Ch07 Discussion Light

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Strategy Management
Robert E. Hoskisson; Michael A. Hitt; R. Duane Ireland

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  • Corporate-Level Strategy Instructor notes are provided at various points throughout the slides and include additional materials and examples for the following topics: • Low levels of diversification • Moderate and high levels of diversification • Related diversification • Operational relatedness: sharing activities • Related constrained strategy • Corporate relatedness: transferring of core competencies • Using the strategic business-unit form of the multidivisional structure to implement the related-linked strategy • Market power • Simultaneous operational relatedness and corporate relatedness • Using the competitive form of the multidivisional structure to implement the unrelated diversification strategy • Uncertain future cash flows • Firm risk reduction
  • Levels and Types of Diversification Low Levels of Diversification (p. 205) A single business diversification strategy generates 95% or more of a firm’s sales revenue from its core business area. Take the chewing gum market, for example. Wm. Wrigley Jr. Company uses a single business strategy while operating in relatively few product markets. Wrigley’s brands include Spearmint, Doublemint, and Juicy Fruit, and in the 1990s the company added sugar-free gums Hubba Bubba, Orbit, and Ice White. Collaboration with Procter & Gamble (P&G) to produce a dental chewing gum—marketed under P&G’s Crest brand—causes Wrigley to become slightly more diversified than it has been historically. `A dominant business diversification strategy generates between 70% and 95% of a firm’s total revenue within a single business area. Smithfield Foods uses the dominant business diversification strategy; the majority of its sales are generated from raising and butchering hogs. Recently, however, Smithfield diversified into beef packing by acquiring a smaller beef processor. Smithfield also attempted to acquire IBP, the largest beef packer, but was outbid by Tyson Foods. Although it still uses the dominant business diversification strategy, Smithfield’s addition of beef packing operations suggests that its portfolio of businesses is becoming more diversified.
  • Levels and Types of Diversification (cont.) Moderate and High Levels of Diversification (p. 206) A firm generating more than 30% of its sales revenue outside a dominant business and whose businesses are related to each other in some manner uses a related diversification corporate-level strategy . When the links between the diversified firm’s businesses are rather direct, a related constrained diversification strategy is being used. A related, constrained firm shares a number of resources and activities among its businesses (Campbell Soup, Procter & Gamble, Xerox, and Merck & Company). A highly diversified firm (no relationships between its businesses) follows an unrelated diversification strategy. United Technologies, Textron, and Samsung are examples of firms using this type of corporate-level strategy. In Latin America, China, Korea, and India, conglomerates (firms following the unrelated diversification strategy) continue to dominate the private sector (~30% of GNP). The largest business groups in India, Brazil, Mexico, Argentina, and Colombia are family-owned, diversified enterprises. However, the viability of these large diversified business groups is now questioned.
  • Alternative Diversification Strategies Related Diversification (p. 210) Economies of scope are 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. As shown in Figure 7.2 in the text, firms seek to create value from economies of scope through two operational economies: sharing activities (operational relatedness) and transferring skills or core competencies (operational relatedness). Ford Motor Co. diversified into many related business units, from rubber plantations to auto body manufacturing plants to upholstery material factories. This allowed Ford to become a nearly fully integrated firm. In doing so Ford was able to produce an automobile that was process and assembly line manufactured. Owning the value chain allowed Ford to control the quality, specifications of manufacture, and timing of manufacturing and delivery of parts that went into its automobiles. Ford could then produce a car that was affordable. Selling a large number of its products allowed Ford to realize high profits. As an added bonus, the autos were easily repaired as there was no longer the need for replacement parts to be machined to fit. Replacement parts could be purchased off the shelf and installed. This also created an aftermarket of auto parts.
