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Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
Chapter 7
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Chapter 7

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strategic management …

strategic management
3rd edition
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    • 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 Environment Process Strategy Formulation Strategy Implementation Chapter 5 Chapter 6 Chapter 7 Chapter 11 Chapter 12 Bus. - Level Competitive Corp. - Level Corporate Structure StrategyStrategic Dynamics Strategy Governance & Control Chapter 8 Chapter 9 Chapter 10 Chapter 13 Chapter 14 Acquisitions & International Cooperative Strategic Entrepreneurship Restructuring Strategy Strategies Leadership & Innovation Outcomes Strategic Chapter 2 Chapter 1 Feedback Above Average Strategic Returns Competitiveness © 2006 by Nelson, a division of Thomson Canada 7-2
    • 3. Corporate–Level 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 Canada 7-3
    • 4. Corporate – Level StrategyKnowledge 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. © 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 advantage by selecting & managing a group of different businesses competing in several industries & product markets © 2006 by Nelson, a division of Thomson Canada 7-5
    • 6. Firms Vary by Degree of DiversificationLow Levels of DiversificationSingle-business > 95% of revenues from a A single business unitDominant-business Between 70% & 95% of revenues A B from a single business unitModerate to High Levels of Diversification ARelated constrained < 70% of revenues from dominant business; bus.s share product, B C technological & distribution links ARelated linked (mixed) < 70% of revenues from dominant business, 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 Enhance Strategic CompetitivenessResources •Economies of Scope •Market Power •Financial EconomiesIncentivesManagerial Motives © 2006 by Nelson, a division of Thomson Canada 7-7 *
    • 8. Reasons for Diversification Incentives & ResourcesResources with Neutral Effects of Strategic Competitiveness •Anti-Competition RegulationIncentives •Tax Laws •Low Performance •Firm Risk ReductionManagerial •Uncertain Future Cash Motives Flows •Tangible Resources •Intangible Resources © 2006 by Nelson, a division of Thomson Canada 7-8
    • 9. Reasons for DiversificationResourcesIncentives •Managerial Motives Causing Value ReductionManagerial •Diversifying Managerial Motives Employment Risk •Increasing Managerial Compensation © 2006 by Nelson, a division of Thomson Canada 7-9 *
    • 10. Summary Model of theRelationship between FirmPerformance & Diversification Resources Diversification Incentives Strategy Managerial Motives © 2006 by Nelson, a division of Thomson Canada 7-10
    • 11. Value-creating Strategies of Diversification Operational and Corporate Relatedness •Related Constrained •Both Operational and Diversification Corporate Relatedness High •Vertical Integration Sharing: (Rare & can create (Market Power) diseconomies of scope) Operational Relatedness Between •Unrelated •Related Linked Business Diversification Diversification Low(Financial Economies) (Economies of Scope) Low High Corporate Relatedness: Transferring Skills Into Business Through Corporate Headquarters © 2006 by Nelson, a division of Thomson Canada 7-11
    • 12. Alternative Diversification StrategiesRelated Diversification Strategies 1 Sharing Activities 2 Transferring Core CompetenciesUnrelated Diversification Strategies 3 Efficient Internal Capital Market Allocation 4 Restructuring © 2006 by Nelson, a division of Thomson Canada 7-12
    • 13. 1 Sharing 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 Canada 7-13
    • 14. 1 Sharing Activities Assumptions * 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 1 Sharing Activities 2 Transferring Core Competencies Unrelated Diversification Strategies 3 Efficient Internal Capital Market Allocation 4 Restructuring © 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 Canada 7-16
    • 17. 2 Transferring Core CompetenciesAssumptionsTransferring Core Competencies leads to competitiveadvantage only if the similarities among business unitsmeet the following conditions: * 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. © 2006 by Nelson, a division of Thomson Canada 7-17
    • 18. Related Diversification StrategiesAlternative Diversification Strategies 1 Sharing Activities 2 Transferring Core CompetenciesUnrelated Diversification Strategies 3 Efficient Internal Capital Market Allocation 4 Restructuring © 2006 by Nelson, a division of Thomson Canada 7-18
    • 19. 3 Efficient Internal Capital Market AllocationKey Characteristics Firms using this strategy often diversify by acquisition: •Acquire sound, attractive companies •Acquired units are autonomous •Acquiring 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-units •Sub-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 Canada 7-20
    • 21. Alternative Diversification StrategiesRelated Diversification Strategies 1 Sharing Activities 2 Transferring Core CompetenciesUnrelated Diversification Strategies 3 Efficient Internal Capital Market Allocation 4 Restructuring © 2006 by Nelson, a division of Thomson Canada 7-21
    • 22. 4 RestructuringKey Characteristics •Seek out undeveloped, sick or threatened organizations or industries •Parent 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 mass Often sells unit after making one-time changes since parent no longer adds value to ongoing operations. © 2006 by Nelson, a division of Thomson Canada 7-22
    • 23. 4 RestructuringAssumptions 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. © 2006 by Nelson, a division of Thomson Canada 7-23 *
    • 24. Performance Diversification & Firm Performance Dominant Related Unrelated Business Constrained Business Level of Diversification © 2006 by Nelson, a division of Thomson Canada 7-24
    • 25. Incentives to DiversifyExternal Incentives•Relaxation of Anti-Competition regulation allows more related acquisitions than in the past.Internal Incentives •Poor performance may lead some firms to diversify to attempt 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 raise their 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 Market Intervention and Market forResources Managerial Talent Diversification FirmIncentives Strategy Performance Internal StrategyManagerial Governance Implementation Motives © 2006 by Nelson, a division of Thomson Canada 7-26

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