Competing for Advantage

1. Competing for Advantage Chapter 8 Corporate-Level Strategy PART III CREATING COMPETITIVE ADVANTAGE

2. The Strategic Management Process

3. 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

4. Five Elements of Strategy

5. 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

6. Levels and Types of Diversification

7. 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

8. 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

9. 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

10. Relationship between Diversification and Performance

11. Reasons for Diversification

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. 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.

15. 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

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

17. 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

18. Operational Relatedness: Sharing Activities • Positive Outcomes: • Increased Value Creation • Improved Financial Returns • Reduced Risk • Challenges: • Linked Outcomes • Conflict Between Divisions • Coordination Costs

19. The Cooperative Form of the Multidivisional Structure • Key Terms • Cooperative form Organizational structure using horizontal integration to bring about interdivisional cooperation

20. Cooperative Form of the Multidivisional Structure

21. Integrating Mechanisms of the Cooperative Form of the Multidivisional Structure • Centralization • Standardization • Formalization

22. Success Factors of the Cooperative Form of the Multidivisional Structure • Information processing among divisions • Strategic controls • Reward systems • Managerial commitment levels

23. 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

24. Corporate Relatedness: Transferring Core Competencies • Elimination of duplicate efforts • Resource intangibility

25. 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

26. Three Levels of the SBU Form • Corporate headquarters • Strategic business units • Divisions within each SBU

27. SBU Form of the Multidivisional Structure

28. Market Power through Related Diversification • Multimarket Competition • Vertical Integration

29. 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

30. 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

31. Sources of Market Powerthrough Vertical Integration • Reduced operational costs • Reduced market costs • Improved product quality • Protected technology (from imitation) • Invaluable ties between assets

32. 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.

33. Simultaneous Operational and Corporate Relatedness “Diseconomies” of Scope or Competitive Advantage

34. Process and Integrating Mechanisms • Frequent and direct contact between division managers • Liaisons • Temporary teams or task forces • Formal integration departments

35. 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.

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 • 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

39. 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).

40. The Downside ofUnrelated Diversification • Attention and resources are focused on acquisitions rather than innovations. • Conglomerates in developed countries have short life cycles.

41. 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.

42. The Competitive Form of the Multidivisional Structure • Key Terms • Competitive form Organizational structure in which the firm's divisions are completely independent

43. Competitive Form of the Multidivisional Structure

44. Benefits of Internal Competition • Creates flexibility • Challenges inertia • Motivates employees

45. 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

46. 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

47. 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

48. Value-Neutral Incentives to Diversify • External • Antitrust regulation • Tax laws • Internal • Low performance • Cash flow uncertainty • Synergy • Risk management

49. Resources and Diversification • Financial Resources • Tangible Resources • Intangible Resources

50. Managerial Motives to Diversify • Increased compensation • Reduced employment risk • Empire building