1Corporate-LevelStrategyChapter62StrategyImplementationChapter11OrganizationalStructureandControlsChapter10CorporateGovernanceChapter12StrategicLeadershipStrategyFormulationStrategicCompetitivenessAbove-AverageReturnsStrategicIntentStrategicMissionChapter2TheExternalEnvironmentChapter3TheInternalEnvironmentTheStrategicManagementProcessChapter6Corporate-LevelStrategyFeedbackStrategicInputsStrategicActionsStrategicOutcomesChapter13StrategicEntrepreneurshipChapter5CompetitiveRivalryandCompetitiveDynamicsChapter4Business-LevelStrategy3Whatproductdoyouthinkof?4Tyson’sgrowthoptionsExpandcorebusinessVerticalintegrationHorizontalintegrationUnrelateddiversification5Tysonin20046TysonandIBPIn2001TysonacquiresIBPfor$4.6BCompanywith25%ofchickenmarketadds28%ofbeefmarketand20%ofporkmarket.WhywouldTysonwanttodothis?WhywouldTysonthinkthatthisactionwillbesuccessful?7MotivationtoacquireIBP8Tysonin2004Processes-43millionchickenaweek-200,000cattleaweek-365,000pigsaweekTysonhas52chickenprocessingplants,12beefplantsand8pork.9ThisiswhatPepsiusedtolooklike10Pepsi’sexperimentwithfastfoodPepsiacquiresPizzaHutin1977,TacoBellin1978andKFCin1986.In1997,PepsispinsoffallthreeasTricon($11Bwith29,000restaurants).TheyarenowpartofYum!Brands.WhatwasPepsi’smotivationinfirstplace?Whydidthisstrategyfail?11Twocases-TysonandPepsicoDistinctionbetweenbusiness-levelandcorporate-levelstrategy.Whydofirmsdiversify?Typesofdiversification.Risksofdiversification.12TwoLevelsofStrategyAdiversifiedcompanyhastwolevelsofstrategy1.Business-LevelStrategy

(CompetitiveStrategy)Howtocreatecompetitiveadvantageineachbusinessinwhichthecompanycompetes

2.Corporate-LevelStrategy

(Company-wideStrategy)Howtocreatevalueforthecorporationasawhole13KeyQuestionsinCorporateStrategyBusinessUnitBusinessUnitBusinessUnitBusinessUnit1.Whatbusinessesshouldthecorporationbein?2.Howshouldthecorporateofficemanagethearrayofbusinessunits?CorporateStrategyiswhatmakesthecorporatewholeadduptomorethanthesumofitsbusinessunitparts14ReasonsforDiversificationReasonstoEnhanceStrategicCompetitivenessEconomiesofscopeMarketpowerFinancialeconomicsIncentivesResourcesManagerialMotives15RelatedDiversificationStrategiessharingactivitiestransferringcorecompetenciesAlternativeDiversificationStrategiesUnrelatedDiversificationStrategiesefficientinternalcapitalmarketallocation16WhydidP&GacquireGillette?17AddingValuebyDiversificationDiversificationmosteffectivelyaddsvaluebyeitheroftwomechanisms:EconomiesofscopeMarketpower18Economyofscope(P&G)19AlternativeDiversificationStrategiesRelatedDiversificationStrategiessharingactivitiestransferringcorecompetenciesUnrelatedDiversificationStrategiesefficientinternalcapitalmarketallocationrestructuring20TransferringCoreCompetencies:

ExploitsinterrelationshipsamongdivisionsStartwithvaluechainanalysisidentifyabilitytotransferskillsorexpertiseamongsimilarvaluechainsexploitabilitytotransferactivitiesWhatisTyson’scorecompetency?WhatisP&G’scorecompetency?KeyCharacteristics21IncentivestoDiversifyExternalIncentives:Relaxationofanti-trustregulationallowsmorerelatedacquisitionsthaninthepast.Before1986,highertaxesondividendsfavoredspendingretainedearningsonacquisitions.After1986,firmsmadefeweracquisitionswithretainedearnings,shiftingtotheuseofdebttotakeadvantageoftaxdeductibleinterestpayments22LevelsandTypesofDiversificationBusinessUnitLowLevelsofDiversificationSingleBusiness>95%ofbusinessfromasinglebusinessunitDominantBusinessBetween70and95%ofbusinessfromasinglebusinessunitExamples:Hershey,WrigleyBusinessUnit23RelatedConstrained<70%ofrevenuesfromdominantbusiness;allbusinessesshareproduct,technologicalanddistributionlinkagesExamples:P&G,CampbellSoupLevelsandTypesofDiversificationBusinessUnitBusinessUnitModeratetoHighLevelsofDiversificationBusinessUnit24Campbell’sdiversification25RelatedLinked(Mixed)<70%ofrevenuesfromdominantbusiness,andonlylimitedlinksexistExamples:GE,Johnson&JohnsonLevelsandTypesofDiversificationBusinessUnitBusinessUnitModeratetoHighLevelsofDiversificationBusinessUnit26GE’srangeofbusinesses27LevelsandTypesofDiversificationUnrelated<70%ofrevenuecomesfromthedominantbusiness,andtherearenocommonlinksbetweenbusinessesExample:UT,SamsungBusinessUnitBusinessUnitVeryHighLevelsofDiversificationBusinessUnit28EfficientInternalCapitalMarketAllocation:Managershavemoredetailedknowledgeoffirmrelativetooutsideinvestors.Firmcanreduceriskbyallocatingresourcesamongdiversifiedbusinesses.Assumptions29ManagerialMotives(ValueReduction)DiversifyingmanagerialemploymentriskIncreasingmanagerialcompensationIncentivesResourcesManagerialMotivesReasonsforDiversification30ManagerialMotivestoDiversifyManagershavemotivestodiversify:

