Upload
laiqa-ahmed
View
455
Download
1
Tags:
Embed Size (px)
DESCRIPTION
Citation preview
7-1© 2006 by Nelson, a division of Thomson Canada Limited.
Corporate-Level Strategy
Chapter Seven
7-2© 2006 by Nelson, a division of Thomson Canada Limited.
Chapter 5Bus. - Level
Strategy
Chapter 6Competitive
Dynamics
Chapter 9International
Strategy
Chapter 10CooperativeStrategies
Chapter 8Acquisitions &Restructuring
Chapter 11Corporate
Governance
Chapter 12Structure& Control
Chapter 13Strategic
Leadership
Chapter 14Entrepreneurship & Innovation
Str
ateg
icIn
pu
ts
Str
ateg
icA
ctio
ns
Str
ateg
ic O
utc
om
esChapter 4Internal
Environment
Chapter 3External
Environment Strat. Intent
Strat. Mission
The Strategic .
Management .
Process
Strategy Formulation Strategy Implementation
Strategic Competitiveness
Chapter 1
Above Average Returns
Chapter 2 Feedback
Strategic Competitiveness
Chapter 1
Chapter 7Corp. - Level
Strategy
Chapter 5Bus. - Level
Strategy
Chapter 6Competitive
Dynamics
7-3© 2006 by Nelson, a division of Thomson Canada Limited.
Corporate–Level Strategy
Knowledge Objectives:
1. Define corporate-level strategy and discuss its importance to the diversified firm.
2. Describe the advantages and disadvantages of single-business strategies and dominant-business strategies.
3. Explain three primary reasons why firms move from single-business strategies and dominant-business strategies to more diversified strategies.
4. Describe how related-diversified firms create value by sharing or transferring core competencies.
7-4© 2006 by Nelson, a division of Thomson Canada Limited.
Corporate – Level Strategy
Knowledge Objectives – continued…
5. Explain the two ways value can be treated with an unrelated-diversification strategy.
6. Discuss the incentives and resources that encourage diversification.
7. Describe motives that can encourage managers to overdiversify a firm.
7-5© 2006 by Nelson, a division of Thomson Canada Limited.
Corporate-level strategy specifies actions to be taken by the firm to gain a competitive advantage
by selecting & managing a group of different businesses competing in several industries &
product markets
Corporate Strategy concerns 2 key questions:
1. What businesses should the firm in? 2. How should the corporate office manage the array of business units?
7-6© 2006 by Nelson, a division of Thomson Canada Limited.
Firms Vary by Degree of Diversification
Single-business > 95% of revenues from a single business unit
Low Levels of Diversification
AAAA
Dominant-business Between 70% & 95% of revenues from a single business unit BBBBAAAA
Unrelated-Diversified Business units not closely related High Levels of Diversification AAAA
BBBB CCCC
Moderate to High Levels of Diversification< 70% of revenues from dominant business; bus.s share product, technological & distribution links
Related constrained
Related linked (mixed) < 70% of revenues from dominant business, only limited links exist
AAAA
BBBB CCCC
BBBB
AAAA
CCCC
7-7© 2006 by Nelson, a division of Thomson Canada Limited.
Motives to Enhance Motives to Enhance Strategic CompetitivenessStrategic Competitiveness
•Economies of ScopeEconomies of Scope
•Market PowerMarket Power
•Financial EconomiesFinancial Economies
ResourcesResources
IncentivesIncentives
ManagerialManagerialMotivesMotives
Reasons for Diversification
*
7-8© 2006 by Nelson, a division of Thomson Canada Limited.
Incentives & Resources Incentives & Resources with Neutral Effects of with Neutral Effects of
Strategic CompetitivenessStrategic Competitiveness
ResourcesResources
IncentivesIncentives
ManagerialManagerialMotivesMotives
Reasons for Diversification
•Anti-Competition RegulationAnti-Competition Regulation•Tax LawsTax Laws
•Low PerformanceLow Performance
•Uncertain Future Cash Uncertain Future Cash FlowsFlows
•Firm Risk ReductionFirm Risk Reduction
•Tangible ResourcesTangible Resources
•Intangible ResourcesIntangible Resources
7-9© 2006 by Nelson, a division of Thomson Canada Limited.
•Managerial Motives Managerial Motives Causing Value ReductionCausing Value Reduction
•Diversifying ManagerialDiversifying ManagerialEmployment RiskEmployment Risk
•Increasing Managerial Increasing Managerial CompensationCompensation
Reasons for Diversification
ResourcesResources
IncentivesIncentives
ManagerialManagerialMotivesMotives
*
7-10© 2006 by Nelson, a division of Thomson Canada Limited.
Summary Model of the Relationship between Firm Performance & Diversification
ResourcesResources
IncentivesIncentives
ManagerialManagerialMotivesMotives
DiversificationStrategy
7-11© 2006 by Nelson, a division of Thomson Canada Limited.
Value-creating Strategies of DiversificationOperational and Corporate Relatedness
Corporate Relatedness: Transferring Skills Into Business Through Corporate Headquarters
Low High
Sharing:OperationalRelatednessBetweenBusiness
High
Low
•Related Linked Diversification
(Economies of Scope)
•UnrelatedDiversification
(Financial Economies)
•Both Operational and Corporate Relatedness
(Rare & can create diseconomies of scope)
•Related Constrained Diversification
•Vertical Integration
(Market Power)
7-12© 2006 by Nelson, a division of Thomson Canada Limited.