  • Sharing Activities Operational Relatedness (p. 211) Firms can create operational relatedness by sharing either a primary activity such as inventory delivery systems or a support activity such as purchasing practices. Procter & Gamble’s paper towel business and baby diaper business both use paper products as an input to the manufacturing process. The joint paper production plant that produces inputs for the two divisions is an example of a shared activity. In addition, because these two businesses produce consumer products, they both share distribution channels and sales networks. PepsiCo has done well in the recent past, but sales growth in carbonated beverages may have reached market saturation or could even decline due to evidence linking soft drink consumption to childhood obesity. PepsiCo reaction? In 2001 PepsiCo purchased Quaker Oats—the maker of the sports drink Gatorade—for $12 billion. PepsiCo believes that it has found a reliable growth driver as Gatorade is the market leader in sports drinks and experienced a 13% annual growth rate in sales revenue between 1998 and 2001. To increase Gatorade’s market share PepsiCo has been integrating Gatorade into its distribution channels. Thus, Pepsi soft drinks, such as Pepsi Cola and Mountain Dew, and Gatorade are sharing the firm’s outbound logistics activity. Similarly, the same distribution channels could be used to distribute Quaker Oats’ healthy snacks and Frito-Lay’s salty snacks.
  • Sharing Activities (cont.) Simultaneous Operational Relatedness and Corporate Relatedness (p. 219) Some firms simultaneously seek operational and corporate forms of economies of scope. Although it has not developed distribution capabilities, Disney has been successful in using both operational relatedness and corporate relatedness. It made $3 billion on the 150 products that were marketed with its movie, The Lion King . Sony’s Men in Black was a clear hit at the box office and earned $600 million, but box office and video revenues were practically the entire success story. Disney succeeded by sharing activities regarding the Lion King theme within its movie, theme parks, music, and retail products divisions, while at the same time transferring knowledge into these same divisions, creating a music CD, Rhythm of the Pride Lands , and a video, Simba’s Pride . In addition, there were Lion King themes at Disney resorts and Animal Kingdom parks. However, it is difficult for analysts from outside the firm to fully assess the value-creating potential of the firm pursuing both operational relatedness and corporate relatedness. As such, Disney’s assets have been discounted somewhat because “the biggest lingering question is whether multiple revenue streams will outpace multiple-platform overhead.”
  • Alternative Diversification Strategies Related Constrained Strategy (p. 212) Procter & Gamble, a related constrained firm, is supported by a cooperative structure of five global business product units (baby, feminine and family care, fabric and home care, food and beverage, and health and beauty care) and seven market development organizations (MDOs) formed around a global region. Using the five global product units to create strong brand through ongoing innovation, P&G interfaces with customers to ensure that a division’s marketing plans fully capitalize on local opportunities. Information is shared between the product-oriented and the marketing-oriented efforts to enhance the corporation’s performance. Indeed, some corporate staff members are responsible for focusing on making certain that knowledge is meaningfully categorized and then rapidly transferred throughout P&G’s businesses. Production competencies, marketing competencies, or channel dominance are examples of strengths that P&G’s divisions might share.
  • Transferring Core Competencies Corporate Relatedness: Transferring Of Core Competencies (p. 214) A firm’s intangible resources, such as its know-how, can become its core competencies, resources and capabilities that link businesses through managerial and technological knowledge, experience, and expertise. For example, McDonald's is creating value by transferring an intangible resource among its businesses: Chipotle Mexican Grill (a small Colorado chain of Mexican food restaurants), Donatos Pizza (a pizza restaurant chain), Boston Market (a chain specializing in home-style cooking), and Prêt à Manger (a London chain with an eclectic food offering, such as sushi and salmon sandwiches). McDonald's goal is to transfer knowledge about all phases of the fast-food industry to its newly acquired restaurants. McDonald's believes that the knowledge the company has gained from operating its core business can also create value in its other food venues—venues attracting customers who do not frequent McDonald's units. Interestingly, McDonald's stock price declined in early 2002, with questions surfacing about the firm’s ability to maintain its historic growth and performance rates. Although all of these acquired businesses are small, McDonald’s believes that each can profitably grow by applying its knowledge in what are unique food concepts. Estimates are that the new units could add 2% to McDonald’s growth rate within a few years.