diversificationincreasessize;sizeisassociatedwithexecutivecompensationdiversificationreducesemploymentriskeffectivegovernancemechanismsmayrestrictsuchmotives31RisksofdiversificationTransferofcorecompetenciesmaybemorecomplexthananticipated.Lossoffocusonprimarybusiness.Riskofmanagerialopportunism32EfficientInternalCapitalMarketAllocation:Firmspursuingthisstrategyfrequentlydiversifybyacquisition:acquiresound,attractivecompaniesacquiredunitsareautonomousacquiringcorporationsuppliesneededcapitalportfoliomanagerstransferresourcesfromunitsthatgeneratecashtothosewithhighgrowthpotentialandsubstantialcashneedsaddprofessionalmanagement&controltosub-unitssub-unitmanagerscompensationbasedonunitresults

KeyCharacteristics33IncentiveswithNeutralEffectsonStrategicCompetitivenessAnti-trustregulationTaxlawsLowperformanceUncertainfuturecashflowsFirmriskreductionIncentivesResourcesManagerialMotivesReasonsforDiversification34ResourceswithvaryingeffectsonvaluecreationandstrategiccompetitivenessTangibleresourcesfinancialresourcesphysicalassetsIntangibleresourcestacitknowledgecustomerrelationsimageandreputationIncentivesResourcesManagerialMotivesReasonsforDiversification35Value-creatingStrategiesofDiversification:

OperationalandCorporateReadinessRelatedConstrainedDiversificationVerticalIntegration(MarketPower)UnrelatedDiversification(FinancialEconomies)BothOperationalandCorporateRelatedness(RareCapabilityandcanCreateDiseconomiesofScope)RelatedLinkedDiversification(EconomiesofScope)CorporateReadiness:TransferringSkillsintoBusinessesThroughCorporateHeadquartersLowHighSharing:OperationalRelatednessBetweenBusinessesLowHigh36AlternativeDiversificationStrategiesRelatedDiversificationStrategiessharingactivities37SharingActivities:SharingactivitiesoftenlowerscostsorraisesdifferentiationSharingactivitiescanlowercostsifit:achieveseconomiesofscaleboostsefficiencyofutilizationhelpsmovemorerapidlydowntheLearningCurveSharingactivitiescanenhancepotentialfororreducethecostofdifferentiationMustinvolveactivitiesthatarecrucialtocompetitiveadvantageKeyCharacteristics38SharingActivities:StrongsenseofcorporateidentityClearcorporatemissionthatemphasizestheimportanceofintegratingbusinessunitsIncentivesystemthatrewardsmorethanjustbusinessunitperformanceAssumptions39RelatedDiversificationStrategiessharingactivitiestransferringcorecompetenciesAlternativeDiversificationStrategies40TransferringCoreCompetencies:

Transferringcorecompetenciesleadstocompetitiveadvantageonlyifthesimilaritiesamongbusinessunitsmeetthefollowingconditions:activitiesinvolvedinthebusinessesaresimilarenoughthatsharingexpertiseismeaningfultransferofskillsinvolvesactivitieswhichareimportanttocompetitiveadvantagetheskillstransferredrepresentsignificantsourcesofcompetitiveadvantageforthereceivingunitAssumptions41RelatedDiversificationStrategiessharingactivitiestransferringcorecompetenciesUnrelatedDiversificationStrategiesefficientinternalcapitalmarketallocationAlternativeDiversificationStrategiesrestructuring42Restructuring:Seekoutundeveloped,sickorthreatenedorganizationsorindustriesParentcompany(acquirer)intervenesandfrequently:changessub-unitmanagementteamshiftsstrategyinfusesfirmwithnewtechnologyenhancesdisciplinebychangingcontrolsystemsdivestspartoffirmmakesadditionalacquisitionstoachievecriticalmassKeyCharacteristics43Restructuring:Frequentlysellunitaftermakingone-timechangessinceparentnolongeraddsvaluetoongoingoperationsKeyCharacteristics44Restructuring:Requireskeenmanagementinsightinselectingfirmswithdepressedvaluesorunfor