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Chapter 6 Chapter 6 Presentation Transcript

  • Chapter 6: Corporate-Level Strategy
    • Overview:
      • Define and discuss corporate-level strategy
      • Different levels and types of diversification
      • Three primary reasons firms diversify
      • Value creation: related diversification strategy
      • Value creation: un related diversification strategy
      • Incentives and resources encouraging diversification
      • Management motives for overdiversification
  • Introduction
    • Business-level Strategy
      • An integrated and coordinated set of commitments and actions the firm uses to gain competitive advantage by exploiting core competencies in specific product markets
    • Corporate-level Strategy
      • Specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets
        • Expected to help firm earn above-average returns
        • Value ultimately determined by degree to which “the businesses in the portfolio are worth more under the management of the company then they would be under any other ownership”
  • Introduction
    • Corporate-level strategy is concerned with:
      • What product markets and businesses the firm should compete in
      • How corporate headquarters should manage those businesses
    • Product Diversification: primary form of corporate-level strategy
      • Concerns:
        • The scope of the markets and industries firm competes in
        • How the firm manages their portfolio of businesses
    • Diversification is often looked at as a growth strategy
  • Introduction
    • Diversified firms vary according to level and type of diversification (Figure 6.1)
      • Level – # of different industries a firms competes in
      • Type – degree of relatedness between business units
    • Corporate-level strategy is also concerned with:
      • Capturing economies of scope or synergies between business units (Related)
      • Capturing financial synergies (Unrelated)
  • Levels and Types of Diversification
    • Low Levels
      • Single Business Strategy
        • Corporate-level strategy in which the firm generates 95% or more of its sales revenue from its core business area
        • Wrigley
      • Dominant Business Diversification Strategy
        • Corporate-level strategy whereby firm generates 70-95% of total sales revenue within a single business area
        • UPS
  • Levels and Types of Diversification
    • Moderate to High Levels
      • Related Constrained Diversification Strategy
        • Less than 70% of revenue comes from the dominant business
        • Direct links (i.e., share products, technology and distribution linkages) between the firm's businesses
      • Related Linked Diversification Strategy (Mixed related and unrelated )
        • Less than 70% of revenue comes from the dominant business
        • Mixed: Linked firms sharing fewer resources and assets among their businesses (compared with related constrained, above), concentrating on the transfer of knowledge and competencies among the businesses
  • Levels and Types of Diversification
    • Very High Levels: Unrelated
        • Less than 70% of revenue comes from dominant business
        • No relationships between businesses
        • Often referred to as conglomerates
  • Reasons for Diversification (Table 6.1)
    • Value-creating
      • Economies of scope (Related)
      • Market power (Related)
      • Financial economies (Unrelated)
    • Value-neutral
      • Antitrust regulation, tax laws, low performance, uncertain future cash flows, firm risk reduction, tangible resources, intangible resources
    • Value-reducing
      • Increasing managerial compensation
      • Managerial risk reduction
  • Value-Creating Diversification Strategies: Operational and Corporate Relatedness (Figure 6.2)
  • Value-Creating Diversification (VCD): Related Strategies
    • Purpose: Gain market power relative to competitors
    • Related diversification wants to develop and exploit economies of scope between its businesses
      • Economies of scope: Cost savings firm creates by successfully sharing some of its resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses
    • Value Creating Diversification: Composed of ‘related’ diversification strategies including Operational and Corporate relatedness
  • Value-Creating Diversification (VCD): Related Strategies
    • Operational Relatedness: Sharing activities
      • Can gain economies of scope
      • Share primary or support activities (in value chain)
        • Risky as ties create links between outcomes
      • Related constrained diversified firms share activities in order to create value
      • Not easy, often synergies not realized as planned
  • Value-Creating Diversification (VCD): Related Strategies
    • Corporate Relatedness: Core competency transfer
      • Complex sets of resources and capabilities linking different businesses through managerial and technological knowledge, experience and expertise
      • Two sources of value creation
        • Core competence can be developed in one business unit and transferred to other business units at no additional cost
        • Intangible resources difficult for competitors to understand and imitate, so immediate competitive advantage over competition can be achieved through transfer of corporate-level core competence
      • Use related-linked diversification strategy
  • Value-Creating Diversification (VCD): Related Strategies
    • Market Power
      • Exists when a firm is able to sell its products above the existing competitive level, to reduce costs of primary and support activities below the competitive level, or both.
