Chapter 13 Strategic Entrepreneurship Hitt, Ireland, and Hoskisson.
2004 by South-Western/Thomson Learning 1 Corporate-Level Strategy Robert E. Hoskisson Michael A....
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Transcript of 2004 by South-Western/Thomson Learning 1 Corporate-Level Strategy Robert E. Hoskisson Michael A....
©2004 by South-Western/Thomson Learning 1
Corporate-Level StrategyCorporate-Level Strategy
Robert E. HoskissonMichael A. Hitt
R. Duane Ireland
Chapter 7Chapter 7
2
Chapter 2Chapter 2Strategic LeadershipStrategic Leadership
Chapter 4Chapter 4The InternalThe InternalOrganizationOrganization
Chapter 6Chapter 6Competitive Rivalry andCompetitive Rivalry andCompetitive DynamicsCompetitive Dynamics
Chapter 9Chapter 9International StrategyInternational Strategy
Chapter 1Chapter 1Introduction toIntroduction to
Strategic ManagementStrategic Management
Chapter 3Chapter 3The ExternalThe ExternalEnvironmentEnvironment
Chapter 5Chapter 5Business-LevelBusiness-Level
StrategyStrategy
Chapter 8Chapter 8Acquisition andAcquisition and
Restructuring StrategiesRestructuring Strategies
Chapter 11Chapter 11Corporate GovernanceCorporate Governance
Strategic IntentStrategic IntentStrategic MissionStrategic Mission
Chapter 7Chapter 7Corporate-Level StrategyCorporate-Level Strategy
Chapter 10Chapter 10Cooperative StrategyCooperative Strategy
Chapter 12Chapter 12Strategic EntrepreneurshipStrategic Entrepreneurship
StrategicAnalysis
StrategicThinking
CreatingCompetitiveAdvantage
MonitoringAnd CreatingEntrepreneurialOpportunities
The Strategic Management ProcessThe Strategic Management Process
Chapter 5Chapter 5Business-LevelBusiness-Level
StrategyStrategy
Chapter 6Chapter 6Competitive Rivalry andCompetitive Rivalry andCompetitive DynamicsCompetitive Dynamics
Chapter 7Chapter 7Corporate-Level StrategyCorporate-Level Strategy
3
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Discussion QuestionsDiscussion Questions1. What is the difference between business-
and corporate- level strategy? How can corporate level diversification strategies be classified in regard to type and amount of diversification?
2. What are the reasons that firms pursue a corporate diversification strategy?
3. What are the value enhancing economic rationales for related diversification?
Click Here More discussion questions
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Discussion Questions (cont.)Discussion Questions (cont.)Click Here
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4. What are the value enhancing economic rationales for unrelated diversification?
5. Why are diversified firms more efficiently managed with a multidivisional structure? What variants of the multidivisional form fit with the specific types of corporate strategy?
Click Here More discussion questions
5
Discussion Questions (cont.)Discussion Questions (cont.)Click Here
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6. What are the external as well as the internal incentives (generally value neutral motives) firms have to diversify? What resources foster increased diversification?
7. Are there managerial rationales that serve as motives to increase diversification but which may deflate the value of the firm?
Click Here More discussion questions
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Discussion Questions (cont.)Discussion Questions (cont.)Click Here 8. How would you summarize the
relationship between diversification strategy and firm performance outcomes?
7
Discussion Question 1Discussion Question 1
What is the difference between business- and corporate- level strategy? How can corporate level diversification strategies be classified in regard to type and amount of diversification?
8
Levels and Types of DiversificationLevels and Types of DiversificationLow Levels of DiversificationLow Levels of Diversification
Single BusinessSingle Business> 95% of business from a single > 95% of business from a single business unitbusiness unit
Dominant BusinessDominant BusinessBetween 70 and 95% of business Between 70 and 95% of business from a single business unitfrom a single business unit
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Related ConstrainedRelated Constrained<70% of revenues from dominant <70% of revenues from dominant business; all businesses share business; all businesses share product, technological and product, technological and distribution linkagesdistribution linkages
Levels and Types of DiversificationLevels and Types of DiversificationModerate to High Levels of DiversificationModerate to High Levels of Diversification
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Related Linked (Mixed)Related Linked (Mixed)< 70% of revenues from dominant < 70% of revenues from dominant business, and only limited links business, and only limited links existexist
Levels and Types of DiversificationLevels and Types of DiversificationModerate to High Levels of DiversificationModerate to High Levels of Diversification
11Click Here Return to Discussion Questions
Levels and Types of Levels and Types of DiversificationDiversification
UnrelatedUnrelated< 70% of revenue comes from the < 70% of revenue comes from the dominant business, and there are dominant business, and there are no common links between no common links between businessesbusinesses
Very High Levels of DiversificationVery High Levels of Diversification
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Discussion Question 2Discussion Question 2
What are the reasons that firms pursue a corporate diversification strategy?
