Competing for Advantage - PowerPoint Presentation

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Competing for Advantage

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Chapter 8Corporate-Level Strategy

PART III

CREATING COMPETITIVE ADVANTAGESlide2

The Strategic Management ProcessSlide3
Corporate-Level

StrategyKey TermsCorporate-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 industriesSlide4
Five Elements of StrategySlide5

Product DiversificationPrimary form of corporate-level strategyConcerns scope of industries and markets Defines approach to buying, creating, and selling

businesses Intends to reduce variability in profitability Comes with development and monitoring

costsSlide6
Levels and Types of Diversification Slide7
Low Levels of Diversification

Key TermsSingle business strategy Corporate-level strategy in which the firm generates 95% or more of its sales revenue from its core business areaDominant

business diversification strategy Corporate-level strategy in which the firm generates between 70% and 95% of its total sales revenue

within a single business areaSlide8

Moderate Levels of DiversificationKey TermsRelated 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 strategyRelated diversification strategy characterized by direct links between the firm's

business unitsRelated linked diversification strategy Related diversification strategy characterized by only a few links between the firm’s business unitsSlide9

High Levels of DiversificationKey TermsUnrelated diversification strategy Corporate-level strategy for highly diversified firms in which there are no well-defined relationships between business units Slide10

Relationship between Diversification and Performance Slide11
Reasons for Diversification Slide12

Value-Creating Strategies of Diversification Slide13

Diversification and the Multidivisional StructureKey TermsMultidivisional 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 delegatedSlide14
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. Slide15

Organizational ControlsKey TermsOrganizational 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 unacceptableStrategic 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 standardsSlide16

Variations of the M-formCooperativeStrategic business-unit (SBU)Competitive Slide17

Related DiversificationKey TermsEconomies 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

independentlySlide18

Operational Relatedness: Sharing ActivitiesPositive Outcomes:Increased Value CreationImproved Financial ReturnsReduced Risk

Challenges:Linked OutcomesConflict Between DivisionsCoordination CostsSlide19

The Cooperative Form of the Multidivisional StructureKey TermsCooperative form Organizational structure using horizontal integration to bring about interdivisional cooperationSlide20

Cooperative Form of the Multidivisional Structure Slide21

Integrating Mechanisms of the Cooperative Form of the Multidivisional Structure Centralization StandardizationFormalizationSlide22

Success Factors of the Cooperative Form of the Multidivisional Structure Information processing among divisions Strategic controlsReward systemsManagerial commitment levelsSlide23

Corporate Relatedness: Transferring Core CompetenciesKey TermsCorporate-level core competencies Complex sets of resources and capabilities that link different businesses, primarily through managerial and technological knowledge, experience, and expertiseSlide24

Corporate Relatedness: Transferring Core CompetenciesElimination of duplicate effortsResource intangibilitySlide25

The Strategic Business-Unit Form of the Multidivisional StructureKey TermsStrategic business-unit form Form of multidivisional organization structure with three levels used to support the implementation of a diversification strategySlide26

Three Levels of the SBU FormCorporate headquartersStrategic business unitsDivisions within each SBUSlide27

SBU Form of the Multidivisional StructureSlide28

Market Power through Related DiversificationMultimarket CompetitionVertical IntegrationSlide29

Market Power through Multipoint Competition Key TermsMarket 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 bothMultimarket (or multipoint) competition Exists when two or more diversified firms simultaneously compete in the same product or geographic marketsSlide30

Market Power through Vertical IntegrationKey TermsVertical 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 channelsSlide31

Sources of Market Powerthrough Vertical IntegrationReduced operational costsReduced market costsImproved product qualityProtected technology (from imitation)

Invaluable ties between assetsSlide32

Limitations of Vertical IntegrationOutside 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. Slide33

Simultaneous Operational and Corporate Relatedness“Diseconomies” of Scope or Competitive AdvantageSlide34

