1. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Strategic Management: Concepts and Cases 9e Part II: Strategic Actions: Strategy Formulation Chapter 6: Corporate-Level Strategy

2. ©2011 Cengage Learning. All rights reserved. 6–2 Brief Overview Of Corporate Strategy What Is Corporate Strategy?  Those strategies concerned with the broad and long-term questions of what business(es) the organization is in and what it wants to do with those businesses We’re in St. Louis  Go east, west, north, south, or stay put  Fly, drive, train, walk  Lease, rent, or buy vehicle  Seattle, San Francisco, San Diego

3. ©2011 Cengage Learning. All rights reserved. 6–3

4. ©2011 Cengage Learning. All rights reserved. 6–4 Two Strategy Levels 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 several industries and product markets. (Sets the curbs for business-level strategy.) 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.

5. ©2011 Cengage Learning. All rights reserved. 6–5 The Corporate Profile: 3 Options Compete in a single industry: Allows a firm to specialize, but “all eggs are in a single basket.” Compete in related industries: Allows a firm to develop synergy among the business units. Compete in unrelated industries: Minimizes risk through diversification. (A Conglomerate)

6. ©2011 Cengage Learning. All rights reserved. 6–6 Corporate-Level Strategy: Key Questions Corporate-level Strategy’s Value  The degree to which the businesses in the portfolio are worth more under the management of the company than they would be under other ownership.  What businesses should the firm be in?  How should the corporate office manage the group of businesses? Business Units

7. ©2011 Cengage Learning. All rights reserved. 6–7 Original BCG Matrix High Relative Market Share Low Relative Market Share High Industry Growth Rate StarsQuestion Marks Low Industry Growth Rate Cash CowsDogs Stars—highly profitable SBUs that require continued investment Question Marks—low shares of fast growing markets, but unknown future Cash Cows—highly profitable SBUs that produce profit without investment Dogs—SBUs that need to be divested

8. ©2011 Cengage Learning. All rights reserved. 6–8 Portfolio Analysis—BCG Matrix Industry Growth Rate (in constant sales dollars) High (faster than the economy as a whole) Low (slower than the economy as a whole) Relative Market Share Position High (above 1.0)Low (below 1.0) 1.0 StarsQuestion Marks Cash CowsDogs

9. ©2011 Cengage Learning. All rights reserved. 6–9 Portfolio Analysis—McKinsey-GE Stoplight Chart Industry (Product-Market) Attractiveness Business Strength-Competitive Position StrongAverageWeak (5)(3)(1) High(5) Medium(3) Low(1) Winners Profit Producers Average Business Question marks Losers

10. ©2011 Cengage Learning. All rights reserved. 6–10 Portfolio Analysis—Product/Market Evolution Matrix StrongAverageWeak The Business Unit’s Competitive Position Industry’s Stage in the Evolutionary Life Cycle Development Growth Decline Competitive Shakeout Maturity  Saturation A B C D E F G H

11. ©2011 Cengage Learning. All rights reserved. 6–11 Table 6.1 Reasons for Diversification Value-Creating Diversification Economies of scope (related diversification) Sharing activities Transferring core competencies Market power (related diversification) Blocking competitors through multipoint competition Vertical integration Financial economies (unrelated diversification) Efficient internal capital allocation Business restructuring Value-Neutral Diversification Antitrust regulation Tax laws Low performance Uncertain future cash flows Risk reduction for firm Tangible resources Intangible resources Value-Reducing Diversification Diversifying managerial employment risk Increasing managerial compensation

12. ©2011 Cengage Learning. All rights reserved. 6–12 Transferring Corporate Competencies Corporate Relatedness  Using complex sets of resources and capabilities to link different businesses through managerial and technological knowledge, experience, and expertise. X

13. ©2011 Cengage Learning. All rights reserved. 6–13 Corporate Relatedness Creates value in two ways:  Eliminates resource duplication in the need to allocate resources for a second unit to develop a competence that already exists in another unit.  Provides intangible resources (resource intangibility) that are difficult for competitors to understand and imitate. A transferred intangible resource gives the unit receiving it an immediate competitive advantage over its rivals. X

14. ©2011 Cengage Learning. All rights reserved. 6–14 Related Diversification: Market Power Multipoint Competition  Two or more diversified firms simultaneously compete in the same product areas or geographic markets. Vertical Integration  Backward integration—a firm produces its own inputs (acquiring suppliers of the company’s raw materials).  Forward integration—a firm operates its own distribution system for delivering its outputs (acquiring buyers of the company’s products).

15. ©2011 Cengage Learning. All rights reserved. 6–15 Internal Incentives to Diversify Diversification may be defensive strategy if:  Product line matures.  Product line is threatened.  Firm is small and is in mature or maturing industry. Low Performance Uncertain Future Cash Flows

16. ©2011 Cengage Learning. All rights reserved. 6–16 Internal Incentives to Diversify Synergy exists when the value created by businesses working together exceeds the value created by them working independently … but synergy creates joint interdependence between business units. A firm may become risk averse and constrain its level of activity sharing. A firm may reduce level of technological change by operating in more certain environments. Low Performance Uncertain Future Cash Flows Synergy and Risk Reduction

17. ©2011 Cengage Learning. All rights reserved. 6–17 Resources and Diversification A firm must have both:  Incentives to diversify  The resources required to create value through diversification—cash and tangible resources (e.g., plant and equipment) Value creation is determined more by appropriate use of resources than by incentives to diversify. Managerial Motives to Diversify (Usually not good for a company!!!)  Managerial risk reduction  Desire for increased compensation  Chief executives are more conscious of their personal brand than the corporate brand.

18. ©2011 Cengage Learning. All rights reserved. 6–18 What The Chapter Doesn’t Cover Many of the advantages of diversification can be attained by strategic partnering without the need to Merge or Acquire All of this analysis ignores the psychological effects of diversification by M&A. We will hit that more in Chapter 7. In Chapter 11 we will discuss Organizational Structure and Controls. In a diversified company, how big is the HQ and how influential are they in decisions at the business unit level?