13
Reasons for DiversificationReasons for Diversification
Reasons to Enhance Strategic Reasons to Enhance Strategic CompetitivenessCompetitiveness
• Economies of scope• Market power• Financial economics
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
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Resources with varying Resources with varying effects on value creation and effects on value creation and strategic competitivenessstrategic competitiveness
• Tangible resources financial resources physical assets
• Intangible resources tacit knowledge customer relations image and reputation
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
Reasons for DiversificationReasons for Diversification
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Value-creating Strategies of Diversification:Value-creating Strategies of Diversification: Operational and Corporate ReadinessOperational and Corporate Readiness
Related ConstrainedRelated ConstrainedDiversificationDiversification
Vertical IntegrationVertical Integration(Market Power)(Market Power)
UnrelatedUnrelatedDiversificationDiversification
(Financial Economies)(Financial Economies)
Both Operational andBoth Operational andCorporate RelatednessCorporate Relatedness
(Rare Capability(Rare Capabilityand can Createand can CreateDiseconomies ofDiseconomies of
Scope)Scope)
Related LinkedRelated LinkedDiversificationDiversification(Economies of(Economies of
Scope)Scope)
Corporate Readiness: Transferring Skills into Corporate Readiness: Transferring Skills into Businesses Through Corporate HeadquartersBusinesses Through Corporate Headquarters
LowLow HighHigh
Shar
ing:
Ope
ratio
nal
Shar
ing:
Ope
ratio
nal
Rel
ated
ness
Bet
wee
n B
usin
esse
sR
elat
edne
ss B
etw
een
Bus
ines
ses
LowLow
HighHigh
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Adding Value by DiversificationAdding Value by DiversificationDiversification most effectively adds value Diversification most effectively adds value by either of two mechanisms:by either of two mechanisms:– Economies of scope:Economies of scope: cost savings attributed cost savings attributed
to transferring the capabilities and competencies to transferring the capabilities and competencies developed in one business to a new businessdeveloped in one business to a new business
– Market power:Market power: when a firm is able to sell its when a firm is able to sell its products above the existing competitive level or products above the existing competitive level or reduce the costs of its primary and support reduce the costs of its primary and support activities below the competitive level, or bothactivities below the competitive level, or both
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Diversification and Diversification and Multidivisional StructureMultidivisional StructureThree major benefits
– more accurate monitoring of the performance of each business, simplifying problems of control
– facilitate comparisons between divisions, improving resource allocation process
– stimulate managers of poorly performing divisions to look for ways of improving performance
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Alternative Diversification Alternative Diversification StrategiesStrategiesRelated Diversification StrategiesRelated Diversification Strategies
– sharing activitiessharing activities
– transferring core competenciestransferring core competencies
Unrelated Diversification StrategiesUnrelated Diversification Strategies
– efficient internal capital market allocationefficient internal capital market allocation
– restructuringrestructuring
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Alternative Diversification Alternative Diversification StrategiesStrategiesRelated Diversification StrategiesRelated Diversification Strategies
– sharing activitiessharing activities
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Discussion Question 3Discussion Question 3
What are the value enhancing economic rationales for related diversification?