Process and Integrating MechanismsFrequent and direct contact between division managersLiaisonsTemporary teams or task forcesFormal integration departmentsSlide35

Simultaneous Operational and Corporate RelatednessKey TermsMatrix organization Organizational structure in which a dual structure combines both functional specialization and business product or project specialization.Slide36
Unrelated Diversification

Key TermsFinancial economiesCost savings realized through improved allocations of financial resources based on investments inside or outside the firmSlide37

Financial Economies that Create ValueEfficient internal capital allocationAsset restructuring of purchased corporations Slide38

Efficient Internal Capital Market AllocationCorporate office distributes capital to business divisionsRequires detailed and accurate informationExternal sources of capital have imperfect information about the organizationMinor corrections to capital allocations are possibleCapital allocations can be based on specific criteriaSlide39

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).Slide40

The Downside ofUnrelated DiversificationAttention and resources are focused on acquisitions rather than innovations.Conglomerates in developed countries have short life cycles.Slide41
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. Slide42

The Competitive Form of the Multidivisional Structure Key TermsCompetitive form Organizational structure in which the firm's divisions are completely independentSlide43

Competitive Form of the Multidivisional Structure Slide44

Benefits of Internal CompetitionCreates flexibilityChallenges inertia Motivates employeesSlide45

HQ Role in the Competitive Form of the Multidivisional Structure Maintains a distant relationship from divisionsPrimarily uses financial controls to monitor performance Focuses on cash flow, resource allocation

, performance appraisal, and the legal aspects of acquisitionsSlide46

Characteristics of Various Structural Forms

Structural Characteristics

Cooperative M-Form

SBU

M-Form

Competitive M-Form

Degree of

Centralization

Centralized at

Corporate Office

Partially Centralized

in SBUs

Decentralized

to Divisions

Use of

Integrating

Mechanisms

Extensive

Moderate

Nonexistent

Type of

Strategy

Related-

Constrained

Related-

Linked

Unrelated

DiversificationSlide47

Characteristics of Various Structural Forms

Divisional

Incentive

Compensation

Linked to

Corporate

Performance

Linked to

Corporate

SBU & Division Performance

Linked to

Division

Performance

Divisional

Performance

Appraisal

Subjective

Strategic

Criteria

Strategic &

Financial

Criteria

Objective Financial

Criteria

Structural Characteristics

Cooperative M-Form

SBU

M-Form

Competitive M-FormSlide48

Value-Neutral Incentives to DiversifyExternalAntitrust regulationTax laws Internal Low performance

Cash flow uncertaintySynergyRisk managementSlide49

Resources and DiversificationFinancial ResourcesTangible ResourcesIntangible ResourcesSlide50

Managerial Motives to Diversify Increased compensationReduced employment riskEmpire buildingSlide51

Governance MechanismsInternal corporate governanceExternal market for corporate controlExternal market for managerial talentManager reputationSlide52

Summary Model - Relationship between Diversification and Performance Slide53

Ethical Question Assume that you overheard the following statement: “Those managing an unrelated diversified firm face far more difficult ethical challenges than do those managing a dominant business firm.” Based on your reading of this chapter, do you believe this statement true or false? Why?Slide54

Ethical Question Is it ethical for managers to diversify a firm rather than return excess earnings to shareholders? Provide reasoning to support your answer.Slide55

Ethical Question Are ethical issues associated with the use of strategic controls? With the use of financial controls? If so, what are they?Slide56

Ethical Question Are ethical issues involved in implementing the cooperative and competitive M-forms? If so, what are they? As a top-level manager, how would you deal with them?Slide57

Ethical Question What unethical practices might occur when a firm restructures the assets it has acquired through its diversification efforts? Explain. Slide58

Ethical Question Do you believe that ethical managers are unaffected by the managerial motives to diversify discussed in this chapter? If so, why? In addition, do you believe that ethical managers should help their peers learn how to avoid making diversification decisions on the basis of the managerial motives to diversify (e.g., increased compensation)? Why or why not?