Chapter 6


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  • Chapter 6

    1. 1. Chapter 6 Corporate-Level Strategy Diane M. Sullivan, Ph.D. 2010 Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage Sections modified from Gentner (2009)
    2. 2. The Strategic Management Process <ul><li>Previously, we have examined firms competing in a single industry or product market. After solidifying a position in a single industry or product market, firms will often want to diversify into multiple businesses. </li></ul>Insert figure 1.1 graphic
    3. 3. Corporate-level Strategy: Definitions <ul><li>Business-level strategy (Chapter 4) </li></ul><ul><ul><li>Deals with how the business should compete (e.g., cost leadership, differentiation, focus, integrated strategies) </li></ul></ul><ul><li>Corporate-level strategy (Chapter 6) </li></ul><ul><ul><li>Definition: Specific actions a firm takes to gain an advantage by selecting and managing a group of different businesses </li></ul></ul><ul><ul><ul><li>Primary form of corporate-level strategy is product diversification </li></ul></ul></ul><ul><ul><ul><ul><li>Diversification involves using expertise and knowledge gained in one business to diversify into a business where it can be used in a related way </li></ul></ul></ul></ul><ul><ul><li>2 main concerns with corporate-level strategy : </li></ul></ul><ul><ul><li>1) What businesses the firm should be in </li></ul></ul><ul><ul><li>2) How the firm should manage the different business units </li></ul></ul>
    4. 4. Corporate-level Strategy: Examples <ul><li>Ex. 1: Proctor & Gamble’s Diversification Strategy </li></ul><ul><ul><li>Pre-2005: Product mix focused on women and baby care </li></ul></ul><ul><ul><li>2005 : Acquired Gillette, which focused on consumer health care products geared toward men </li></ul></ul><ul><ul><li>Synergy created by combining Gillette’s toothbrush (Oral-B) and P&G’s toothpaste (Crest) businesses to create Pro-Health oral care product line </li></ul></ul><ul><ul><ul><li>Good for retailers (shelf space) </li></ul></ul></ul><ul><ul><ul><li>Strategy had potential but was more difficult to create operational relatedness between the products </li></ul></ul></ul><ul><ul><ul><ul><li>Comingle employees requiring actual physical re-location/talent exit </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Different ways to make business decisions </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Conflicting organizational cultures </li></ul></ul></ul></ul><ul><ul><ul><li>In 2007, Pro-Health overtook Colgate in market share </li></ul></ul></ul><ul><li>Ex. 2: Disney </li></ul>
    5. 5. 3 Levels of Diversification <ul><li>Low level of diversification </li></ul><ul><ul><li>Single-business strategy </li></ul></ul><ul><ul><li>Dominant-business strategy </li></ul></ul><ul><li>Moderate-to-high levels of diversification </li></ul><ul><ul><li>Related constrained diversification strategy </li></ul></ul><ul><ul><li>Related linked diversification strategy </li></ul></ul><ul><li>Very high levels of diversification </li></ul><ul><ul><li>Unrelated diversification </li></ul></ul>
    6. 6. Level of Diversification Diversification and Firm Performance Performance Dominant Business Unrelated Business Related Constrained
    7. 7. Low-level Diversification <ul><li>Single-business strategy </li></ul><ul><ul><li>Firm generates 95% or more of its sales revenue from its core business area </li></ul></ul><ul><ul><li>Example (pre-2008): Wm. Wrigley Jr. Company—the world’s largest producer of chewing and bubble gums </li></ul></ul><ul><ul><ul><li>Post-2008  Acquired by Mars Inc. </li></ul></ul></ul><ul><li>Dominant-business strategy </li></ul><ul><ul><li>Firm generates 70-95% of total sales revenue within a single business area </li></ul></ul><ul><ul><li>Example: UPS generated 74% of revenue from U.S. package delivery business; 17% from international package business; 9% from non-package business </li></ul></ul>A B A
    8. 8. Moderate-to-High Diversification <ul><li>Related constrained diversification strategy </li></ul><ul><ul><li>< 70% of revenue comes from the dominant business </li></ul></ul><ul><ul><li>There are direct links between the firm's businesses (e.g., share products, technology; marketing; and distribution linkages) </li></ul></ul><ul><ul><li>Example : Campbell’s </li></ul></ul>A B C
    9. 9. Moderate-to-High Diversification <ul><li>Related linked diversification strategy </li></ul><ul><ul><li>< 70% of revenue comes from the dominant business </li></ul></ul><ul><ul><li>Mix between related and unrelated diversification </li></ul></ul><ul><ul><ul><li>Linked firms share fewer resources and assets among their businesses </li></ul></ul></ul><ul><ul><ul><li>Interested in constantly adjusting the mix in their portfolio of businesses and how to manage the businesses </li></ul></ul></ul><ul><ul><ul><li>Example : Rachel Ray </li></ul></ul></ul>D A B C
    10. 10. Moderate-to-High Diversification <ul><li>Related linked diversification strategy example 2 </li></ul>A B C