21
Sharing Activities:Sharing Activities: Sharing activities often lowers costs or raises Sharing activities often lowers costs or raises
differentiationdifferentiation Sharing activities can lower costs if it:Sharing activities can lower costs if it:
– achieves economies of scaleachieves economies of scale– boosts efficiency of utilizationboosts efficiency of utilization– helps move more rapidly down the Learning Curvehelps move more rapidly down the Learning Curve
Sharing activities can enhance potential for or Sharing activities can enhance potential for or reduce the cost of differentiationreduce the cost of differentiation
Must involve activities that are crucial to Must involve activities that are crucial to competitive advantagecompetitive advantage
Key CharacteristicsKey Characteristics
22
Sharing Activities:Sharing Activities: Strong sense of corporate identityStrong sense of corporate identity Clear corporate mission that emphasizes Clear corporate mission that emphasizes
the importance of integrating business the importance of integrating business unitsunits
Incentive system that rewards more than Incentive system that rewards more than just business unit performancejust business unit performance
AssumptionsAssumptions
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Related Diversification StrategiesRelated Diversification Strategies
– sharing activitiessharing activities
– transferring core competenciestransferring core competencies
Alternative Diversification Alternative Diversification StrategiesStrategies
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Transferring Core Competencies:Transferring Core Competencies:
Exploits interrelationships among Exploits interrelationships among divisionsdivisions
Start with value chain analysisStart with value chain analysis– identify ability to transfer skills or expertise identify ability to transfer skills or expertise
among similar value chainsamong similar value chains– exploit ability to transfer activitiesexploit ability to transfer activities
Key CharacteristicsKey Characteristics
25Click Here Return to Discussion Questions
Transferring Core Competencies: Transferring Core Competencies:
Transferring core competencies leads to Transferring core competencies leads to competitive advantage only if the competitive advantage only if the similarities among business units meet the similarities among business units meet the following conditions:following 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– 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 the skills transferred represent significant
sources of competitive advantage for the sources of competitive advantage for the receiving unitreceiving unit
AssumptionsAssumptions
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Question 4Question 4
What are the value enhancing economic rationales for unrelated diversification?
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Related Diversification StrategiesRelated Diversification Strategies
– sharing activitiessharing activities
– transferring core competenciestransferring core competencies
Alternative Diversification Alternative Diversification StrategiesStrategies
Unrelated Diversification StrategiesUnrelated Diversification Strategies
– efficient internal capital market allocationefficient internal capital market allocation
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Efficient Internal Capital Market Efficient Internal Capital Market Allocation:Allocation: Firms pursuing this strategy frequently Firms pursuing this strategy frequently
diversify by acquisition:diversify by acquisition:– acquire sound, attractive companiesacquire sound, attractive companies– acquired units are autonomousacquired units are autonomous– acquiring corporation supplies needed capitalacquiring corporation supplies needed capital– portfolio managers transfer resources from units portfolio managers transfer resources from units
that generate cash to those with high growth that generate cash to those with high growth potential and substantial cash needspotential and substantial cash needs
– add professional management & control to sub-add professional management & control to sub-unitsunits
– sub-unit managers compensation based on unit sub-unit managers compensation based on unit resultsresults
Key CharacteristicsKey Characteristics
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Efficient Internal Capital Market Efficient Internal Capital Market Allocation:Allocation: Managers have more detailed knowledge Managers have more detailed knowledge
of firm relative to outside investorsof firm relative to outside investors Firm need not risk competitive edge by Firm need not risk competitive edge by
disclosing sensitive competitive disclosing sensitive competitive information to investorsinformation to investors
Firm can reduce risk by allocating Firm can reduce risk by allocating resources among diversified businesses, resources among diversified businesses, although shareholders can generally although shareholders can generally diversify more economically on their owndiversify more economically on their own
AssumptionsAssumptions
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Related Diversification StrategiesRelated Diversification Strategies
– sharing activitiessharing activities
– transferring core competenciestransferring core competencies
Unrelated Diversification StrategiesUnrelated Diversification Strategies
– efficient internal capital market allocationefficient internal capital market allocation
Alternative Diversification Alternative Diversification StrategiesStrategies
– restructuringrestructuring
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Restructuring:Restructuring: Seek out undeveloped, sick or threatened Seek out undeveloped, sick or threatened
organizations or industriesorganizations or industries Parent company (acquirer) intervenes and Parent company (acquirer) intervenes and
frequently:frequently:– changes sub-unit management teamchanges sub-unit management team– shifts strategyshifts strategy– infuses firm with new technologyinfuses firm with new technology– enhances discipline by changing control enhances discipline by changing control
systemssystems– divests part of firmdivests part of firm– makes additional acquisitions to achieve makes additional acquisitions to achieve
critical masscritical mass
Key CharacteristicsKey Characteristics
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Restructuring:Restructuring: Frequently sell unit after making one-time Frequently sell unit after making one-time
changes since parent no longer adds changes since parent no longer adds value to ongoing operationsvalue to ongoing operations
Key CharacteristicsKey Characteristics
33
Restructuring:Restructuring: Requires keen management insight in Requires keen management insight in
selecting firms with depressed values or selecting firms with depressed values or unforeseen potentialunforeseen potential
Must do more than restructure companiesMust do more than restructure companies Need to initiate restructuring of industries Need to initiate restructuring of industries
to create a more attractive environmentto create a more attractive environment
AssumptionsAssumptions
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34
Question 5Question 5Why are diversified firms more efficiently managed with a multidivisional structure? What variants of the multidivisional form fit with the specific types of corporate strategy?