  • Strategy and Structure Growth Pattern Market Power (p. 217) Multipoint competition exists when two or more diversified firms simultaneously compete in the same product areas or geographic markets (discussed on p. 217). For example, the actions taken by Hewlett-Packard (HP) in its merger with Compaq demonstrate multipoint competition. This merger allows the new HP to compete with the likes of IBM and Sun Microsystems. For example, HP and Compaq are now coordinating their efforts in PCs, servers, and services. The combined revenues of the two companies almost equal those of IBM. As a competitive action, HP and Compaq’s decision to integrate their operations is a strategic action to improve the new HP’s market positions and strategic response to IBM’s success in servers and services. Counterattacks are not common in multipoint competition because the threat of a counterattack may prevent strategic actions from being taken, or, more likely, firms may retract their strategic actions when faced with the threat of counterattack. Using a matching strategy (taking the same strategic action as the attacker) is a strategic response. It signals a commitment to defend the status quo without escalating rivalry. (Continued on next slide.)
  • Strategy and Structure Growth Pattern (cont.) Market Power (cont.) Smithfield Foods is a vertically integrated hog processing business. It is vertically integrated backward by raising the hogs that it processes in its plants. While packaging plants excel when the price of meat is low and suffer when it is high, Smithfield can control its costs because it owns the facilities that provide the raw materials required for its core processing operations. This control gives Smithfield market power over its rivals. It typically produces products at below industry production cost. Recent acquisitions of ten U.S. and a few international meat-packaging companies are intended to support Smithfield’s vertical integration to yield attractive options to consumers. Many manufacturing firms no longer pursue vertical integration. In fact, deintegration is the focus of most manufacturing firms, such as Intel and Dell, and even among large automobile companies, such as Ford and GM, as they develop independent supplier networks. Contract manufacturers, such as Solectron Corp., often manage their customers’ entire product lines and offer services ranging from inventory management to delivery and after-sales service. Conducting business through e-commerce makes vertical integration into “virtual integration.” Thus, efficient relationships are possible with suppliers and customers via virtual integration allowing cost reductions of processing transactions while improving supply-chain management control of inventories.
  • SBU Form of Multidivisional Structure Using the Strategic Business-Unit Form of the Multidivisional Structure to Implement the Related Linked Strategy (p. 215) Complexity is reflected by the organization’s size and product and market diversity. Related linked firm GE, for example, has 28 strategic business units (SBUs), each with multiple divisions. GE Aircraft Engines, Appliances, Power Systems, NBC, and GE Capital are a few of the firm’s SBUs. The scale of GE’s business units is striking. GE Aircraft Engines is the world’s leading manufacturer of jet engines. With almost 30 divisions, GE Capital is a diversified financial services company creating comprehensive solutions to increase client productivity and efficiency. The GE Power Systems business unit has 21 divisions including GE Energy Rentals, GE Distributed Power, and GE Water Technologies. GE SBUs are making efforts to form competencies in services and technology as a source of competitive advantage. Recently, technology was identified as an advantage for the GE Medical Systems SBU, as that unit’s divisions share technological competencies to produce equipment, including computed tomography (CT) scanners, MRI systems, nuclear medicine cameras, and ultrasound systems. Once a competence is developed in one of GE Medical Systems’ divisions, it is quickly transferred to the other divisions in that SBU so that the competence can be leveraged to increase the unit’s overall performance.
  • Competitive Form of Multidivisional Structure Using the Competitive Form of the Multidivisional Structure to Implement the Unrelated Diversification Strategy (p. 223) Started as a small textile company in 1923, Textron Inc. is an industrial conglomerate using the unrelated diversification strategy. It has grown through volume, geography, vertical or horizontal integration, and diversification. Its growth started when the firm vertically integrated in 1943 to gain control of declining revenues and underutilized production capacity. Facing another revenue decline in 1952, the company diversified by acquiring businesses in unrelated industries. Today, Textron has five divisions: aircraft, automotive, industrial products, fastening systems, and finance. Return on invested capital is the financial control Textron uses as the primary measure of divisional performance. According to the firm, “return on invested capital serves as both a compass to guide every investment decision and a measurement of Textron’s success.”
