Chapter 7
Corporate-Level Strategy
Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland
©2004 by South-Western/Thomson Learning
1
The Strategic Management Process
Strategic
Thinking
Chapter 1
Introduction to
Strategic Management
Chapter 2
Strategic Leadership
Strategic
Analysis
Chapter 3
The External
Environment
Chapter 4
The Internal
Organization
Strategic Intent
Strategic Mission
Chapter 5
Business-Level
Strategy
Chapter 6
Competitive Rivalry and
Competitive Dynamics
Chapter 7
Corporate-Level Strategy
Chapter 8
Acquisition and
Restructuring Strategies
Chapter 9
International Strategy
Chapter 10
Cooperative Strategy
Creating
Competitive
Advantage
Monitoring
And Creating
Entrepreneurial
Opportunities
Chapter 11
Corporate Governance
Chapter 12
Strategic Entrepreneurship
2
Discussion Questions
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Here
1. What is the difference between businessand corporate- level strategy? How can
corporate level diversification strategies
be classified in regard to type and
amount of diversification?
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Here
2. What are the reasons that firms pursue a
corporate diversification strategy?
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Here
3. What are the value enhancing economic
rationales for related diversification?
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Here
More discussion questions
3
Discussion Questions (cont.)
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4. What are the value enhancing
economic rationales for unrelated
diversification?
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Here
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?
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Here
More discussion questions
4
Discussion Questions (cont.)
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Here
6. What are the external as well as the
internal incentives (generally value
neutral motives) firms have to
diversify? What resources foster
increased diversification?
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Here
7. Are there managerial rationales that
serve as motives to increase
diversification but which may deflate
the value of the firm?
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Here
More discussion questions
5
Discussion Questions (cont.)
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Here
8. How would you summarize the
relationship between diversification
strategy and firm performance
outcomes?
6
Discussion Question 1
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?
7
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
8
Levels and Types of Diversification
Moderate to High Levels of Diversification
Related Constrained
<70% of revenues from dominant
business; all businesses share
product, technological and
distribution linkages
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Levels and Types of Diversification
Moderate to High Levels of Diversification
Related Linked (Mixed)
< 70% of revenues from dominant
business, and only limited links
exist
10
Levels and Types of Diversification
Very High Levels of Diversification
Unrelated
< 70% of revenue comes from the
dominant business, and there are
no common links between
businesses
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Return to Discussion Questions
11
Discussion Question 2
What are the reasons that firms pursue
a corporate diversification strategy?
12
Reasons for Diversification
Incentives
Resources
Reasons to Enhance Strategic
Competitiveness
• Economies of scope
• Market power
• Financial economics
Managerial
Motives
13
Reasons for Diversification
Incentives
Resources
Managerial
Motives
Resources with varying
effects on value creation and
strategic competitiveness
• Tangible resources
 financial resources
 physical assets
• Intangible resources
 tacit knowledge
 customer relations
 image and reputation
14
Value-creating Strategies of Diversification:
Sharing: Operational
Relatedness Between Businesses
Operational and Corporate Readiness
Related Constrained
Diversification
High
Vertical Integration
(Market Power)
Low
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
Corporate Readiness: Transferring Skills into15
Businesses Through Corporate Headquarters
Adding Value by Diversification
Diversification most effectively adds value
by either of two mechanisms:
– Economies of scope: cost savings attributed
to transferring the capabilities and competencies
developed in one business to a new business
– 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
16
Diversification and
Multidivisional Structure

Three major benefits
– more accurate monitoring of the
performance of each business,
simplifying problems of control
– facilitate comparisons between
divisions, improving resource allocation
process
– stimulate managers of poorly
performing divisions to look for ways of
improving performance
17
Alternative Diversification
Strategies
Related Diversification Strategies
– sharing activities
– transferring core competencies
Unrelated Diversification Strategies
– efficient internal capital market allocation
– restructuring
18
Alternative Diversification
Strategies
Related Diversification Strategies
– sharing activities
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Return to Discussion Questions
19
Discussion Question 3
What are the value enhancing
economic rationales for related
diversification?
20
Sharing Activities:
Key Characteristics

Sharing activities often lowers costs or
raises differentiation
 Sharing activities can lower costs if it:
– achieves economies of scale
– boosts efficiency of utilization
– helps move more rapidly down the Learning
Curve

Sharing activities can enhance potential
for or reduce the cost of differentiation
 Must involve activities that are crucial to
competitive advantage
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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
22
Alternative Diversification
Strategies
Related Diversification Strategies
– sharing activities
– transferring core competencies
23
Transferring Core Competencies:
Key Characteristics

