1. Corporate-Level Strategy Chapter Seven 2006 by Nelson, a division of Thomson Canada 7-1

2. Chapter 3 External The Strategic.Inputs Environment Strat. Intent Strategic Chapter 4 Strat. Mission Management. Internal EnvironmentProcess Strategy FormulationStrategy ImplementationChapter 5 Chapter 6Chapter 7 Chapter 11 Chapter 12Bus. - Level Competitive Corp. - LevelCorporateStructure StrategyStrategic DynamicsStrategy Governance& ControlChapter 8Chapter 9 Chapter 10Chapter 13 Chapter 14Acquisitions & InternationalCooperative Strategic EntrepreneurshipRestructuring StrategyStrategies Leadership & Innovation Outcomes Strategic Chapter 2 Chapter 1 Feedback Above AverageStrategicReturnsCompetitiveness 2006 by Nelson, a division of Thomson Canada7-2 3. CorporateLevel StrategyKnowledge 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. 2006 by Nelson, a division of Thomson Canada7-3 4. Corporate Level StrategyKnowledge Objectives continued5. 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. 2006 by Nelson, a division of Thomson Canada 7-4 5. Corporate Strategyconcerns 2 key questions:1. What businesses should the firm in?2. How should the corporate office manage the array of business units?Corporate-level strategy specifies actions to be taken by the firm to gain a competitive advantageby selecting & managing a group of different businesses competing in several industries &product markets 2006 by Nelson, a division of Thomson Canada7-5 6. Firms Vary by Degree of DiversificationLow Levels of DiversificationSingle-business> 95% of revenues from a A single business unitDominant-businessBetween 70% & 95% of revenues A B from a single business unitModerate to High Levels of Diversification ARelated constrained < 70% of revenues from dominantbusiness; bus.s share product, B Ctechnological & distribution links ARelated linked (mixed) < 70% of revenues from dominantbusiness, only limited links exist B CHigh Levels of Diversification AUnrelated-Diversified Business units not closely related B C 2006 by Nelson, a division of Thomson Canada 7-6 7. Reasons for Diversification Motives to EnhanceStrategic CompetitivenessResources Economies of Scope Market Power Financial EconomiesIncentivesManagerial Motives 2006 by Nelson, a division of Thomson Canada7-7 * 8. Reasons for Diversification Incentives & ResourcesResources with Neutral Effects ofStrategic CompetitivenessAnti-Competition RegulationIncentivesTax LawsLow Performance Firm Risk ReductionManagerial Uncertain Future Cash MotivesFlows Tangible ResourcesIntangible Resources 2006 by Nelson, a division of Thomson Canada7-8 9. Reasons for DiversificationResourcesIncentivesManagerial MotivesCausing Value ReductionManagerial Diversifying Managerial Motives Employment RiskIncreasing ManagerialCompensation 2006 by Nelson, a division of Thomson Canada7-9 * 10. Summary Model of theRelationship between FirmPerformance & Diversification Resources Diversification Incentives Strategy ManagerialMotives 2006 by Nelson, a division of Thomson Canada7-10 11. Value-creating Strategies of Diversification Operational and Corporate Relatedness Related ConstrainedBoth Operational andDiversificationCorporate RelatednessHighVertical Integration Sharing:(Rare & can create (Market Power)diseconomies of scope) OperationalRelatednessBetween Unrelated Related Linked BusinessDiversificationDiversificationLow(Financial Economies) (Economies of Scope)Low HighCorporate Relatedness: Transferring Skills IntoBusiness Through Corporate Headquarters 2006 by Nelson, a division of Thomson Canada 7-11 12. Alternative Diversification StrategiesRelated Diversification Strategies1Sharing Activities2Transferring Core CompetenciesUnrelated Diversification Strategies3Efficient Internal Capital Market Allocation4Restructuring 2006 by Nelson, a division of Thomson Canada7-12 13. 1Sharing ActivitiesKey CharacteristicsSharing Activities can lower costs if it: * Achieves economies of scale * Boosts efficiency of utilization * Helps move more rapidly down Learning Curve.Example: Laboratory costs forcing drug companies to merge in order to continue R&D efforts.Sharing Activities can enhance differentiation if it: * Involves activities crucial to competitive advantage.Example: Shared order processing system may allow the firm to discover new features customers value from a group of products. 2006 by Nelson, a division of Thomson Canada7-13 14. 