    11. 11. Very High Diversification <ul><li>Unrelated diversification strategy </li></ul><ul><ul><li>Less than 70% of revenue comes from dominant business </li></ul></ul><ul><ul><li>No relationships between businesses </li></ul></ul><ul><ul><li>Often called conglomerates </li></ul></ul><ul><ul><li>Example : Jarden Corporation </li></ul></ul>A B C
    12. 12. Level of Diversification Diversification and Firm Performance Performance Dominant Business Unrelated Business Related Constrained
    13. 13. 3 Reasons Firms Diversify <ul><li>Value-creating reasons </li></ul><ul><ul><li>Economies of scope </li></ul></ul><ul><ul><li>Market power </li></ul></ul><ul><ul><ul><li>Vertical Integration </li></ul></ul></ul><ul><ul><li>Financial economies </li></ul></ul><ul><li>Value-neutral reasons </li></ul><ul><ul><li>Antitrust regulation </li></ul></ul><ul><ul><li>Tax laws </li></ul></ul><ul><ul><li>Low performance </li></ul></ul><ul><ul><li>Uncertain future cash flows </li></ul></ul><ul><ul><li>Risk reduction for firm </li></ul></ul><ul><ul><li>Tangible resources </li></ul></ul><ul><ul><li>Intangible resources </li></ul></ul><ul><li>Value-reducing reasons </li></ul><ul><ul><li>Diversifying managerial employment risk </li></ul></ul><ul><ul><li>Increasing managerial compensation </li></ul></ul>
    14. 14. Value-Creating Reasons to Diversify <ul><li>Based a desire to develop resources that will enhance strategic competitiveness </li></ul><ul><li>Ok, but how? </li></ul><ul><ul><li>Two main ways diversification strategies can create value </li></ul></ul><ul><ul><ul><li>Operational relatedness : sharing activities between businesses </li></ul></ul></ul><ul><ul><ul><ul><li>Ex: P&G’s paper towel business and baby diaper business both use paper products as inputs; the firm’s paper production plant produces inputs for both businesses </li></ul></ul></ul></ul><ul><ul><ul><li>Corporate relatedness : transferring core competencies into business </li></ul></ul></ul><ul><ul><ul><ul><li>Ex: Honda’s competence in engine design and manufacturing to motorcycles, lawnmowers, cars and trucks </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Often achieved via transferring or hiring personnel with competencies </li></ul></ul></ul></ul>
    15. 15. Operational & Corporate Relatedness Value <ul><li>The value these create are referred to as </li></ul><ul><ul><li>Economies of Scope (for related constrained and related-linked strategies) </li></ul></ul><ul><ul><ul><li>Cost savings created by sharing its resources/capabilities or transferring core competencies of one businesses to another of its businesses </li></ul></ul></ul><ul><ul><li>Market Power (for related constrained and related-linked strategies) </li></ul></ul><ul><ul><ul><li>Exists when a firm sells its products above competitive levels and/or reduces the cost of its Value Chain activities below competitive levels </li></ul></ul></ul><ul><ul><ul><li>Influenced by a firm’s level of vertical integration </li></ul></ul></ul><ul><ul><li>Financial Economies (for unrelated diversification) </li></ul></ul><ul><ul><ul><li>Cost savings realized via improved allocations of financial resources based on investments inside or outside the firm—2 main types </li></ul></ul></ul><ul><ul><ul><ul><li>Efficient internal capital allocations can reduce risk of the firm’s portfolio </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Restructuring of acquired assets </li></ul></ul></ul></ul>
    16. 16. Value-creating Strategies of Diversification Operational and Corporate Relatedness Sharing Activities: Operational Relatedness Between Business Corporate Relatedness: Transferring Skills Into Business Through Corporate Headquarters Low High High Low Related Linked Diversification (Economies of Scope & Market Power) Unrelated Diversification (Financial Economies) Both Operational and Corporate Relatedness (Rare Capability; Can sometimes Create Dis economies of Scope) Related Constrained Diversification (Economies of Scope & Market Power)
    17. 17. <ul><li>External value-neutral reasons </li></ul><ul><ul><li>Antitrust Regulation and Tax Laws </li></ul></ul><ul><ul><ul><li>Deregulation </li></ul></ul></ul><ul><ul><ul><li>Changing tax laws </li></ul></ul></ul><ul><li>Internal value-neutral reasons </li></ul><ul><ul><li>Low Performance </li></ul></ul><ul><ul><li>Uncertain Future Cash Flows </li></ul></ul><ul><ul><li>Firm Risk Reduction </li></ul></ul><ul><ul><li>Resources and Diversification </li></ul></ul><ul><ul><ul><li>Excess tangible resources like plant and equipment, sales force, etc. </li></ul></ul></ul>Value-Neutral Reasons to Diversify
    18. 18. Value-Reducing Reasons to Diversify <ul><li>Managerial Motives </li></ul><ul><ul><li>Diversifying managerial employment risk </li></ul></ul><ul><ul><ul><li>If one business fails, the whole firm will stay intact </li></ul></ul></ul><ul><ul><li>Increasing managerial compensation </li></ul></ul><ul><ul><ul><li>Larger firms are more complex </li></ul></ul></ul><ul><ul><ul><li>Generally mean larger compensation packages </li></ul></ul></ul>