35
Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern:
SimpleSimpleStructureStructure
FunctionalFunctionalStructureStructure
MultidivisionalMultidivisionalStructureStructure
Sales Growth-Sales Growth-Coordination andCoordination andControl ProblemsControl Problems
Sales Growth-Sales Growth-Coordination andCoordination andControl ProblemsControl Problems
Efficient implementation Efficient implementation of formulated strategyof formulated strategy
Efficient Efficient implementation implementation of formulated of formulated strategystrategy
Multidivisional StructureMultidivisional Structure
36
Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Strategic controlStrategic control
– operating divisionsoperating divisions– each division is separate business or profit each division is separate business or profit
centercenter Top corporate officer delegates Top corporate officer delegates
responsibilities to division managersresponsibilities to division managers– for day-to-day operationsfor day-to-day operations– for business-unit strategyfor business-unit strategy
Appropriate when the firm grows through Appropriate when the firm grows through diversificationdiversification
Multidivisional StructureMultidivisional Structure
37
Strategy and Structure Growth Strategy and Structure Growth Pattern:Pattern: Three major benefitsThree major benefits
– corporate officers able to more accurately corporate officers able to more accurately monitor the performance of each business, monitor the performance of each business, which simplifies the problem of controlwhich simplifies the problem of control
– facilitates comparisons between divisions, facilitates comparisons between divisions, which improves the resource allocation processwhich improves the resource allocation process
– stimulates managers of poorly performing stimulates managers of poorly performing divisions to look for ways of improving divisions to look for ways of improving performanceperformance
Multidivisional StructureMultidivisional Structure
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Multidivisional StructureMultidivisional Structure Managers try to strike a balance between:Managers try to strike a balance between:
– competing among divisions for scarce capital competing among divisions for scarce capital resourcesresources
– creating opportunities for cooperation to creating opportunities for cooperation to develop synergiesdevelop synergies
The goal is to maximize overall firm The goal is to maximize overall firm performanceperformance
The decision-making of managers in a The decision-making of managers in a multidivisional structure may be:multidivisional structure may be:– centralized or decentralizedcentralized or decentralized– bureaucratic or non-bureaucraticbureaucratic or non-bureaucratic
39
Multidivisional StructureMultidivisional Structure Balance on these dimensions may change Balance on these dimensions may change
over timeover time Structure will evolve over time with:Structure will evolve over time with:
– changes in strategychanges in strategy– degree of diversificationdegree of diversification– geographic scopegeographic scope– nature of competitionnature of competition
40
Three Variations of the Three Variations of the Multidivisional StructureMultidivisional Structure
MultidivisionalMultidivisionalStructureStructure(M-form)(M-form)
Strategic Business-UnitStrategic Business-Unit(SBU) Form(SBU) Form
CooperativeCooperativeFormForm
CompetitiveCompetitiveFormForm
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Cooperative Form of Multidivisional Cooperative Form of Multidivisional Structure:Structure: Related-Constrained StrategyRelated-Constrained Strategy
GovernmentGovernmentAffairsAffairs
LegalLegalAffairsAffairs
CorporateCorporateR&D LabR&D Lab
StrategicStrategicPlanningPlanning
CorporateCorporateHumanHuman
ResourcesResources
CorporateCorporateMarketingMarketing
CorporateCorporateFinanceFinance
ProductProductDivisionDivision
ProductProductDivisionDivision
ProductProductDivisionDivision
ProductProductDivisionDivision
ProductProductDivisionDivision
PresidentPresidentHeadquarters OfficeHeadquarters Office
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Cooperative Form of Multidivisional Cooperative Form of Multidivisional Structure:Structure: Structural integration devices create tight links Structural integration devices create tight links
among all divisionsamong all divisions Corporate office emphasizes centralized strategic Corporate office emphasizes centralized strategic
planning, human resources, and marketing to planning, human resources, and marketing to foster cooperation between divisionsfoster cooperation between divisions
R&D is likely to be centralizedR&D is likely to be centralized Rewards are subjective and tend to emphasize Rewards are subjective and tend to emphasize
overall corporate performance, in addition to overall corporate performance, in addition to divisional performancedivisional performance
Culture emphasizes cooperative sharingCulture emphasizes cooperative sharing
Related-Constrained StrategyRelated-Constrained Strategy
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SBU Form of Multidivisional SBU Form of Multidivisional Structure:Structure: Related-Linked StrategyRelated-Linked Strategy