1 Sharing ActivitiesAssumptions* 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 2006 by Nelson, a division of Thomson Canada 7-14 * 15. Alternative Diversification Strategies Related Diversification Strategies 1Sharing Activities 2Transferring Core Competencies Unrelated Diversification Strategies 3 Efficient Internal Capital Market Allocation 4Restructuring 2006 by Nelson, a division of Thomson Canada 7-15 16. 2 Transferring Core CompetenciesKey Characteristics* 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. 2006 by Nelson, a division of Thomson Canada7-16 17. 2Transferring Core CompetenciesAssumptionsTransferring Core Competencies leads to competitiveadvantage only if the similarities among business unitsmeet the following conditions:* Activities involved in the businesses are similarenough that sharing expertise is meaningful.* Transfer of skills involves activities which areimportant to competitive advantage.* The skills transferred represent significantsources of competitive advantage for thereceiving unit. 2006 by Nelson, a division of Thomson Canada 7-17 18. Related Diversification StrategiesAlternative Diversification Strategies1Sharing Activities2Transferring Core CompetenciesUnrelated Diversification Strategies3 Efficient Internal Capital Market Allocation4Restructuring 2006 by Nelson, a division of Thomson Canada7-18 19. 3Efficient Internal Capital Market AllocationKey CharacteristicsFirms using this strategyoften diversify by acquisition:Acquire sound, attractive companiesAcquired units are autonomousAcquiring corporation supplies needed capitalPortfolio managers transfer resources from unitsthat generate cash to those with high growthpotential and substantial cash needs.Add professional management/control to sub-unitsSub-unit managers compensation based on unit results. 2006 by Nelson, a division of Thomson Canada 7-19 20. 3 Efficient Internal Capital Market Allocation Efficient Internal Capital Market AllocationAssumptionsManagers have more detailed knowledge of firmrelative to outside investors.Firm need not risk competitive edge by disclosingsensitive competitive information to investors.Firm can reduce risk by allocating resourcesamong diversified businesses, althoughshareholders can generally diversify moreeconomically on their own. 2006 by Nelson, a division of Thomson Canada7-20 21. Alternative Diversification StrategiesRelated Diversification Strategies1Sharing Activities2Transferring Core CompetenciesUnrelated Diversification Strategies3 Efficient Internal Capital Market Allocation 4 Restructuring 2006 by Nelson, a division of Thomson Canada7-21 22. 4RestructuringKey CharacteristicsSeek out undeveloped, sick or threatened organizations or industriesParent firm (acquirer) intervenes & 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 massOften sells unit after making one-time changes sinceparent no longer adds value to ongoing operations. 2006 by Nelson, a division of Thomson Canada 7-22 23. 4 RestructuringAssumptionsRequires keen management insight inselecting firms with depressed values orunforeseen potential.Must do more than restructurecompanies.Need to initiate restructuring ofindustries to create a moreattractive environment. 2006 by Nelson, a division of Thomson Canada7-23 * 24. Performance Diversification & Firm Performance Dominant RelatedUnrelated Business ConstrainedBusinessLevel of Diversification 2006 by Nelson, a division of Thomson Canada7-24 25. Incentives to DiversifyExternal IncentivesRelaxation of Anti-Competition regulation allows more related acquisitions than in the past.Internal Incentives Poor performance may lead some firms to diversify toattempt to achieve better returns in new industries.Firms may diversify to balance uncertain future cash flows.Firms may diversify into different businesses in orderto reduce risk. Managers often have incentives to diversify to raisetheir compensation & reduce employment risk. (Effective governance mechanisms may restrict such abuses) 2006 by Nelson, a division of Thomson Canada 7-25 26. Summary Model of the Relationshipbetween Firm Performance &Diversification Capital MarketIntervention and Market forResources Managerial Talent Diversification FirmIncentivesStrategy PerformanceInternalStrategyManagerialGovernance Implementation Motives 2006 by Nelson, a division of Thomson Canada7-26