  • Relationship Between Firm Performance and Diversification Uncertain Future Cash Flows (p. 228) Historically, independent sales agents sold Tupperware products (Tupperware Parties), but as more women reenter the workforce, the firm’s traditional customer base—women in their homes—has eroded. Tupperware wanted to diversify its distribution due to uncertainty about demand for its products. For example, in July 2001, Target started to display Tupperware products in SuperTarget stores and on Target’s Web site. To prevent problems with the traditional sales channel, Tupperware’s independent sales agents staff the displays of the firm’s products in SuperTarget stores. Company officials estimated that 40% of sales would come from this and similar ventures such as television and mall ventures within five years. Thus, Tupperware is diversifying its distribution channels in order to reduce the uncertainty of its future cash flows. Firm Risk Reduction (p. 229) StarTek Inc. historically has generated its revenues from a small number of large customers: packaging and shipping software for Microsoft, providing tech support to AOL Time Warner and AT&T, and maintaining communications systems for AT&T. To reduce its dependence risk, StarTek chose to diversify. It spent $12.4 million to acquire a 20% interest in Gifts.com, an online retailer selling gifts, home furnishings, and other merchandise. Unfortunately, Gifts.com is loosing money. StarTek also invested in a mortgagefinancing firm that has since been accused of defrauding investors, forcing StarTek to take a $3 million charge in 2001. Clearly, firms seeking to reduce risk by diversifying should fully understand the nature of the businesses they are entering through their diversification efforts.
  • Ch07 Discussion Light

    1. 1. Corporate-Level Strategy Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Chapter 7
    2. 2. Chapter 2 Strategic Leadership Chapter 4 The Internal Organization Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 9 International Strategy Chapter 1 Introduction to Strategic Management Chapter 3 The External Environment Chapter 5 Business-Level Strategy Chapter 8 Acquisition and Restructuring Strategies Chapter 11 Corporate Governance Strategic Intent Strategic Mission Chapter 7 Corporate-Level Strategy Chapter 10 Cooperative Strategy Chapter 12 Strategic Entrepreneurship Strategic Analysis Strategic Thinking Creating Competitive Advantage Monitoring And Creating Entrepreneurial Opportunities The Strategic Management Process Chapter 5 Business-Level Strategy Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 7 Corporate-Level Strategy
    3. 3. Discussion Questions <ul><li>What is the difference between business- and corporate- level strategy? How can corporate level diversification strategies be classified in regard to type and amount of diversification? </li></ul><ul><li>What are the reasons that firms pursue a corporate diversification strategy? </li></ul><ul><li>What are the value enhancing economic rationales for related diversification? </li></ul>Click Here Click Here Click Here Click Here More discussion questions
    4. 4. Discussion Questions (cont.) <ul><li>What are the value enhancing economic rationales for unrelated diversification? </li></ul><ul><li>Why are diversified firms more efficiently managed with a multidivisional structure? What variants of the multidivisional form fit with the specific types of corporate strategy? </li></ul>Click Here Click Here Click Here More discussion questions
    5. 5. Discussion Questions (cont.) <ul><li>What are the external as well as the internal incentives (generally value neutral motives) firms have to diversify? What resources foster increased diversification? </li></ul><ul><li>Are there managerial rationales that serve as motives to increase diversification but which may deflate the value of the firm? </li></ul>Click Here Click Here Click Here More discussion questions
    6. 6. Discussion Questions (cont.) <ul><li>How would you summarize the relationship between diversification strategy and firm performance outcomes? </li></ul>Click Here
    7. 7. Discussion Question 1 <ul><li>What is the difference between business- and corporate- level strategy? How can corporate level diversification strategies be classified in regard to type and amount of diversification? </li></ul>
    8. 8. Levels and Types of Diversification Low Levels of Diversification Single Business > 95% of business from a single business unit Dominant Business Between 70 and 95% of business from a single business unit Business Unit Business Unit
