Should we Diversify? Corporate-Level Strategy. Two Levels of Strategy. Key Questions in Corporate Strategy. Chapter 6

Transcription

1 Chapter 6 Corporate-Level Strategy Should we Diversify? 1 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 2 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 3

2 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 4 Reasons for Diversification Incentives Resources Reasons to Enhance Strategic Competitiveness Economies of scope Market power Financial economics Managerial Motives 5 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 6

3 Reasons for Diversification Incentives Resources Managerial Motives (Value Reduction) Diversifying managerial employment risk Increasing managerial compensation Managerial Motives 7 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 8 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 9

4 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 10 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 11 Alternative Diversification Strategies Related Diversification Strategies sharing activities transferring core competencies Unrelated Diversification Strategies efficient internal capital market allocation restructuring 12

5 Related Diversification Strategies: Sharing activities Sharing activities often lowers costs or raises differentiation Sharing activities can lower costs if it: achieves economies of scale boosts efficiency of utilization Sharing activities can enhance potential for or reduce the cost of differentiation Must involve activities that are crucial to competitive advantage 13 Related Diversification Strategies: Transferring Core Competencies 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 14 Unrelated Diversification Strategies: Efficient internal capital market allocation 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 15

6 Unrelated Diversification Strategies: Restructuring 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 Frequently sell unit after making one-time changes since parent no longer adds value to ongoing operations 16 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 17 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 18