4. Corporate Strategy concerns 2 key questions: Corporate-level strategy specifies actions to be taken by the firm to gain a competitive advantage by selecting & managing a group of different businesses competing in several industries & product markets 1. What businesses should the firm in? 2. How should the corporate office manage the array of business units?
5. Firms Vary by Degree of Diversification A Single-business > 95% of revenues from a single business unit Low Levels of Diversification Dominant-business Between 70% & 95% of revenues from a single business unit B A Unrelated-Diversified Business units not closely related High Levels of Diversification A B C Moderate to High Levels of Diversification < 70% of revenues from dominant business; bus.s share product, technological & distribution links Related constrained Related linked (mixed) < 70% of revenues from dominant business, only limited links exist A B C B A C
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9. Summary Model of the Relationship between Firm Performance & Diversification Resources Incentives Managerial Motives Diversification Strategy
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11. Alternative Diversification Strategies Transferring Core Competencies 2 Efficient Internal Capital Market Allocation Unrelated Diversification Strategies 3 Restructuring 4 Sharing Activities 1 Related Diversification Strategies
12. Sharing Activities Sharing Activities can lower costs if it: Example : Laboratory costs forcing drug companies to merge in order to continue R&D efforts Sharing Activities can enhance differentiation if it: Example : Shared order processing may allow discovery of new features customers value from a group of products 1 Key Characteristics * Achieves economies of scale * Boosts efficiency of utilization * Helps move more rapidly down Learning Curve Involves activities crucial to competitive advantage *
13. Sharing Activities Assumptions 1 * * Incentive system that rewards more than just business unit performance Strong sense of corporate identity * Clear corporate mission that emphasizes the importance of integrating business units *
14. Alternative Diversification Strategies Sharing Activities 1 Related Diversification Strategies Efficient Internal Capital Market Allocation Unrelated Diversification Strategies 3 Restructuring 4 Transferring Core Competencies 2
15. Transferring Core Competencies Key Characteristics 2 * Exploits Interrelationships among divisions * Start with Value Chain analysis Identify ability to transfer skills or expertise among similar value chains Exploit ability to share activities Two firms can share the same sales force, logistics network or distribution channels.
16. Transferring Core Competencies Assumptions Transferring Core Competencies leads to competitive advantage only if the similarities among business units meet the following conditions: 2 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. *
17. Alternative Diversification Strategies Transferring Core Competencies 2 Restructuring 4 Sharing Activities 1 Related Diversification Strategies Efficient Internal Capital Market Allocation Unrelated Diversification Strategies 3
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19. Efficient Internal Capital Market Allocation Assumptions Managers have more detailed knowledge of firm relative to outside investors. Firm can reduce risk by allocating resources among diversified businesses, although shareholders can generally diversify more economically on their own. Firm need not risk competitive edge by disclosing sensitive competitive information to investors. 3 Efficient Internal Capital Market Allocation
20. Alternative Diversification Strategies Efficient Internal Capital Market Allocation Unrelated Diversification Strategies 3 Transferring Core Competencies 2 Sharing Activities 1 Related Diversification Strategies Restructuring 4
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22. 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. 4 *
23. Diversification & Firm Performance Performance Level of Diversification Dominant Business Unrelated Business Related Constrained
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25. Summary Model of the Relationship between Firm Performance & Diversification Resources Incentives Managerial Motives Diversification Strategy Firm Performance Capital Market Intervention and Market for Managerial Talent Internal Governance Strategy Implementation
