Solution Manual Of Strategic Management Concepts And Cases Competitiveness And Globalization, 12th edition By Michael

Solution Manual Of Strategic Management Concepts And Cases Competitiveness And Globalization, 12th edition By Michael

Chapter 6
Corporate-Level Strategy

LEARNING OBJECTIVES

1. Define corporate-level strategy and discuss its purpose.
2. Describe different levels of diversification achieved using different corporate-level strategies.
3. Explain three primary reasons firms diversify.
4. Describe how firms can create value by using a related diversification strategy.
5. Explain the two ways value can be created with an unrelated diversification strategy.
6. Discuss the incentives and resources that encourage diversification.
7. Describe motives that can encourage managers to over diversify a firm.

CHAPTER OUTLINE

Opening Case: Disney Adds Value Using a Related Diversification Strategy LEVELS OF DIVERSIFICATION
Low Levels of Diversification
Moderate and High Levels of Diversification
Reasons for Diversification
VALUE-CREATING DIVERSIFICATION: RELATED CONSTRAINED AND RELATED LINKED DIVERSIFICATION
Operational Relatedness: Sharing Activities
Corporate Relatedness: Transferring of Core Competencies
Market Power
UNRELATED DIVERSIFICATION
Efficient Internal Capital Market Allocation
Restructuring of Assets
Strategic Focus: GE and United Technology are Firms that Have Pursued Internal Capital Allocation and Restructuring Strategies
Strategic Focus: Ericsson’s Substantial Market Power
VALUE-NEUTRAL DIVERSIFICATION: INCENTIVES AND RESOURCES
Incentives to Diversify
Resources and Diversification
Strategic Focus: Coca Cola’s Diversification to Deal with Its Reduced Growth in Soft Drinks
VALUE-REDUCING DIVERSIFICATION: MANAGERIAL MOTIVES TO DIVERSIFY
SUMMARY
MINI-CASES
REVIEW QUESTIONS
MINDTAP RESOURCES

LECTURE NOTES

Chapter Introduction: Chapters 4 and 5 looked at strategy at the level of the business and focused on the factors and approaches that can lead to competitive advantage and superior performance. Chapter 6 takes this a step further by standing back to consider strategy at a higher level – corporate strategy. The concern here is for the performance benefits that are derived from putting together an effective “portfolio of businesses” – that is, putting businesses together in a way that makes sense and can generate synergies between units. The discussion of this chapter builds toward a summary presented in Figure 6.4. It might be helpful to review that figure carefully before starting into the material of the chapter.

OPENING CASE
Disney Adds Value Using a Related Diversification Strategy

The Walt Disney Company has pursued a related diversification strategy by using its movies to create franchises and platforms around its popular cartoon and action movie figures. While competitive content providers have weakened to lower TV ratings, Disney was strengthened through its other businesses including consumer products, interactive consumer products, interactive parks and resorts, and studio entertainment parks, and a strong cable franchise. Disney’s strategy is successful because its corporate strategy, compared to its business level strategy, adds value across its set of businesses above what the individual businesses could create individually. In addition, the corporation has broad and deep knowledge about its customers that is a corporate level capability in terms advertising and marketing. This capability allows it to cross sell products highlighted in its movies through its media distribution outlets, parks and resorts, as well as consumer product businesses.

Teaching Note
While many content creating competitors are facing revenue losses due to lower TV ratings, The Walt Disney Company is growing through a related diversification strategy by using its movies to create franchises and platforms around its popular cartoon and action movie figures. Ask students to evaluate these related franchises and platforms to support its movie content. Why is this strategy successful in creating value?

1 Define corporate-level strategy and discuss its purpose.

Remember that in Chapters 4 and 5 the discussion centered on selecting and implementing a business-level or competitive strategy – actions a firm should take to compete in a single industry or product market – and the actions and responses that affect the competitive dynamics of a single industry or product market.

In contrast, when a firm diversifies its operations by operating business in several industries, corporate-level strategy becomes a primary focus. This means that a diversified firm has two levels of strategy: business-level (or competitive) and corporate-level (or company-wide), the latter of which entails selecting a strategy that focuses on the selection and management of a mix of businesses.

Corporate-level strategies detail actions taken to gain a competitive advantage through the selection and management of a mix of businesses competing in several industries or product markets. Primary concerns of corporate-level strategy are:
• What businesses should the firm be in?
• How should the corporate office manage its group of businesses?
• How can the corporation as a whole add up to more than the sum of its business parts?

The ultimate measure of the value of a firm’s corporate-level strategy is that the businesses in the firm’s portfolio are worth more under current management (and by following the firm’s corporate-level strategy) than they would be under different ownership or management.

Teaching Note
Indicate to students that the unique organizational structure that is required by this strategy is discussed in Chapter 11.

LEVELS OF DIVERSIFICATION

Diversified firms vary according to two factors:
• The level of diversification
• Connection or linkages between and among business units

Figure Note
Five levels of diversification are listed and each is defined in Figure 6.1. It is recommended that you refer students to Figure 6.1 as you begin to discuss levels of diversification in more detail.