      • Can come from increasing scale
    • Market power can also be created through:
      • Multipoint Competition
        • Exists when 2 or more diversified firms simultaneously compete in the same product or geographic markets.
      • Vertical Integration
        • Exists when a company produces its own inputs (backward integration) or owns its own source of output distribution (forward integration)
        • Virtual integration – when this is done through e-commerce
  • Value-Creating Diversification (VCD): Related Strategies
    • Proctor and Gamble
    • Provides branded consumer goods products worldwide
    • 3 GBUs
      • Beauty GBU
        • Beauty segment
        • Grooming segment
      • Health and Well-Being GBU
        • Health Care segment
        • Snacks, Coffee, and Pet Care segment
      • Household Care GBU
        • Fabric Care and Home Care segment
        • Baby Care and Family Care segment
  • Value-Creating Diversification (VCD): Related Strategies
    • Johnson and Johnson
    • Engages in the research and development, manufacture, and sale of various products in the health care field worldwide
    • 3 segments
      • Consumer segment
        • Products for baby care, skin care, oral care, wound care, and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products
      • Pharmaceutical segment
        • Products for anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology, and virology
      • Medical Devices and Diagnostics segment
        • Products for circulatory disease management, orthopaedic joint reconstruction and spinal care, wound care and women’s health, minimally invasive surgical, blood glucose monitoring and insulin delivery, and diagnostic products, as well as disposable contact lenses
  • Value-Creating Diversification (VCD): Related Strategies
    • Campbell Soup Company
    • Engages in the manufacture and marketing of branded convenience food products worldwide
    • 4 segments
      • U.S. Soup, Sauces, and Beverages
      • Baking and Snacking
      • International Soup, Sauces, and Beverages
      • North America Foodservice
  • Value-Creating Diversification (VCD): Un related Strategies
    • Creates value through two types of financial economies
    • Financial economies – c ost savings realized through improved allocations of financial resources based on investments inside or outside firm
      • Efficient internal capital market allocation (versus external capital market)
      • Restructuring of acquired assets
        • Firm A buys firm B and restructures assets so it can operate more profitably, then A sells B for a profit in the external market
  • Value-Creating Diversification (VCD): Un related Strategies
    • United Technologies Corporation
    • Provides technology products and services to the building systems and aerospace industries worldwide
      • Otis segment – elevators and escalators
      • Carrier segment – air conditioning and refrigeration
      • UTC Fire and Security segment.
      • Pratt and Whitney segment - aircraft engines; parts and services
      • Hamilton Sundstrand segment - aerospace products and aftermarket services
      • Sikorsky segment – helicopters
      • UTC also engages in the development and marketing of distributed generation power systems and fuel cell power plants for stationary, transportation, space, and defense applications
  • Value-Creating Diversification (VCD): Un related Strategies
    • Textron, Inc.
    • Operates in the aircraft, industrial, and finance industries worldwide.
    • 4 segments
      • Bell – helicopters plus parts and service
      • Cessna – general aviation aircraft
      • Industrial – auto parts, food containers, hydraulics, golf carts
      • Finance – aircraft finance, asset-based lending, distribution finance, golf finance, resort finance
  • Value-Neutral Diversification: Incentives and Resources
    • Value-Neutral Incentives to Diversify
      • Antitrust Regulation and Tax Laws
      • Low Performance
      • Uncertain Future Cash Flows
      • Synergy and Firm Risk Reduction
      • Resources and Diversification
  • Value-Reducing Diversification: Managerial Motives to Diversify
    • Top-level executives may diversify in order to diversity their own employment risk and to increase their own compensation, as long as profitability does not suffer excessively
      • Diversification adds benefits to top-level managers but not shareholders
      • This strategy may be held in check by governance mechanisms or concerns for one’s reputation