Competing For Advantage

1. Competing For Advantage Part III – Creating Competitive Advantage Chapter 8 – Corporate-Level Strategy

2. The Strategic Management Process

3. Corporate-Level Strategies • 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

4. Product Diversification • Is the primary form of corporate-level strategy • Is concerned with the scope of the industries and markets in which the firm competes • Defines how managers buy, create, and sell different businesses to match skills and strengths with opportunities • Is expected to reduce variability in the firm's profitability, generating earnings from several different business units • Its development and monitoring carry a cost which must be balanced with benefits to establish an ideal portfolio of businesses

5. Levels and Types of Diversification

6. 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 70% to 95% of its total sales revenue within a single business area

7. Moderate and High 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 businesses

8. Moderate and High Levels of Diversification • Key Terms • Related Linked Diversification Strategy– related diversification strategy characterized by linked firms that share fewer resources and assets among their businesses, concentrating on the transfer of knowledge and competencies among the businesses • Unrelated Diversification Strategy– corporate-level strategy for highly diversified firms in which there are no well-defined relationships between its businesses

9. Curvilinear Relationship between Diversification and Performance

10. Reasons for Diversification

11. Creating Value with Diversification Strategies • Operational relatedness - sharing activities • Corporate relatedness - transferring knowledge

12. Value-Creating Strategies of Diversification

13. 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

14. Diversification and the Multidivisional Structure • Key Terms • Organizational Controls – guide the use of strategy, indicate how to compare actual results with expected results, and suggest 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 the company's competitive advantages (used for "sharing" strategies) • Finance Controls – objective criteria used to measure firm performance against previously established quantitative standards (used for unrelated diversification)

15. 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

16. Variations of the M-form • Cooperative • Strategic business-unit (SBU) • Competitive

17. 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

18. 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 Divisional Performance

19. 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 when working independently

20. Operational Relatedness – Sharing Activities • Activity sharing requires sharing strategic control over business units • Pursuing appropriate coordination mechanisms can lead to successful creation of economies of scope • Activity sharing can be risky because business-unit ties create links between outcomes and can cause organizational difficulties that interfere with success • More attractive results are obtained through activity sharing when facilitated by a strong corporate office

21. Cooperative Form of the Multidivisional Structure • Key Terms • Cooperative Form – organizational structure using horizontal integration to bring about interdivisional cooperation

22. Cooperative Form of the Multidivisional Structure

23. Cooperative Form of the Multidivisional Structure • All of the divisions share one or more corporate strengths • Interdivisional sharing depends on cooperation • Links resulting from effective integration mechanisms support sharing of both tangible and intangible resources • Centralization is one integrating mechanism that can be used to link activities among divisions, allowing firms to exploit common strengths and share competencies • Success is influenced by how well information is processed among divisions • Success can be influenced by managerial commitment levels and the response to some lost managerial autonomy

24. 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

25. Corporate Relatedness – Transferring Core Competencies • The expense of developing a competence is incurred in one unit, eliminating the need for the second unit to allocate resources to develop the competence • Intangible resources are difficult for competitors to understand and imitate, so the unit receiving a transferred competence often gains an immediate competitive advantage over its rivals

26. The Strategic Business-Unit Form of the Multidivisional Structure • Key Terms • Strategic Business-Unit (SBU) Form– multidivisional organization structure with three levels used to support the implementation of a diversification strategy

27. SBU Form of the Multidivisional Structure

28. SBU Form of the Multidivisional Structure • Divisions within each SBU are related in terms of shared products and/or markets • Divisions of one SBU have little in common with division of other SBUs • Divisions within each SBU share product or market competencies to develop economies of scope • Integrations used in cooperative form are equally effective for the SBU form • Each SBU is a profit center • Financial controls are more vital for evaluating performance

29. Market Power Through Related Diversification • Key Terms • Market Power – exists when 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. • Multimarket (or Multipoint) Competition– exists when two or more diversified firms simultaneously compete in the same product or geographic markets.

30. Market Power Through Related Diversification • Key Terms • Vertical Integration– exists when a company produces its own inputs or owns its source of distribution of outputs • 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

31. Market Power Through Related Diversification • Multimarket Competition • Vertical Integration

32. Market Power Through Vertical Integration • Reduced operational costs • Reduced market costs • Improved product quality • Protected technology (from imitation)

33. Limitations of Vertical Integration • Outside supplier may produce inputs at a lower cost • Bureaucratic costs may occur • Substantial investments may be required • Changes in demand can create capacity imbalances and coordination problems

34. Simultaneous Operational Relatedness and Corporate Relatedness • Key Terms • Matrix Organization – organizational structure in which a dual structure combines both functional specialization and business product or project specialization

35. Simultaneous Operational Relatedness and Corporate Relatedness • Managing two sources of information is very difficult • More process mechanisms to facilitate integration and coordination may be required • Success is likely to produce a sustainable competitive advantage as imitation becomes difficult

36. Unrelated Diversification • Key Terms • Financial Economies– cost savings realized through improved allocations of financial resources based on investments inside or outside the firm

37. Financial Economies that Create Value • Efficient internal capital allocation • Asset restructuring of purchased corporations

38. Efficient Internal Capital Market Allocation • Information provided to capital markets through sources such as annual reports may not include negative information, but only positive prospects and outcomes • External sources of capital have limited ability to understand the dynamics inside large organizations • Even external shareholders who have access to information have no guarantee of full and complete disclosure

39. Efficient Internal Capital Market Allocation • Although a firm must disseminate information, that information also becomes simultaneously available to current and potential competitors • By studying such information, competitors may more easily attempt to duplicate a firm’s competitive advantage • Thus, an ability to efficiently allocate capital through an internal market may help the firm protect its competitive advantages

40. Efficient Internal Capital Market Allocation • Capital can be allocated according to more specific criteria than is possible through external market allocations • External market may fail to allocate resources adequately to high-potential investments

41. Internal Capital Markets – Downside • Firms sometimes substitute acquisitions for innovations, allocating more to analyze and complete acquisitions than to nurture internal innovation • Conglomerates in developed economies have a fairly short life cycle, as financial economies are more easily duplicated than the gains from operational and corporate relatedness

42. 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

43. The Competitive Form of the Multidivisional Structure • Key Terms • Competitive Form – organizational structure in which the firm's divisions are completely independent

44. Competitive Form of the Multidivisional Structure

45. Competitive Form of the Multidivisional Structure • Divisions do not share common corporate strengths • Integration devices are not developed to coordinate activities across divisions • Efficient capital markets in unrelated strategies require organizational arrangements that emphasize divisional competition rather than cooperation • Specific performance expectations and accountability for independent divisions stimulate internal competition for future resources

46. Competitive Form of the Multidivisional Structure • Headquarters maintains a distant relationship to avoid intervention in divisional affairs • Strategic controls are used to monitor performance relative to targeted returns • Headquarters remains responsible for cash flow allocation, performance appraisal, resource allocation, and the legal aspects related to acquisitions

47. Benefits of Internal Competition • Internal competition creates flexibility • Internal competition challenges the status quo and inertia • Internal competition motivates effort

48. Incentives to Diversify • Antitrust regulations • Tax laws • Low performance • Uncertain future cash flows • Synergy

49. Non-Value-Adding Reasons for Diversification • Desire for increased compensation to handle the complexities and difficulties of managing larger firms • Desire for reduced managerial and employment risks

50. Mechanisms to Protect Shareholder Interests • Corporate governance • External market for corporate control • External market for managerial talent