Competing for ADVANTAGE

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Chapter 8Corporate-Level Strategy

PART IIICREATING COMPETITIVE ADVANTAGE

The Strategic Management Process

Corporate-Level Strategy

Key Terms Corporate-level strategy

Specifies actions a firm takes to gain a competitive advantage by selecting and managing a portfolio of businesses that compete in different product markets or industries

Five Elements of Strategy

Product Diversification

Primary form of corporate-level strategy Concerns scope of industries and

markets Defines approach to buying,

creating, and selling businesses Intends to reduce variability in

profitability Comes with development and

monitoring costs

Levels and Types of Diversification

Low Levels of Diversification

Key Terms Single business strategy

Corporate-level strategy in which the firm generates 95% or more of its sales revenue from its core business area

Dominant business diversification strategy Corporate-level strategy in which the firm generates between 70% and 95% of its total sales revenue within a single business area

Moderate Levels of Diversification

Key Terms Related diversification strategy

Corporate-level strategy in which the firm generates more than 30% of its sales revenue outside a dominant business and whose businesses are related to each other in some manner

Related constrained diversification strategyRelated diversification strategy characterized by direct links between the firm's business units

Related linked diversification strategy Related diversification strategy characterized by only a few links between the firm’s business units

High Levels of Diversification

Key Terms Unrelated diversification strategy

Corporate-level strategy for highly diversified firms in which there are no well-defined relationships between business units

Relationship between Diversification and Performance

Reasons for Diversification

Value-Creating Strategies of Diversification

Diversification and the Multidivisional Structure

Key Terms Multidivisional structure (M-

form) Organizational structure which ties together several operating divisions, each representing a separate business or profit center to which responsibility for daily operations and business-unit strategy is delegated

Original Benefits of the M-form

It enabled corporate officers to more accurately monitor the performance of each business, which simplified the problem of control.

It facilitated comparisons between divisions, which improved the resource allocation process.

It stimulated managers of poorly performing divisions to look for ways of improving performance.

Organizational Controls Key Terms

Organizational controls Management tool which indicates how to compare actual results with expected results and suggests corrective actions to take when the difference between actual and expected results is unacceptable

Strategic controls Subjective criteria intended to verify that the firm is using appropriate strategies for the conditions in the external environment and given the company's competitive advantages

Financial controls Objective criteria used to measure firm performance against previously established quantitative standards

Variations of the M-form

CooperativeStrategic business-unit (SBU)

Competitive

Related Diversification Key Terms

Economies of scope Cost savings that the firm creates by successfully transferring some of its capabilities and competencies that were developed in one of its businesses to another of its businesses

Synergy Conditions that exist when the value created by business units working together exceeds the value those same units create working independently

Operational Relatedness: Sharing Activities

Positive Outcomes: Increased Value Creation Improved Financial Returns Reduced Risk

Challenges: Linked Outcomes Conflict Between Divisions Coordination Costs

The Cooperative Form of the Multidivisional Structure

Key Terms Cooperative form

Organizational structure using horizontal integration to bring about interdivisional cooperation

Cooperative Form of the Multidivisional Structure

Integrating Mechanisms of the Cooperative Form of the

Multidivisional Structure

Centralization Standardization Formalization

Success Factors of the Cooperative Form of the Multidivisional Structure

Information processing among divisions

Strategic controls Reward systems Managerial commitment levels

Corporate Relatedness: Transferring Core Competencies

Key Terms Corporate-level core

competencies Complex sets of resources and capabilities that link different businesses, primarily through managerial and technological knowledge, experience, and expertise

Corporate Relatedness: Transferring Core Competencies

Elimination of duplicate efforts

Resource intangibility

The Strategic Business-Unit Form of the Multidivisional Structure

Key Terms Strategic business-unit form

Form of multidivisional organization structure with three levels used to support the implementation of a diversification strategy

Three Levels of the SBU Form

Corporate headquarters Strategic business units Divisions within each

SBU

SBU Form of the Multidivisional Structure

Market Power through Related Diversification

Multimarket Competition

Vertical Integration

Market Power through Multipoint Competition

Key Terms Market power

Exists when a firm is able to price and sell its products above the existing competitive level or to reduce costs of value chain activities and support functions below the competitive level, or both

Multimarket (or multipoint) competition Exists when two or more diversified firms simultaneously compete in the same product or geographic markets

Market Power through Vertical Integration

Key Terms Vertical integration

Exists when a company produces its own inputs or owns its own source(s) of output distribution

Taper integration Exists when a firm sources inputs externally from independent suppliers as well as internally within the boundaries of the firm, or disposes of its outputs through independent outlets in addition to company-owned distribution channels

Sources of Market Powerthrough Vertical Integration

Reduced operational costs Reduced market costs Improved product quality Protected technology (from

imitation) Invaluable ties between assets

Limitations of Vertical Integration

Outside supplier may produce inputs at a lower cost.

