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Competing for Advantage. Chapter 8 Corporate-Level Strategy. PART III CREATING COMPETITIVE ADVANTAGE. The Strategic Management Process. Corporate-Level Strategy. Key Terms Corporate-level strategy

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Competing for advantage

Competing for Advantage

Chapter 8

Corporate-Level Strategy

PART III

CREATING COMPETITIVE ADVANTAGE



Corporate level strategy
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



Product diversification
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



Low levels 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
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 strategy

      Related 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
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
Relationship between Diversification and Performance




Diversification and the multidivisional structure
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
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
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
Variations of the M-form

  • Cooperative

  • Strategic business-unit (SBU)

  • Competitive


Related diversification
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
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
The Cooperative Form of the Multidivisional Structure

  • Key Terms

    • Cooperative form

      Organizational structure using horizontal integration to bring about interdivisional cooperation



Integrating mechanisms of the 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
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
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 competencies1
Corporate Relatedness: Transferring Core Competencies

  • Elimination of duplicate efforts

  • Resource intangibility


The strategic business unit form of the multidivisional structure
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
Three Levels of the SBU Form Structure

  • Corporate headquarters

  • Strategic business units

  • Divisions within each SBU



Market power t hrough related diversification
Market Power t Structurehrough Related Diversification

  • Multimarket Competition

  • Vertical Integration


Market power through multipoint competition
Market Power Structurethrough 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
Market Power Structurethrough 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 power t hrough vertical integration
Sources Structureof 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
Limitations of Vertical Integration Structure

  • 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
Simultaneous Operational and Corporate Relatedness Structure

“Diseconomies” of Scope

or

Competitive Advantage


Process and integrating mechanisms
Process and StructureIntegrating Mechanisms

  • Frequent and direct contact between division managers

  • Liaisons

  • Temporary teams or task forces

  • Formal integration departments


Simultaneous operational and corporate relatedness1
Simultaneous Operational Structureand 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
Unrelated Diversification Structure

  • 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
Financial Economies Structurethat Create Value

  • Efficient internal capital allocation

  • Asset restructuring of purchased corporations


Efficient internal capital market allocation
Efficient Internal StructureCapital 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
The “Conglomerate Discount” Structure

  • 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 of unrelated diversification
The Downside of StructureUnrelated Diversification

  • Attention and resources are focused on acquisitions rather than innovations.

  • Conglomerates in developed countries have short life cycles.


Restructuring strategy
Restructuring Strategy Structure

  • 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
The Competitive Form of the Multidivisional Structure Structure

  • Key Terms

    • Competitive form

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



Benefits of internal competition
Benefits of Internal Competition Structure

  • Creates flexibility

  • Challenges inertia

  • Motivates employees


Hq role in the competitive form of the multidivisional structure
HQ Role in the StructureCompetitive 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
Characteristics of Various Structural Forms Structure

Structural Characteristics

Cooperative M-Form

Competitive M-Form

SBU

M-Form

Type of

Strategy

Related-

Constrained

Related-

Linked

Unrelated

Diversification

Degree of

Centralization

Centralized at

Corporate Office

Partially Centralized

in SBUs

Decentralized

to Divisions

Use of

Integrating

Mechanisms

Extensive

Moderate

Nonexistent


Characteristics of various structural forms1
Characteristics of Various Structural Forms Structure

Structural Characteristics

Cooperative M-Form

Competitive M-Form

SBU

M-Form

Divisional

Performance

Appraisal

Subjective

Strategic

Criteria

Strategic &

Financial

Criteria

Objective Financial

Criteria

Divisional

Incentive

Compensation

Linked to

Corporate

Performance

Linked to

Corporate

SBU & Division Performance

Linked to

Division

Performance


Value neutral incentives to diversify
Value-Neutral StructureIncentives to Diversify

  • External

    • Antitrust regulation

    • Tax laws

  • Internal

    • Low performance

    • Cash flow uncertainty

    • Synergy

    • Risk management


Resources and diversification
Resources and Diversification Structure

  • Financial Resources

  • Tangible Resources

  • Intangible Resources


Managerial motives to diversify
Managerial Motives to Diversify Structure

  • Increased compensation

  • Reduced employment risk

  • Empire building


Governance mechanisms
Governance Mechanisms Structure

  • Internal corporate governance

  • External market for corporate control

  • External market for managerial talent

  • Manager reputation


Summary model relationship between diversification and performance
Summary Model Structure- Relationship between Diversification and Performance


Ethical question

Ethical StructureQuestion

Assume 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 question1

Ethical StructureQuestion

Is it ethical for managers to diversify a firm rather than return excess earnings to shareholders? Provide reasoning to support your answer.


Ethical question2

Ethical StructureQuestion

Are ethical issues associated with the use of strategic controls? With the use of financial controls? If so, what are they?


Ethical question3

Ethical StructureQuestion

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 question4

Ethical StructureQuestion

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


Ethical question5

Ethical StructureQuestion

Do 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?


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