    9. 9. Levels and Types of Diversification Related Constrained <70% of revenues from dominant business; all businesses share product, technological and distribution linkages Moderate to High Levels of Diversification Business Unit Business Unit Business Unit
    10. 10. Levels and Types of Diversification Related Linked (Mixed) < 70% of revenues from dominant business, and only limited links exist Moderate to High Levels of Diversification Business Unit Business Unit Business Unit
    11. 11. Levels and Types of Diversification Click Here Return to Discussion Questions Unrelated < 70% of revenue comes from the dominant business, and there are no common links between businesses Very High Levels of Diversification Business Unit Business Unit Business Unit
    12. 12. Discussion Question 2 <ul><li>What are the reasons that firms pursue a corporate diversification strategy? </li></ul>
    13. 13. Reasons for Diversification Reasons to Enhance Strategic Competitiveness <ul><li>Economies of scope </li></ul><ul><li>Market power </li></ul><ul><li>Financial economics </li></ul>Incentives Resources Managerial Motives
    14. 14. Reasons for Diversification Resources with varying effects on value creation and strategic competitiveness <ul><li>Tangible resources </li></ul><ul><ul><li>financial resources </li></ul></ul><ul><ul><li>physical assets </li></ul></ul><ul><li>Intangible resources </li></ul><ul><ul><li>tacit knowledge </li></ul></ul><ul><ul><li>customer relations </li></ul></ul><ul><ul><li>image and reputation </li></ul></ul>Incentives Resources Managerial Motives
    15. 15. Value-creating Strategies of Diversification: Operational and Corporate Readiness Corporate Readiness: Transferring Skills into Businesses Through Corporate Headquarters Sharing: Operational Relatedness Between Businesses Related Constrained Diversification Vertical Integration (Market Power) Unrelated Diversification (Financial Economies) Both Operational and Corporate Relatedness (Rare Capability and can Create Diseconomies of Scope) Related Linked Diversification (Economies of Scope) Low High Low High
    16. 16. Adding Value by Diversification <ul><li>Diversification most effectively adds value by either of two mechanisms: </li></ul><ul><ul><li>Economies of scope: cost savings attributed to transferring the capabilities and competencies developed in one business to a new business </li></ul></ul><ul><ul><li>Market power: when a firm is able to sell its products above the existing competitive level or reduce the costs of its primary and support activities below the competitive level, or both </li></ul></ul>
    17. 17. Diversification and Multidivisional Structure <ul><li>Three major benefits </li></ul><ul><ul><li>more accurate monitoring of the performance of each business, simplifying problems of control </li></ul></ul><ul><ul><li>facilitate comparisons between divisions, improving resource allocation process </li></ul></ul><ul><ul><li>stimulate managers of poorly performing divisions to look for ways of improving performance </li></ul></ul>
    18. 18. Alternative Diversification Strategies <ul><li>Related Diversification Strategies </li></ul><ul><ul><li>sharing activities </li></ul></ul><ul><ul><li>transferring core competencies </li></ul></ul><ul><li>Unrelated Diversification Strategies </li></ul><ul><ul><li>efficient internal capital market allocation </li></ul></ul><ul><ul><li>restructuring </li></ul></ul>
    19. 19. Alternative Diversification Strategies <ul><li>Related Diversification Strategies </li></ul><ul><ul><li>sharing activities </li></ul></ul>Click Here Return to Discussion Questions
    20. 20. Discussion Question 3 <ul><li>What are the value enhancing economic rationales for related diversification? </li></ul>
    21. 21. Sharing Activities: <ul><li>Sharing activities often lowers costs or raises differentiation </li></ul><ul><li>Sharing activities can lower costs if it: </li></ul><ul><ul><li>achieves economies of scale </li></ul></ul><ul><ul><li>boosts efficiency of utilization </li></ul></ul><ul><ul><li>helps move more rapidly down the Learning Curve </li></ul></ul><ul><li>Sharing activities can enhance potential for or reduce the cost of differentiation </li></ul><ul><li>Must involve activities that are crucial to competitive advantage </li></ul>Key Characteristics