Bureaucratic costs may occur. Substantial investments may be

required, which lessen flexibility. Changes in demand can create a

capacity imbalance and coordination problems.

Simultaneous Operational and Corporate Relatedness

“Diseconomies” of Scope or

Competitive Advantage

Process and Integrating Mechanisms

Frequent and direct contact between division managers

Liaisons Temporary teams or task forces Formal integration

departments

Simultaneous Operational and Corporate Relatedness

Key Terms Matrix organization

Organizational structure in which a dual structure combines both functional specialization and business product or project specialization.

Unrelated Diversification

Key Terms Financial economies

Cost savings realized through improved allocations of financial resources based on investments inside or outside the firm

Financial Economies that Create Value

Efficient internal capital allocation

Asset restructuring of purchased corporations

Efficient Internal Capital Market Allocation

Corporate office distributes capital to business divisions

Requires detailed and accurate information External sources of capital have imperfect

information about the organization Minor corrections to capital allocations are

possible Capital allocations can be based on

specific criteria

The “Conglomerate Discount”

Stock markets value diversified manufacturing conglomerates at 20% less than the value of the sum of their parts.

The discount applies despite economic influences.

Only extraordinary manufacturers can defy it (for a while).

The Downside ofUnrelated Diversification

Attention and resources are focused on acquisitions rather than innovations.

Conglomerates in developed countries have short life cycles.

Restructuring Strategy

Success usually calls for a focus on mature, low-technology businesses with more certain demand and less reliance on valuable human resources.

Service businesses oriented toward clients are difficult to buy/sell because of their sales orientation and the mobility of sales people.

The Competitive Form of the Multidivisional Structure

Key Terms Competitive form

Organizational structure in which the firm's divisions are completely independent

Competitive Form of the Multidivisional Structure

Benefits of Internal Competition

Creates flexibility Challenges inertia Motivates employees

HQ Role in the Competitive Form of the Multidivisional Structure

Maintains a distant relationship from divisions

Primarily uses financial controls to monitor performance

Focuses on cash flow, resource allocation, performance appraisal, and the legal aspects of acquisitions

Characteristics of Various Structural Forms

Structural Characteristics

Cooperative M-Form

SBU M-Form

Competitive M-Form

Degree ofCentralization

Centralized atCorporate Office

Partially Centralizedin SBUs

Decentralizedto Divisions

Use ofIntegrating

MechanismsExtensive Moderate Nonexistent

Type ofStrategy

Related-Constrained

Related-Linked

UnrelatedDiversification

Characteristics of Various Structural Forms

DivisionalIncentive

Compensation

Linked toCorporate

Performance

Linked toCorporate

SBU & Division Performance

Linked toDivision

Performance

DivisionalPerformance

Appraisal

SubjectiveStrategicCriteria

Strategic &FinancialCriteria

Objective FinancialCriteria

Structural Characteristics

Cooperative M-Form

SBU M-Form

Competitive M-Form

Value-Neutral Incentives to Diversify

External Antitrust regulation Tax laws

Internal Low performance Cash flow uncertainty Synergy Risk management

Resources and Diversification

Financial Resources Tangible Resources Intangible Resources

Managerial Motives to Diversify

Increased compensation Reduced employment risk Empire building

Governance Mechanisms

Internal corporate governance External market for corporate

control External market for managerial

talent Manager reputation

Summary Model - Relationship between Diversification and

Performance

ETHICAL QUESTIONAssume that you overheard the following

statement: “Those managing an unrelated diversified firm face far more difficult ethical

challenges than do those managing a dominant business firm.” Based on your

reading of this chapter, do you believe this statement true or false? Why?

ETHICAL QUESTION

Is it ethical for managers to diversify a firm rather than return excess

earnings to shareholders? Provide reasoning to support your answer.

ETHICAL QUESTION

Are ethical issues associated with the use of strategic controls? With the use

of financial controls? If so, what are they?

ETHICAL QUESTION

Are ethical issues involved in implementing the cooperative and competitive M-forms? If so, what are they? As a top-level manager,

how would you deal with them?

ETHICAL QUESTION

What unethical practices might occur when a firm restructures the assets it has acquired through its diversification efforts? Explain.

ETHICAL QUESTIONDo you believe that ethical managers are unaffected by the managerial motives to diversify discussed in this chapter? If so,

why? In addition, do you believe that ethical managers should help their peers learn how to avoid making diversification decisions on the basis of the managerial

motives to diversify (e.g., increased compensation)? Why or why not?