PresidentPresident
CorporateCorporateR&D LabR&D Lab
StrategicStrategicPlanningPlanning
CorporateCorporateHRMHRM
CorporateCorporateMarketingMarketing
CorporateCorporateFinanceFinance
Headquarters OfficeHeadquarters Office
DivisionDivision
DivisionDivisionDivisionDivision
SBUSBU SBUSBU SBUSBU
DivisionDivision
DivisionDivisionDivisionDivision
DivisionDivision
DivisionDivisionDivisionDivision
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SBU Form of Multidivisional SBU Form of Multidivisional Structure:Structure: Structural integration devices create tight links Structural integration devices create tight links
among all divisionsamong all divisions Corporate office emphasizes centralized strategic Corporate office emphasizes centralized strategic
planning, human resources, and marketing to planning, human resources, and marketing to foster cooperation between divisionsfoster cooperation between divisions
R&D is likely to be centralizedR&D is likely to be centralized Rewards are subjective and tend to emphasize Rewards are subjective and tend to emphasize
overall corporate performance, in addition to overall corporate performance, in addition to divisional performancedivisional performance
Culture emphasizes cooperative sharingCulture emphasizes cooperative sharing
Related-Linked StrategyRelated-Linked Strategy
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Market PowerMarket PowerMultipoint competition
– two or more diversified firms simultaneously compete in the same product areas or geographic markets
Vertical integration– company produces its own inputs
(backward integration) or owns its own source of distribution of outputs
(forward integration)
46
Simultaneous Operational Relatedness Simultaneous Operational Relatedness and Corporate Relatednessand Corporate RelatednessSimultaneously managing two
sources of knowledge is difficult and such efforts often fail
Either cooperative or SBU M-form structures would likely be implemented with this dual strategy
47
Competitive Form of Multidivisional Competitive Form of Multidivisional Structure:Structure: Unrelated Diversification StrategyUnrelated Diversification Strategy
PresidentPresident
LegalLegalAffairsAffairs FinanceFinance AuditingAuditing
Headquarters OfficeHeadquarters Office
DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision DivisionDivision
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Competitive Form of Multidivisional Competitive Form of Multidivisional Structure:Structure: Corporate headquarters has a small staffCorporate headquarters has a small staff Finance and auditing are the most prominent Finance and auditing are the most prominent
functions in the headquarters to manage cash flow functions in the headquarters to manage cash flow and ensure the accuracy of performance data and ensure the accuracy of performance data coming from divisionscoming from divisions
The legal affairs function becomes important when The legal affairs function becomes important when the firm acquires or divests assetsthe firm acquires or divests assets
Divisions are independent and separate for Divisions are independent and separate for financial evaluation purposesfinancial evaluation purposes
Divisions retain strategic control, but cash is Divisions retain strategic control, but cash is managed by the corporate officemanaged by the corporate office
Divisions compete for corporate resourcesDivisions compete for corporate resources
Unrelated Diversification StrategyUnrelated Diversification Strategy
49
Characteristics of Various Characteristics of Various Structural FormsStructural Forms
Structural Structural CharacteristicsCharacteristics
Cooperative Cooperative M-FormM-Form
SBUSBU M-FormM-Form
Competitive Competitive M-FormM-Form
Degree ofDegree ofCentralizationCentralization
Centralized atCentralized atCorporate Corporate
OfficeOffice
Partially Partially CentralizedCentralized
in SBUsin SBUs
DecentralizedDecentralizedto Divisionsto Divisions
Use ofUse ofIntegratingIntegrating
MechanismsMechanismsExtensiveExtensive ModerateModerate NonexistentNonexistent
Type ofType ofStrategyStrategy
Related-Related-ConstrainedConstrained
Related-Related-LinkedLinked
UnrelatedUnrelatedDiversificationDiversification
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Characteristics of Various Characteristics of Various Structural FormsStructural Forms
DivisionalDivisionalIncentiveIncentive
CompensationCompensation
Linked toLinked toCorporateCorporate
PerformancePerformance
Linked toLinked toCorporateCorporate
SBU & Division SBU & Division PerformancePerformance
Linked toLinked toDivisionalDivisional
PerformancePerformance
DivisionalDivisionalPerformancePerformance
AppraisalAppraisal
SubjectiveSubjectiveStrategicStrategicCriteriaCriteria
Strategic &Strategic &FinancialFinancialCriteriaCriteria
Objective Objective FinancialFinancialCriteriaCriteria
Structural Structural CharacteristicsCharacteristics
Cooperative Cooperative M-FormM-Form
SBUSBU M-FormM-Form
Competitive Competitive M-FormM-Form
Click Here Return to Discussion Questions
51
Question 6Question 6
What are the external as well as the internal incentives (generally value neutral motives) firms have to diversify? What resources foster increased diversification?
