Chapter 6
Corporate-Level Strategy
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
©2003 Southwestern Publishing Company
1
Strategic Inputs
The Strategic
Management
Process
Chapter 2
The External
Environment
Strategic Intent
Strategic Mission
Chapter 3
The Internal
Environment
Strategy Implementation
Strategic Outcomes
Strategic Actions
Strategy Formulation
Chapter 5
Chapter 4
Competitive Rivalry
Business-Level
and Competitive
Strategy
Dynamics
Chapter 6
CorporateLevel Strategy
Chapter 10
Corporate
Governance
Chapter 11
Organizational
Structure and
Controls
Chapter 12
Strategic
Leadership
Chapter 13
Strategic
Entrepreneurship
Strategic
Competitiveness
Above-Average
Returns
Feedback
2
Two Levels of Strategy
A diversified company has two levels of strategy
1. Business-Level Strategy (Competitive Strategy)
How to create competitive advantage in each
business in which the company competes
- low cost
- differentiation
- focused low cost - focused differentiation
- integrated low cost/
differentiation
2. Corporate-Level Strategy (Company-wide Strategy)
How to create value for the corporation as a whole
3
Key Questions in
Corporate Strategy
1. What businesses should the corporation
be in?
2. How should the corporate office manage
the array of business units?
Corporate Strategy is
what makes the
corporate whole add up
to more than the sum of
its business unit parts
4
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
5
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
6
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
7
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
8
Reasons for Diversification
Incentives
Resources
Reasons to Enhance Strategic
Competitiveness
• Economies of scope
• Market power
• Financial economics
Managerial
Motives
9
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
10
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
11
Reasons for Diversification
Incentives
Managerial Motives (Value
Reduction)
• Diversifying managerial
employment risk
Resources
• Increasing managerial
compensation
Managerial
Motives
12
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 into13
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
14
Alternative Diversification
Strategies
Related Diversification Strategies
– sharing activities
– transferring core competencies
Unrelated Diversification Strategies
– efficient internal capital market allocation
– restructuring
15
Alternative Diversification
Strategies
Related Diversification Strategies
– sharing activities
16
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
17
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
18
Alternative Diversification
Strategies
Related Diversification Strategies
– sharing activities
– transferring core competencies
19
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
20
Transferring Core Competencies:
Assumptions

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
21
Alternative Diversification
Strategies
Related Diversification Strategies
– sharing activities
– transferring core competencies
Unrelated Diversification Strategies
– efficient internal capital market allocation
22
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
23
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
24
Alternative Diversification
Strategies
Related Diversification Strategies
– sharing activities
– transferring core competencies
Unrelated Diversification Strategies
– efficient internal capital market allocation
– restructuring
25
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
26
Restructuring: Key Characteristics

Frequently sell unit after making one-time
changes since parent no longer adds
value to ongoing operations
27
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
28
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
29
Incentives to Diversify
Internal Incentives:



Poor performance may lead some firms to
diversify to 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
30
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
31
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
32
Performance
Relationship Between
Diversification and Performance
Dominant
Business
Related
Constrained
Level of Diversification
Unrelated
Business
33
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
34