies
efficient internal capital market allocation
restructuring

26. 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
enhances discipline by changing control systems
divests part of firm
makes additional acquisitions to achieve critical mass

27. Restructuring: Key Characteristics
Frequently sell unit after making one-time changes since parent no longer adds value to ongoing operations

28. 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

29. 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

30. 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
Firms may diversify into different businesses in order to reduce risk

31. Resources and Diversification
Besides strong incentives, firms are more likely to diversify if they have the resources to do so
Value creation is determined more by appropriate use of resources than incentives to diversify

32. Managerial Motives to Diversify
Managers have motives to diversify
diversification increases size; size is associated with executive compensation
diversification reduces employment risk
effective governance mechanisms may restrict such motives

33. Relationship Between Diversification and Performance
Dominant
Business
Related
Constrained
Unrelated
Business
Level of Diversification

34. Relationship Between Firm Performance and Diversification
Capital Market
Intervention and the
Market for
Managerial Talent
Incentives
Resources
Diversification
Strategy
Firm
Performance
Managerial
Motives
Internal
Governance
Strategy
Implementation