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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

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
  • Corporate headquarters
  • Strategic business units
  • Divisions within each SBU
market power t hrough related diversification
Market Power through Related Diversification
  • Multimarket Competition
  • Vertical Integration
market power through multipoint competition
Market Power through 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 through 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 of 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
  • 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

“Diseconomies” of Scope

or

Competitive Advantage

process and integrating mechanisms
Process and Integrating Mechanisms
  • Frequent and direct contact between division managers
  • Liaisons
  • Temporary teams or task forces
  • Formal integration departments
simultaneous operational and corporate relatedness1
Simultaneous Operational and 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
  • 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 that Create Value
  • Efficient internal capital allocation
  • Asset restructuring of purchased corporations
efficient internal capital market allocation
Efficient Internal Capital 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”
  • 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 ofUnrelated Diversification
  • Attention and resources are focused on acquisitions rather than innovations.
  • Conglomerates in developed countries have short life cycles.
restructuring strategy
Restructuring Strategy
  • 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
  • Key Terms
    • Competitive form

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

benefits of internal competition
Benefits of Internal Competition
  • Creates flexibility
  • Challenges inertia
  • Motivates employees
hq role in the competitive form of the multidivisional structure
HQ Role in the Competitive 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

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

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 Incentives to Diversify
  • External
    • Antitrust regulation
    • Tax laws
  • Internal
    • Low performance
    • Cash flow uncertainty
    • Synergy
    • Risk management
resources and diversification
Resources and Diversification
  • Financial Resources
  • Tangible Resources
  • Intangible Resources
managerial motives to diversify
Managerial Motives to Diversify
  • Increased compensation
  • Reduced employment risk
  • Empire building
governance mechanisms
Governance Mechanisms
  • Internal corporate governance
  • External market for corporate control
  • External market for managerial talent
  • Manager reputation
ethical question

Ethical Question

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 Question

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 Question

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

ethical question3

Ethical Question

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 Question

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

ethical question5

Ethical Question

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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