52
Incentives with Neutral Incentives with Neutral Effects on Strategic Effects on Strategic CompetitivenessCompetitiveness
• Anti-trust regulation• Tax laws• Low performance• Uncertain future cash flows• Firm risk reduction
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
Reasons for DiversificationReasons for Diversification
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Incentives to DiversifyIncentives to DiversifyExternal Incentives:External Incentives: Relaxation of anti-trust regulation allows more Relaxation of anti-trust regulation allows more
related acquisitions than in the pastrelated acquisitions than in the past Before 1986, higher taxes on dividends favored Before 1986, higher taxes on dividends favored
spending retained earnings on acquisitionsspending retained earnings on acquisitions After 1986, firms made fewer acquisitions with After 1986, firms made fewer acquisitions with
retained earnings, shifting to the use of debt to retained earnings, shifting to the use of debt to take advantage of tax deductible interest take advantage of tax deductible interest paymentspayments
54
Incentives to DiversifyIncentives to DiversifyInternal Incentives:Internal Incentives: Poor performance may lead some firms to Poor performance may lead some firms to
diversify an attempt to achieve better returnsdiversify an attempt to achieve better returns Firms may diversify to balance uncertain future Firms may diversify to balance uncertain future
cash flowscash flows Firms may diversify into different businesses in Firms may diversify into different businesses in
order to reduce riskorder to reduce risk
55
Resources and DiversificationResources and Diversification Besides strong incentives, firms are more Besides strong incentives, firms are more
likely to diversify if they have the likely to diversify if they have the resources to do soresources to do so
Value creation is determined more by Value creation is determined more by appropriate use of resources than appropriate use of resources than incentives to diversifyincentives to diversify
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56
Question 7Question 7
Are there managerial rationales that serve as motives to increase diversification but which may deflate the value of the firm?
57
Managerial Motives (Value Managerial Motives (Value Reduction)Reduction)
• Diversifying managerial employment risk
• Increasing managerial compensation
IncentivesIncentives
ResourcesResources
ManagerialManagerialMotivesMotives
Reasons for DiversificationReasons for Diversification
58
Managerial Motives to DiversifyManagerial Motives to DiversifyManagers have motives to diversifyManagers have motives to diversify
– diversification increases size; size is diversification increases size; size is associated with executive compensationassociated with executive compensation
– diversification reduces employment riskdiversification reduces employment risk– effective governance mechanisms may restrict effective governance mechanisms may restrict
such motivessuch motives
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59
Question 8Question 8
How would you summarize the relationship between diversification strategy and firm performance outcomes?
60
Relationship Between Relationship Between Diversification and PerformanceDiversification and Performance
Perf
orm
ance
Perf
orm
ance
Level of DiversificationLevel of Diversification
DominantBusiness
UnrelatedBusiness
RelatedConstrained
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Relationship Between Firm Relationship Between Firm Performance and DiversificationPerformance and Diversification
IncentivesIncentives
ManagerialManagerialMotivesMotives
ResourcesResources DiversificationDiversificationStrategyStrategy
FirmFirmPerformancePerformance
InternalInternalGovernanceGovernance
StrategyStrategyImplementationImplementation
Capital MarketCapital MarketIntervention and theIntervention and theMarket forMarket forManagerial TalentManagerial Talent