    22. 22. Sharing Activities: <ul><li>Strong sense of corporate identity </li></ul><ul><li>Clear corporate mission that emphasizes the importance of integrating business units </li></ul><ul><li>Incentive system that rewards more than just business unit performance </li></ul>Assumptions
    23. 23. <ul><ul><li>transferring core competencies </li></ul></ul>Alternative Diversification Strategies <ul><li>Related Diversification Strategies </li></ul><ul><ul><li>sharing activities </li></ul></ul>
    24. 24. Transferring Core Competencies: <ul><li>Exploits interrelationships among divisions </li></ul><ul><li>Start with value chain analysis </li></ul><ul><ul><li>identify ability to transfer skills or expertise among similar value chains </li></ul></ul><ul><ul><li>exploit ability to transfer activities </li></ul></ul>Key Characteristics
    25. 25. Transferring Core Competencies: <ul><li>Transferring core competencies leads to competitive advantage only if the similarities among business units meet the following conditions: </li></ul><ul><ul><li>activities involved in the businesses are similar enough that sharing expertise is meaningful </li></ul></ul><ul><ul><li>transfer of skills involves activities which are important to competitive advantage </li></ul></ul><ul><ul><li>the skills transferred represent significant sources of competitive advantage for the receiving unit </li></ul></ul>Click Here Return to Discussion Questions Assumptions
    26. 26. Question 4 <ul><li>What are the value enhancing economic rationales for unrelated diversification? </li></ul>
    27. 27. Alternative Diversification Strategies <ul><li>Unrelated Diversification Strategies </li></ul><ul><ul><li>efficient internal capital market allocation </li></ul></ul><ul><li>Related Diversification Strategies </li></ul><ul><ul><li>sharing activities </li></ul></ul><ul><ul><li>transferring core competencies </li></ul></ul>
    28. 28. Efficient Internal Capital Market Allocation: <ul><li>Firms pursuing this strategy frequently diversify by acquisition: </li></ul><ul><ul><li>acquire sound, attractive companies </li></ul></ul><ul><ul><li>acquired units are autonomous </li></ul></ul><ul><ul><li>acquiring corporation supplies needed capital </li></ul></ul><ul><ul><li>portfolio managers transfer resources from units that generate cash to those with high growth potential and substantial cash needs </li></ul></ul><ul><ul><li>add professional management & control to sub-units </li></ul></ul><ul><ul><li>sub-unit managers compensation based on unit results </li></ul></ul>Key Characteristics
    29. 29. Efficient Internal Capital Market Allocation: <ul><li>Managers have more detailed knowledge of firm relative to outside investors </li></ul><ul><li>Firm need not risk competitive edge by disclosing sensitive competitive information to investors </li></ul><ul><li>Firm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their own </li></ul>Assumptions
    30. 30. Alternative Diversification Strategies <ul><ul><li>restructuring </li></ul></ul><ul><li>Related Diversification Strategies </li></ul><ul><ul><li>sharing activities </li></ul></ul><ul><ul><li>transferring core competencies </li></ul></ul><ul><li>Unrelated Diversification Strategies </li></ul><ul><ul><li>efficient internal capital market allocation </li></ul></ul>
    31. 31. Restructuring: <ul><li>Seek out undeveloped, sick or threatened organizations or industries </li></ul><ul><li>Parent company (acquirer) intervenes and frequently: </li></ul><ul><ul><li>changes sub-unit management team </li></ul></ul><ul><ul><li>shifts strategy </li></ul></ul><ul><ul><li>infuses firm with new technology </li></ul></ul><ul><ul><li>enhances discipline by changing control systems </li></ul></ul><ul><ul><li>divests part of firm </li></ul></ul><ul><ul><li>makes additional acquisitions to achieve critical mass </li></ul></ul>Key Characteristics
    32. 32. Restructuring: <ul><li>Frequently sell unit after making one-time changes since parent no longer adds value to ongoing operations </li></ul>Key Characteristics
    33. 33. Restructuring: <ul><li>Requires keen management insight in selecting firms with depressed values or unforeseen potential </li></ul><ul><li>Must do more than restructure companies </li></ul><ul><li>Need to initiate restructuring of industries to create a more attractive environment </li></ul>Assumptions Click Here Return to Discussion Questions
    34. 34. Question 5 Why are diversified firms more efficiently managed with a multidivisional structure? What variants of the multidivisional form fit with the specific types of corporate strategy?