Transferring Core CompetenciesTransferring Core Competencies22
Efficient Internal Capital Market Allocation
Unrelated Diversification Strategies
3
Restructuring4
Sharing ActivitiesSharing Activities11
Related Diversification Strategies
Alternative Diversification Strategies
7-13© 2006 by Nelson, a division of Thomson Canada Limited.
Sharing Activities can lower costs if it:
Example: Laboratory costs forcing drug companies to merge in order to continue R&D efforts.
** Achieves economies of scale
** Boosts efficiency of utilization
** Helps move more rapidly down Learning Curve.
Sharing Activities can enhance differentiation if it:
Example: Shared order processing system may allow the firm to discover new features customers value from a group of products.
11 Sharing ActivitiesSharing Activities
Involves activities crucial to competitive advantage.**
Key Characteristics
7-14© 2006 by Nelson, a division of Thomson Canada Limited.
** Incentive system that rewards more than just business unit performance
Strong sense of corporate identity**
Assumptions
11 Sharing ActivitiesSharing Activities
Clear corporate mission that emphasizes the importance of integrating business units
**
*
7-15© 2006 by Nelson, a division of Thomson Canada Limited.
Transferring Core CompetenciesTransferring Core Competencies22
Sharing ActivitiesSharing Activities11
Related Diversification StrategiesAlternative Diversification Strategies
Efficient Internal Capital Market Allocation
Unrelated Diversification Strategies
3
Restructuring4
7-16© 2006 by Nelson, a division of Thomson Canada Limited.
** Exploits Interrelationships among divisions
** Start with Value Chain analysis
Identify ability to transfer skills or expertise among similar value chains
Exploit ability to share activities
Two firms can share the same sales force, logistics network or distribution channels.
Key Characteristics
22 Transferring Core CompetenciesTransferring Core Competencies
7-17© 2006 by Nelson, a division of Thomson Canada Limited.
Assumptions
Transferring Core Competencies leads to competitive advantage only if the similarities among business units meet the following conditions:
22 Transferring Core CompetenciesTransferring Core Competencies
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.
**
7-18© 2006 by Nelson, a division of Thomson Canada Limited.
Transferring Core CompetenciesTransferring Core Competencies22
Efficient Internal Capital Market Allocation
Unrelated Diversification Strategies
3
Restructuring4
Alternative Diversification Strategies
Sharing ActivitiesSharing Activities11
Related Diversification Strategies
7-19© 2006 by Nelson, a division of Thomson Canada Limited.
•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.
Key Characteristics Firms using this strategy often diversify by acquisition:
3 Efficient Internal Capital Market Allocation
7-20© 2006 by Nelson, a division of Thomson Canada Limited.
Assumptions
Managers have more detailed knowledge of firm relative to outside investors.
Firm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their own.
Firm need not risk competitive edge by disclosing sensitive competitive information to investors.
Efficient Internal Capital Market Allocation3 Efficient Internal Capital Market Allocation
7-21© 2006 by Nelson, a division of Thomson Canada Limited.
Efficient Internal Capital Market Allocation
Unrelated Diversification Strategies
3
Restructuring4
Alternative Diversification Strategies
Transferring Core CompetenciesTransferring Core Competencies22
Sharing ActivitiesSharing Activities11
Related Diversification Strategies
7-22© 2006 by Nelson, a division of Thomson Canada Limited.
Key Characteristics•Seek out undeveloped, sick or threatened organizations or industries
Often sells unit after making one-time changes since parent no longer adds value to ongoing operations.
•Parent firm (acquirer) intervenes & frequently:- Changes sub-unit management team- Shifts strategy
- Divests part of firm- Makes additional acquisitions to achieve critical mass
- Infuses firm with new technology- Enhances discipline by changing control systems
4 Restructuring
7-23© 2006 by Nelson, a division of Thomson Canada Limited.
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.
4 Restructuring
*
7-24© 2006 by Nelson, a division of Thomson Canada Limited.
Per
form
ance
Level of Diversification
DominantBusiness
UnrelatedBusiness
RelatedConstrained
Diversification & Firm Performance
7-25© 2006 by Nelson, a division of Thomson Canada Limited.
External Incentives
•Relaxation of Anti-Competition regulation allows more related acquisitions than in the past.
Incentives to Diversify
•Poor performance may lead some firms to diversify to attempt to achieve better returns in new industries.
•Firms may diversify into different businesses in order to reduce risk.
Internal Incentives
•Firms may diversify to balance uncertain future cash flows.
•Managers often have incentives to diversify to raise their compensation & reduce employment risk. (Effective governance mechanisms may restrict such abuses)
7-26© 2006 by Nelson, a division of Thomson Canada Limited.
FirmFirmPerformancePerformance
Summary Model of the Relationship between Firm Performance & Diversification
ResourcesResources
IncentivesIncentives
ManagerialManagerialMotivesMotives
DiversificationDiversificationStrategyStrategy
Capital Market Capital Market Intervention and Intervention and
Market for Market for Managerial TalentManagerial Talent
InternalInternalGovernanceGovernance
StrategyStrategyImplementationImplementation