FIGURE 6.1
Levels and Types of Diversification

Figure 6.1 should be used as a reference point during your discussion of diversification types. Students’ attention should be directed to inter-unit linkages depicted on the right side of Figure 6.1.

Levels and types of diversification defined in Figure 6.1 and discussed in more detail in the next sections of this chapter are:

Low levels of diversification:
• Single business
• Dominant business

Moderate to high levels of diversification:
• Related-constrained diversification
• Related-linked diversification (mixed related and unrelated)

Very high levels of diversification:
• Unrelated diversification

2 Describe different levels of diversification achieved using different corporate-level strategies.

LOW LEVELS OF DIVERSIFICATION

Firms that follow single- or dominant-business strategies have low levels of diversification. A single business is a firm where more than 95 percent of its revenues are generated by the dominant business. Firms such as the Wrigley Co. are examples of single-business firms. Wrigley Co. has dominated the global gum-related industry as the largest manufacturer of chewing gum, specialty gums, and gum bases. Its brands, Doublemint, Spearmint, and Juicy Fruit, led the market.

Teaching Note
Wrigley has chosen to focus its attention on its historic (since 1915) core business. It competes effectively (and successfully) against large diversified firms, including RJR Nabisco (Beechnut and Carefree) and Warner-Lambert (Trident and Dentyne). Focusing on its core business has enabled Wrigley’s top-level managers to maintain strategic control of the business. As a result, Wrigley maintains a clear, strategic focus and is highly competitive in its core business (though it is beginning to diversify somewhat in recent years).

A dominant business is a firm that generates between 70 and 95 percent of its sales within a single business area.

Teaching Note
UPS is an example of a dominant business firm because, although 22 percent of revenue comes from international operations, it generates 60 percent of its revenue from its US package delivery service.

Moderate and High Levels of Diversification

A related-diversified firm is one that earns at least 30 percent of its revenues from sources outside the dominant business and whose units are related to each other – e.g., by the sharing of resources and by product, technological, and distribution linkages.

Related-constrained firms also earn at least 30 percent of their revenues from the dominant business, and all business units share product, technological, and distribution linkages, as illustrated in Figure 6.1. Kodak, Procter & Gamble, and Campbell’s Soup Company are related-constrained firms.

Related linked (mixed related and unrelated) firms, such as Campbell Soup and P&G, generate at least 30 percent of their total revenues from the dominant business, but there are few linkages between key value-creating activities.

Unrelated-diversified (or highly diversified) firms do not share resources or linkages, as illustrated in Figure 6.1. Firms that pursue unrelated diversification strategies – often known as conglomerates – include United Technologies, Samsung, and Textron.

Though there are more unrelated diversified firms in the US than in most other countries, conglomerates (firms following unrelated diversification strategies) dominate the private sector economy in Latin America and in several emerging economies (such as China, South Korea, and India).

Teaching Note
Many firms that have at one time pursued unrelated diversification strategies are restructuring to focus on a less diversified mix of businesses, a move that may reflect:
• An inability to manage high levels of diversification
• Recognition that a lower level of diversification would improve the match between the firm’s core competencies and environmental opportunities and threats

3 Explain three primary reasons firms diversify.

REASONS FOR DIVERSIFICATION

Teaching Note
The content of this section of the chapter generally is limited to a discussion of Table 6.1, which provides some of the reasons that firms implement diversification strategies. The various value-related motives for diversification are discussed in more detail in the remainder of the chapter as specific diversification strategies are discussed.

Firms may implement diversification strategies to enhance or increase the strategic competitiveness of the overall organization, and thus the value of the firm increases.

Value can be created through either related or unrelated diversification if the strategies enable the firm’s mix of businesses to increase revenues and/or decrease costs when implementing business-level strategies.

Firms may implement diversification strategies that are either value neutral or result in devaluation of the firm. They may attempt to diversify:
• To neutralize a competitor’s market power
• To reduce managers’ employment risk (i.e., risk of the CEO being unemployed when a dominant-business firm fails as compared to this risk when a single business fails when it is only one part of a diversified firm)
• To increase managerial compensation because of the positive relationships between diversification, firm size, and compensation

Table Note
Reasons or motives for implementing diversification strategies are presented in Table 6.1. They are discussed in the following chapter sections.

TABLE 6.1
Reasons for Diversification

Firms follow diversification strategies for many reasons. These can be grouped into three broad sets of motives:

Motives to create value:
• Economies of scope (related diversification) through activity-sharing and the transfer of core competencies
• Market power motives (related diversification) by vertical integration or blocking competitors via multipoint competition
• Financial economies motives (unrelated diversification) to improve efficiency of capital allocation through an internal capital market or by restructuring the portfolio of businesses

Motives that are value-neutral with respect to strategic competitiveness are used to:
• avoid violations of antitrust regulations
• take advantage of tax incentives
• overcome low performance
• reduce the uncertainty of future cash flows
• reduce overall firm risk
• exploit tangible resources
• exploit intangible resources

Managerial or value-reducing motives are used to:
• diversify managerial employment risk
• increase managerial compensation

Figure Note
As illustrated in Figure 6.2, firms seek to create value by sharing activities and transferring skills or corporate core competencies. This figure can help students organize their thoughts about the options firms have to exploit various forms of relatedness.