    35. 35. Strategy and Structure Growth Pattern: Efficient implementation of formulated strategy Efficient implementation of formulated strategy Multidivisional Structure Simple Structure Functional Structure Multidivisional Structure Sales Growth- Coordination and Control Problems Sales Growth- Coordination and Control Problems
    36. 36. Strategy and Structure Growth Pattern: <ul><li>Strategic control </li></ul><ul><ul><li>operating divisions </li></ul></ul><ul><ul><li>each division is separate business or profit center </li></ul></ul><ul><li>Top corporate officer delegates responsibilities to division managers </li></ul><ul><ul><li>for day-to-day operations </li></ul></ul><ul><ul><li>for business-unit strategy </li></ul></ul><ul><li>Appropriate when the firm grows through diversification </li></ul>Multidivisional Structure
    37. 37. Strategy and Structure Growth Pattern: <ul><li>Three major benefits </li></ul><ul><ul><li>corporate officers able to more accurately monitor the performance of each business, which simplifies the problem of control </li></ul></ul><ul><ul><li>facilitates comparisons between divisions, which improves the resource allocation process </li></ul></ul><ul><ul><li>stimulates managers of poorly performing divisions to look for ways of improving performance </li></ul></ul>Multidivisional Structure
    38. 38. Multidivisional Structure <ul><li>Managers try to strike a balance between: </li></ul><ul><ul><li>competing among divisions for scarce capital resources </li></ul></ul><ul><ul><li>creating opportunities for cooperation to develop synergies </li></ul></ul><ul><li>The goal is to maximize overall firm performance </li></ul><ul><li>The decision-making of managers in a multidivisional structure may be: </li></ul><ul><ul><li>centralized or decentralized </li></ul></ul><ul><ul><li>bureaucratic or non-bureaucratic </li></ul></ul>
    39. 39. Multidivisional Structure <ul><li>Balance on these dimensions may change over time </li></ul><ul><li>Structure will evolve over time with: </li></ul><ul><ul><li>changes in strategy </li></ul></ul><ul><ul><li>degree of diversification </li></ul></ul><ul><ul><li>geographic scope </li></ul></ul><ul><ul><li>nature of competition </li></ul></ul>
    40. 40. Three Variations of the Multidivisional Structure Multidivisional Structure (M-form) Strategic Business-Unit (SBU) Form Cooperative Form Competitive Form
    41. 41. Cooperative Form of Multidivisional Structure: Related-Constrained Strategy Headquarters Office Government Affairs Legal Affairs Corporate R&D Lab Strategic Planning Corporate Human Resources Corporate Marketing Corporate Finance Product Division Product Division Product Division Product Division Product Division President
    42. 42. Cooperative Form of Multidivisional Structure: <ul><li>Structural integration devices create tight links among all divisions </li></ul><ul><li>Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions </li></ul><ul><li>R&D is likely to be centralized </li></ul><ul><li>Rewards are subjective and tend to emphasize overall corporate performance, in addition to divisional performance </li></ul><ul><li>Culture emphasizes cooperative sharing </li></ul>Related-Constrained Strategy
    43. 43. SBU Form of Multidivisional Structure: Related-Linked Strategy Headquarters Office President Corporate R&D Lab Strategic Planning Corporate HRM Corporate Marketing Corporate Finance Division Division Division SBU SBU SBU Division Division Division Division Division Division
    44. 44. SBU Form of Multidivisional Structure: <ul><li>Structural integration devices create tight links among all divisions </li></ul><ul><li>Corporate office emphasizes centralized strategic planning, human resources, and marketing to foster cooperation between divisions </li></ul><ul><li>R&D is likely to be centralized </li></ul><ul><li>Rewards are subjective and tend to emphasize overall corporate performance, in addition to divisional performance </li></ul><ul><li>Culture emphasizes cooperative sharing </li></ul>Related-Linked Strategy
    45. 45. Market Power <ul><li>Multipoint competition </li></ul><ul><ul><li>two or more diversified firms simultaneously compete in the same product areas or geographic markets </li></ul></ul><ul><li>Vertical integration </li></ul><ul><ul><li>company produces its own inputs (backward integration) or owns its own source of distribution of outputs </li></ul></ul><ul><ul><li>(forward integration) </li></ul></ul>
    46. 46. Simultaneous Operational Relatedness and Corporate Relatedness <ul><li>Simultaneously managing two sources of knowledge is difficult and such efforts often fail </li></ul><ul><li>Either cooperative or SBU M-form structures would likely be implemented with this dual strategy </li></ul>
