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Chapter 6 – Corporate-Level Strategy

Chapter 6 – Corporate-Level Strategy. Two Strategy Levels. Business-level strategy (competitive) Each business unit in a diversified firm chooses a business-level strategy as its means of competing in individual product markets Corporate-level strategy (company-wide)

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Chapter 6 – Corporate-Level Strategy

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  1. Chapter 6 –Corporate-Level Strategy

  2. Two Strategy Levels • Business-level strategy (competitive) • Each business unit in a diversified firm chooses a business-level strategy as its means of competing in individual product markets • Corporate-level strategy (company-wide) • Specifies actions taken by the firm to gain a competitive advantage by selecting and managing a group of different businesses competing in several industries and product markets

  3. Corporate-Level Strategy: Key Questions • Corporate-level strategy’s value • The degree to which the businesses in the portfolio are worth more under the management of the company than they would be under other ownership • What businesses should the firm be in? • How should the corporate office manage the group of businesses? Business Units

  4. Example – Conglomerate Discount GE overall: 70% increase in profits since 2001, but $20bn decrease in market value • General Electric’s planned sale of its plastics business to Saudi Basic Industries is double-edged sword: • Unit sold at $11.6bn, in contrast to investors’ valuation of $8bn • Sale unlocked 45% more value for shareholders Many of GE’s assets may have more value than GE’s share price suggests Source: Cox, R. & Cass, D. (2007). “Placing value on GE’s parts”, The Wall Street Journal, Tuesday, May 22: C14.

  5. Portfolio Matrix Market Share High Low High Market Growth Low

  6. Levels and Types of Diversification

  7. Motives for Diversification • To Enhance Strategic Competitiveness: • 1. Economies of scope (related diversification) • Sharing activities • Transferring core competencies • 2. Market power (related diversification) • Blocking competitors by multipoint competition • Vertical integration • 3. Financial economies (unrelated diversification) • Efficient internal capital allocation • Business restructuring Related Unrelated

  8. Economies of Scope (EoS) • Firm creates value by building upon or extending its: • Resources • Capabilities • Core competencies • Definition: • Cost savings that occur when a firm makes use of capabilities and competencies developed in one of its businesses in another of its businesses • Value is created from economies of scope through: • Operational relatedness in sharing activities • Corporate relatedness in transferring skills or corporate core competencies among units Related

  9. Market Power • Market power exists when a firm can: • Sell its products above the existing competitive level and/or • Reduce the costs below the competitive level • Multipoint Competition • Two or more diversified firms simultaneously compete in the same product or geographic markets • Vertical Integration • Backward integration – firm produces its own inputs • Forward integration – firm operates its own distribution system for delivering its outputs Related

  10. Financial Economies • Cost savings realized through improved allocations of financial resources • Based on investments inside or outside the firm • Create value through two types of financial economies: • Efficient internal capital allocation • Purchasing other corporations and restructuring their assets Unrelated

  11. Examples • Intuitively, which of the following strategies make sense? Why (please explain)? • Apple introduces an I-Pod player with a larger memory. • PepsiCo distributes Lay’s Potato Chips to the same stores where it sells Pepsi Cola. • General Electric borrows money from Bank of America at 3 percent interest rate and then makes capital available to its jet engine subsidiary at 8 percent interest.

  12. Motives for Diversification • Incentives and Resources with NeutralEffects: • Antitrust regulation / Tax Law • Antitrust laws in 1960s and 1970s discouraged mergers that created increased market power • Tax rate on dividend vs. capital gain • Low performance • Firms plagued by poor performance often take higher risks (diversification is risky) • Uncertain future cash flows • Diversification may be defensive strategy if, Product line matures or is threatened

  13. Motives for Diversification • Managerial Motives (Value Reduction) • Diversifying managerial employment risk • Increasing managerial compensation

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