Exploits interrelationships among
divisions
 Start with value chain analysis
– identify ability to transfer skills or expertise
among similar value chains
– exploit ability to transfer activities
24
Transferring Core Competencies:
Assumptions

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Here
Transferring core competencies leads to
competitive advantage only if the
similarities among business units meet
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
Return to Discussion Questions
25
Question 4
What are the value enhancing
economic rationales for unrelated
diversification?
26
Alternative Diversification
Strategies
Related Diversification Strategies
– sharing activities
– transferring core competencies
Unrelated Diversification Strategies
– efficient internal capital market allocation
27
Efficient Internal Capital Market
Allocation: Key Characteristics

Firms pursuing this strategy frequently
diversify by acquisition:
–
–
–
–
acquire sound, attractive companies
acquired units are autonomous
acquiring corporation supplies needed capital
portfolio managers transfer resources from
units that generate cash to those with high
growth potential and substantial cash needs
– add professional management & control to
sub-units
– sub-unit managers compensation based on
unit results
28
Efficient Internal Capital Market
Allocation: Assumptions

Managers have more detailed knowledge
of firm relative to outside investors
 Firm need not risk competitive edge by
disclosing sensitive competitive
information to investors
 Firm can reduce risk by allocating
resources among diversified businesses,
although shareholders can generally
diversify more economically on their own
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Alternative Diversification
Strategies
Related Diversification Strategies
– sharing activities
– transferring core competencies
Unrelated Diversification Strategies
– efficient internal capital market allocation
– restructuring
30
Restructuring: Key Characteristics

Seek out undeveloped, sick or threatened
organizations or industries
 Parent company (acquirer) intervenes and
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
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Restructuring: Key Characteristics

Frequently sell unit after making one-time
changes since parent no longer adds
value to ongoing operations
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Restructuring: Assumptions

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
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Return to Discussion Questions
33
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?
34
Strategy and Structure Growth
Pattern: Multidivisional Structure
Simple
Structure
Efficient implementation
of formulated strategy
Multidivisional
Structure
Sales GrowthCoordination and
Control Problems
Functional
Structure
Efficient
implementation
of formulated
strategy
Sales GrowthCoordination and
Control Problems
35
Strategy and Structure Growth
Pattern: Multidivisional Structure

Strategic control
– operating divisions
– each division is separate business or profit
center

Top corporate officer delegates
responsibilities to division managers
– for day-to-day operations
– for business-unit strategy

Appropriate when the firm grows through
diversification
36
Strategy and Structure Growth
Pattern: Multidivisional Structure

Three major benefits
– corporate officers able to more accurately
monitor the performance of each business,
which simplifies the problem of control
– facilitates comparisons between divisions,
which improves the resource allocation process
– stimulates managers of poorly performing
divisions to look for ways of improving
performance
37
Multidivisional Structure

Managers try to strike a balance between:
– competing among divisions for scarce capital
resources
– creating opportunities for cooperation to
develop synergies

The goal is to maximize overall firm
performance
 The decision-making of managers in a
multidivisional structure may be:
– centralized or decentralized
– bureaucratic or non-bureaucratic
38
Multidivisional Structure

Balance on these dimensions may change
over time
 Structure will evolve over time with:
–
–
–
–
changes in strategy
degree of diversification
geographic scope
nature of competition
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Three Variations of the
Multidivisional Structure
Multidivisional
Structure
(M-form)
Cooperative
Form
Competitive
Form
Strategic Business-Unit
(SBU) Form
40
Cooperative Form of Multidivisional
Structure: Related-Constrained Strategy
Headquarters Office
President
Government
Affairs
Legal
Affairs
Corporate
R&D Lab
Strategic
Planning
Corporate
Human
Resources
Product
Division
Product
Division
Product
Division
Corporate
Marketing
Corporate
Finance
Product
Division
Product
Division
41
Cooperative Form of Multidivisional
Structure: Related-Constrained Strategy

Structural integration devices create tight links
among all divisions
 Corporate office emphasizes centralized strategic
planning, human resources, and marketing to
foster cooperation between divisions
 R&D is likely to be centralized
 Rewards are subjective and tend to emphasize
overall corporate performance, in addition to
divisional performance
 Culture emphasizes cooperative sharing
42
SBU Form of Multidivisional
Structure: Related-Linked Strategy
Headquarters Office
Corporate
R&D Lab
President
Strategic
Planning
Corporate
HRM
SBU
Division
Corporate
Marketing
Corporate
Finance
SBU
Division
Division
Division
SBU
Division
Division
Division
Division
Division
43
SBU Form of Multidivisional
Structure: Related-Linked Strategy