    47. 47. Competitive Form of Multidivisional Structure: Unrelated Diversification Strategy Headquarters Office President Legal Affairs Finance Auditing Division Division Division Division Division Division
    48. 48. Competitive Form of Multidivisional Structure: <ul><li>Corporate headquarters has a small staff </li></ul><ul><li>Finance and auditing are the most prominent functions in the headquarters to manage cash flow and ensure the accuracy of performance data coming from divisions </li></ul><ul><li>The legal affairs function becomes important when the firm acquires or divests assets </li></ul><ul><li>Divisions are independent and separate for financial evaluation purposes </li></ul><ul><li>Divisions retain strategic control, but cash is managed by the corporate office </li></ul><ul><li>Divisions compete for corporate resources </li></ul>Unrelated Diversification Strategy
    49. 49. Characteristics of Various Structural Forms Structural Characteristics Cooperative M-Form SBU M-Form Competitive M-Form Degree of Centralization Centralized at Corporate Office Partially Centralized in SBUs Decentralized to Divisions Use of Integrating Mechanisms Extensive Moderate Nonexistent Type of Strategy Related- Constrained Related- Linked Unrelated Diversification
    50. 50. Characteristics of Various Structural Forms Divisional Incentive Compensation Linked to Corporate Performance Linked to Corporate SBU & Division Performance Linked to Divisional Performance Divisional Performance Appraisal Subjective Strategic Criteria Strategic & Financial Criteria Objective Financial Criteria Structural Characteristics Cooperative M-Form SBU M-Form Competitive M-Form Click Here Return to Discussion Questions
    51. 51. Question 6 What are the external as well as the internal incentives (generally value neutral motives) firms have to diversify? What resources foster increased diversification?
    52. 52. Reasons for Diversification Incentives with Neutral Effects on Strategic Competitiveness <ul><li>Anti-trust regulation </li></ul><ul><li>Tax laws </li></ul><ul><li>Low performance </li></ul><ul><li>Uncertain future cash flows </li></ul><ul><li>Firm risk reduction </li></ul>Incentives Resources Managerial Motives
    53. 53. Incentives to Diversify <ul><li>External Incentives: </li></ul><ul><li>Relaxation of anti-trust regulation allows more related acquisitions than in the past </li></ul><ul><li>Before 1986, higher taxes on dividends favored spending retained earnings on acquisitions </li></ul><ul><li>After 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of tax deductible interest payments </li></ul>
    54. 54. Incentives to Diversify <ul><li>Internal Incentives: </li></ul><ul><li>Poor performance may lead some firms to diversify an attempt to achieve better returns </li></ul><ul><li>Firms may diversify to balance uncertain future cash flows </li></ul><ul><li>Firms may diversify into different businesses in order to reduce risk </li></ul>
    55. 55. Resources and Diversification <ul><li>Besides strong incentives, firms are more likely to diversify if they have the resources to do so </li></ul><ul><li>Value creation is determined more by appropriate use of resources than incentives to diversify </li></ul>Click Here Return to Discussion Questions
    56. 56. Question 7 Are there managerial rationales that serve as motives to increase diversification but which may deflate the value of the firm?
    57. 57. Reasons for Diversification Managerial Motives (Value Reduction) <ul><li>Diversifying managerial employment risk </li></ul><ul><li>Increasing managerial compensation </li></ul>Incentives Resources Managerial Motives
    58. 58. Managerial Motives to Diversify <ul><li>Managers have motives to diversify </li></ul><ul><ul><li>diversification increases size; size is associated with executive compensation </li></ul></ul><ul><ul><li>diversification reduces employment risk </li></ul></ul><ul><ul><li>effective governance mechanisms may restrict such motives </li></ul></ul>Click Here Return to Discussion Questions
    59. 59. Question 8 How would you summarize the relationship between diversification strategy and firm performance outcomes?
    60. 60. Relationship Between Diversification and Performance Performance Level of Diversification Dominant Business Unrelated Business Related Constrained
    61. 61. Relationship Between Firm Performance and Diversification Incentives Managerial Motives Resources Diversification Strategy Firm Performance Internal Governance Strategy Implementation Capital Market Intervention and the Market for Managerial Talent

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