oct 17 slidesssssssssssssssssssssssssssssssss.ppt

business

1. Transparency 6-1
- low cost- low cost
- differentiation- differentiation
- integrated low - integrated low
cost/differentiationcost/differentiation
- focused low cost- focused low cost
- focused - focused
differentiationdifferentiation
How to create value for the corporation as a whole
A Diversified Company has A Diversified Company has 22 levels of strategy levels of strategy
How to create competitive advantage in each business in How to create competitive advantage in each business in
which the company competeswhich the company competes
Corporate-Level Strategy Corporate-Level Strategy (Companywide Strategy)(Companywide Strategy)
Business-Level Strategy Business-Level Strategy (Competitive Strategy)(Competitive Strategy)

2. Transparency 6-2
What businesses should the corporation be in?What businesses should the corporation be in?
How should the corporate office manage the How should the corporate office manage the
array of business units?array of business units?
Corporate Strategy is what makes the corporate whole Corporate Strategy is what makes the corporate whole
add up to more than the sum of it business unit partsadd up to more than the sum of it business unit parts
Corporate Strategy concerns Corporate Strategy concerns 22 key questions: key questions:

3. Transparency 6-3
Firms Vary by Degree of DiversificationFirms Vary by Degree of Diversification
Single-businessSingle-business > 95% of revenues from a single > 95% of revenues from a single
business unitbusiness unit
Low Levels of DiversificationLow Levels of Diversification
Dominant-businessDominant-businessBetween 70% and 95% of revenues Between 70% and 95% of revenues
from a single business unitfrom a single business unit
Related-DiversifiedRelated-Diversified<70% of revenues from a single <70% of revenues from a single
business unitbusiness unit
Moderate to High Levels of DiversificationModerate to High Levels of Diversification
Businesses share product, techno-Businesses share product, techno-
logical or distribution linkageslogical or distribution linkages
Unrelated-DiversifiedBusiness units not closely related Business units not closely related
High Levels of DiversificationHigh Levels of Diversification

4. Transparency 6-4
Adding Value by DiversificationAdding Value by Diversification
By developing economies of scope between By developing economies of scope between
business units in the firms which leads to business units in the firms which leads to
synergistic benefitssynergistic benefits
By developing market power which lead to By developing market power which lead to
greater returnsgreater returns
Diversification most effectively adds value by Diversification most effectively adds value by
either of two mechanismseither of two mechanisms

5. Transparency 6-5
Transferring Core CompetenciesTransferring Core Competencies
Sharing ActivitiesSharing Activities
Alternative Diversification StrategiesAlternative Diversification Strategies
Efficient Internal Capital Market AllocationEfficient Internal Capital Market Allocation
RestructuringRestructuring
Related Diversification Strategies
Unrelated Diversification Strategies
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6. Transparency 6-6
Sharing ActivitiesSharing Activities
Key Characteristics
Sharing Activities often lowers costs or raises differentiationSharing Activities often lowers costs or raises differentiation
Sharing Activities can lower costs if it:Sharing Activities can lower costs if it:
ExampleExample: Using a common physical distribution system : Using a common physical distribution system
and sales force such as Procter & Gamble’s disposable and sales force such as Procter & Gamble’s disposable
diaper and paper towel divisionsdiaper and paper towel divisions
**Achieves economies of scaleAchieves economies of scale
**Boosts efficiency of utilizationBoosts efficiency of utilization
**Helps move more rapidly down Learning CurveHelps move more rapidly down Learning Curve
ExampleExample: : General Electric’s costs to advertise, sell and General Electric’s costs to advertise, sell and
service major appliances are spread over many different service major appliances are spread over many different
productsproducts

7. Transparency 6-7
Sharing ActivitiesSharing Activities
Sharing Activities can enhance potential for or reduce the Sharing Activities can enhance potential for or reduce the
cost of differentiationcost of differentiation
Must involve activities that are crucial to competitive Must involve activities that are crucial to competitive
advantageadvantage
ExampleExample: Shared order processing system may allow new : Shared order processing system may allow new
features customers value or make more advanced remote features customers value or make more advanced remote
sensing technology availablesensing technology available
ExampleExample: : Procter & Gamble’s sharing of sales and Procter & Gamble’s sharing of sales and
physical distribution for disposable diapers and paper physical distribution for disposable diapers and paper
towels is effective because these items are so bulky and towels is effective because these items are so bulky and
costly to shipcostly to ship
Key Characteristics

8. Transparency 6-8
Sharing ActivitiesSharing Activities
**Clear corporate mission that emphasizes the Clear corporate mission that emphasizes the
importance of integrating business unitsimportance of integrating business units
**Incentive system that rewards more than just Incentive system that rewards more than just
business unit performancebusiness unit performance
Strong sense of corporate identityStrong sense of corporate identity
**
Assumptions

9. Transparency 6-9
Transferring Core CompetenciesTransferring Core Competencies
Key Characteristics
**Exploits Exploits InterrelationshipsInterrelationships among divisions among divisions
**Start with Start with Value ChainValue Chain analysisanalysis
Identify ability to transfer skills or expertise Identify ability to transfer skills or expertise
among similar value chainsamong similar value chains
Exploit ability to Exploit ability to share activitiesshare activities
Two firms can share the same sales force, Two firms can share the same sales force,
logistics network or distribution channelslogistics network or distribution channels

10. Transparency 6-10
Assumptions
Transferring Core Competencies leads to competitive advantage Transferring Core Competencies leads to competitive advantage
only if the similarities among business units meet the following only if the similarities among business units meet the following
conditions:conditions:
Activities involved in the businesses are similar Activities involved in the businesses are similar
enough that sharing expertise is meaningfulenough that sharing expertise is meaningful
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Transfer of skills involves activities which are Transfer of skills involves activities which are
important to competitive advantageimportant to competitive advantage
The skills transferred represent significant sources The skills transferred represent significant sources
of competitive advantage for the receiving unitof competitive advantage for the receiving unit
Transferring Core CompetenciesTransferring Core Competencies

11. Transparency 6-11
Key Characteristics
Firms pursuing this strategy frequently diversify by acquisition:Firms pursuing this strategy frequently diversify by acquisition:
Acquire sound, attractive companiesAcquire sound, attractive companies
Acquired units are autonomousAcquired units are autonomous
Acquiring corporation supplies needed capital Acquiring corporation supplies needed capital
Portfolio managers transfer resources from units that Portfolio managers transfer resources from units that
generate cash to those with high growth potential and generate cash to those with high growth potential and
substantial cash needssubstantial cash needs
Add professional management & control to sub-unitsAdd professional management & control to sub-units
Sub-unit managers compensation based on unit resultsSub-unit managers compensation based on unit results
Efficient Internal Capital Market AllocationEfficient Internal Capital Market Allocation

12. Transparency 6-12
Efficient Internal Capital Market AllocationEfficient Internal Capital Market Allocation
Assumptions
Managers have more detailed knowledge of firm relative Managers have more detailed knowledge of firm relative
to outside investorsto outside investors
Firm can reduce risk by allocating resources among Firm can reduce risk by allocating resources among
diversified businesses, although shareholders can generally diversified businesses, although shareholders can generally
diversify more economically on their owndiversify more economically on their own
Firm need not risk competitive edge by disclosing sensitive Firm need not risk competitive edge by disclosing sensitive
competitive information to investorscompetitive information to investors