Structural integration devices create tight links
among all divisions
 Corporate office emphasizes centralized strategic
planning, human resources, and marketing to
foster cooperation between divisions
 R&D is likely to be centralized
 Rewards are subjective and tend to emphasize
overall corporate performance, in addition to
divisional performance
 Culture emphasizes cooperative sharing
44
Market Power

Multipoint competition
– two or more diversified firms
simultaneously compete in the same
product areas or geographic markets

Vertical integration
– company produces its own inputs
(backward integration) or owns its own
source of distribution of outputs
(forward integration)
45
Simultaneous Operational Relatedness
and Corporate Relatedness
Simultaneously managing two
sources of knowledge is difficult and
such efforts often fail
 Either cooperative or SBU M-form
structures would likely be
implemented with this dual strategy

46
Competitive Form of Multidivisional
Structure: Unrelated Diversification Strategy
Headquarters Office
President
Legal
Affairs
Finance
Division
Division
Division
Division
Auditing
Division
Division
47
Competitive Form of Multidivisional
Structure: Unrelated Diversification Strategy






Corporate headquarters has a small staff
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
The legal affairs function becomes important
when the firm acquires or divests assets
Divisions are independent and separate for
financial evaluation purposes
Divisions retain strategic control, but cash is
managed by the corporate office
Divisions compete for corporate resources
48
Characteristics of Various
Structural Forms
Structural
Characteristics
Cooperative
M-Form
SBU
M-Form
Competitive
M-Form
Type of
Strategy
RelatedConstrained
RelatedLinked
Unrelated
Diversification
Degree of
Centralization
Centralized at
Corporate
Office
Partially
Centralized
in SBUs
Decentralized
to Divisions
Extensive
Moderate
Nonexistent
Use of
Integrating
Mechanisms
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Characteristics of Various
Structural Forms
Structural
Characteristics
Cooperative
M-Form
SBU
M-Form
Competitive
M-Form
Divisional
Performance
Appraisal
Subjective
Strategic
Criteria
Strategic &
Financial
Criteria
Objective
Financial
Criteria
Divisional
Incentive
Compensation
Linked to
Corporate
Performance
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Here
Linked to
Linked to
Corporate
Divisional
SBU & Division Performance
Performance
Return to Discussion Questions
50
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?
51
Reasons for Diversification
Incentives
Resources
Managerial
Motives
Incentives with Neutral
Effects on Strategic
Competitiveness
•
•
•
•
•
Anti-trust regulation
Tax laws
Low performance
Uncertain future cash flows
Firm risk reduction
52
Incentives to Diversify
External Incentives:



Relaxation of anti-trust regulation allows more
related acquisitions than in the past
Before 1986, higher taxes on dividends favored
spending retained earnings on acquisitions
After 1986, firms made fewer acquisitions with
retained earnings, shifting to the use of debt to
take advantage of tax deductible interest
payments
53
Incentives to Diversify
Internal Incentives:



Poor performance may lead some firms to
diversify an attempt to achieve better returns
Firms may diversify to balance uncertain future
cash flows
Firms may diversify into different businesses in
order to reduce risk
54
Resources and Diversification

Besides strong incentives, firms are more
likely to diversify if they have the
resources to do so
 Value creation is determined more by
appropriate use of resources than
incentives to diversify
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55
Question 7
Are there managerial rationales
that serve as motives to
increase diversification but
which may deflate the value of
the firm?
56
Reasons for Diversification
Incentives
Managerial Motives (Value
Reduction)
• Diversifying managerial
employment risk
Resources
• Increasing managerial
compensation
Managerial
Motives
57
Managerial Motives to Diversify
Managers have motives to diversify
– diversification increases size; size is
associated with executive compensation
– diversification reduces employment risk
– effective governance mechanisms may restrict
such motives
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Return to Discussion Questions
58
Question 8
How would you summarize the
relationship between diversification
strategy and firm performance
outcomes?
59
Performance
Relationship Between
Diversification and Performance
Dominant
Business
Related
Constrained
Level of Diversification
Unrelated
Business
60
Relationship Between Firm
Performance and Diversification
Incentives
Resources
Managerial
Motives
Capital Market
Intervention and the
Market for
Managerial Talent
Diversification
Strategy
Internal
Governance
Firm
Performance
Strategy
Implementation
61