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· Use the Internet Library to research the corporate-level strategies of Victory Motorcycles.
Evaluate the business-level strategy of Victory Motorcycles to determine whether you believe the strategy is appropriate to offset forces in the industry. Provide specific examples to support your response.
· Make recommendations for improving this strategy as well as describing any challenges you foresee in executing those recommendations. Provide specific examples to support your response.
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eBook attached
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One page
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Citation must be included
Senior Seminar in Business Administration
BUS 499
Corporate-Level Strategy
Welcome to the Business Administration Capstone.
In this lesson we will discuss Corporate-Level Strategy.
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Objectives
Upon completion of this lesson, you will be able to:
Identify various levels and types of strategy in a firm
Upon completion of this lesson, you will be able to:
Identify various levels and types of strategy in a firm.
Please go to the next slide.
Supporting Topics
Levels of Diversification
Reasons for Diversification
Value-Creating Diversification: Related Constrained and Related Linked Diversification
Unrelated Diversification
Value-Neutral Diversification
Value-Reducing Diversification: Managerial Motives to Diversify
In order to achieve this objective, the following supporting topics will be covered:
Levels of diversification;
Reasons for diversification;
Value-creating diversification: related constrained and related linked diversification;
Unrelated diversification;
Value-neutral diversification; and
Value-reducing diversification: managerial motives to diversify.
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Levels of Diversification
How Firms Vary
Level of diversification
Connections among their businesses
Single Business Diversification Strategy
Related Constrained Diversification Strategy
Unrelated Diversification Strategy
Firms that are diversified vary based on their level of diversification and the connections among their businesses. There are five categories of businesses according to increasing levels of diversification. The single and dominant business categories show relatively low levels of diversification. However, the more fully diversified firms are classified into related and unrelated categories. A firm can be related through its diversification when its businesses share several links. The more links that exist among businesses, the more constrained the relatedness of diversification. When dealing with the term unrelated, it refers to the absence of direct links between businesses.
A firm that wants to pursue a lower level of diversification can use either a single or dominant corporate level diversification strategy. A single business diversification strategy refers to the corporate level strategy where the firm generates ninety five percent or more of its sales revenue from its core business area. When using a dominant business diversification strategy, the firm generates between seventy and ninety percent of its total revenue within a single business area. It is important to note that firms that focus on one or very few businesses and markets can earn positive returns. These positive returns are a result of developing capabilities useful for these markets and providing superior service to their customers.
Another point to make is that there are fewer challenges in managing small sets of businesses. This gives firms the ability to scale and efficiently use their resources. When dealing with family-owned and controlled businesses, we see that they are commonly less diversified. They prefer the focus, because the family’s reputation is related closely to that of the business. As a result, family members prefer to provide quality goods and services which are reflected by a focused strategy.
When a firm is generating more than thirty percent of its revenue outside a dominant business and its businesses are all related to each other, the firm will be utilizing a related diversification corporate level strategy. A related constrained diversification strategy is used when the links between the diversified firm’s businesses are direct. An example of this would be Campbell Soup, Procter and Gamble, and Merck and Company. They all use a related constrained strategy, as do some large cable companies. When using a related constrained strategy, a firm shares resources and activities between its businesses. When compared with related constrained firms, related linked firms share fewer resources and assets between their businesses. These firms instead concentrate instead on transferring knowledge and core competencies between the businesses.
A highly diversified firm that has no relationships between its businesses follows an unrelated diversification strategy. Companies like United Technologies, Textron and Samsung are all examples of firms using this type of corporate level strategy. Firms that use this strategy are often referred to as conglomerates.
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Reasons for Diversification
Corporate Level Diversification Strategies
Increase a firm’s value
Related or unrelated diversification
Neutral effects
Value-neutral reasons for diversification
Two Diversification Strategies to Create Value
Operational Relatedness
Corporate Relatedness
A firm uses corporate level diversification strategies for several reasons. Usually a diversification strategy is used to increase the firm’s value. This is done by improving its overall performance. Value is created either through related diversification or through unrelated diversification. Utilizing this strategy allows a company’s businesses to increase revenues or reduce costs while implementing their business level strategies. Other reasons for using a diversification strategy may have nothing to do with increasing the firm’s value. It can be argued that diversification can have neutral effects or even reduce a firm’s value. A value-neutral reason for diversification is a desire to match and neutralize a competitor’s market power. These decisions can expand a firm’s portfolio of businesses to reduce managerial risks which can have a negative effect on the firm’s value. Using greater amounts of diversification can reduce the managerial risk that if one of the businesses in a diversified firm fails, the top executive of that business does not risk total failure by the corporation. By doing things this way, it helps reduce the top executives’ employment risk. It is important to note that because diversification can increase a firm’s size and managerial compensation, managers must have motives that can diversify a firm to a level that can reduce its value.
Using operational relatedness and corporate relatedness are two ways diversification strategies can create value. Research shows that these independent relatedness dimensions show the importance of resources and key competencies.
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Value-Creating Diversification
Diversification Corporate-Level Strategy
Builds upon or extends resources and capabilities
Creates value
Economies of Scope
Two Ways to Create Value
Sharing activities
Transferring corporate-level core competencies
With the related diversification corporate-level strategy, the firm builds upon or extends its resources and capabilities to create value. The company using the related diversification strategy wants to develop and exploit economies of scope between its businesses. Available to companies operating in multiple product markets or industries, economies of scope are cost savings that the firm creates by successfully sharing some of its resources and capabilities or transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses.
Firms seek to create value from economies of scope through two basic kinds of operational economies:
Sharing activities, or operational relatedness; and
Transferring corporate-level core competencies, or corporate relatedness.
The difference between sharing activities and transferring competencies is based on how separate resources are jointly used to create economies of scope.
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Value-Creating Diversification, continued
Creating Operational Relatedness
Sharing a primary activity or support activity
Create value through related constrained diversification strategy share activities
Activity sharing is risky
Ties among businesses create links between outcomes
Research shows activity sharing can create value
Firms can create operational relatedness by sharing either a primary activity or a support activity. Firms using the related constrained diversification strategy share activities in order to create value.
Activity sharing is risky because ties among a firm’s businesses create links between outcomes. For instance, if demand for one’s businesses is reduced, it may not generate sufficient revenues to cover the fixed costs required to operate shared facilities. These types of organizational difficulties can reduce activity-sharing success.
Although activity sharing across businesses is not risk-free, research shows that it can create value. For example, studies that examined acquisitions of firms in the same industry found that sharing resources and activities and thereby creating economies of scope contributed to post acquisition increases in performance and higher returns to shareholders.
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Value-Creating Diversification, continued
How Time Comes Into Play
Intangible resources become the foundation of core competencies
Corporate-Level Competencies
Two Ways Related Linked Diversification Strategies Help Create Value
Over time, the firm’s intangible resources, such as its know-how, become the foundation of core competencies. Corporate-level core competencies are complex sets of resources and capabilities that link different businesses, primarily through managerial and technological knowledge, experience, and expertise. Firms seeking to create value through corporate relatedness use the related linked diversification strategy.
In at least two ways, the related linked diversification strategy helps firms to create value. First, because the expense of developing a core competence has been incurred in one of the firm’s businesses, transferring it to a second business eliminates the need for that second business to allocate resources to develop it.
Resource intangibility is a second source of value creation through corporate relatedness. Intangible resources are difficult for competitors to understand and imitate. Because of this difficulty, the unit receiving a transferred corporate-level competence often gains an immediate competitive advantage over its rivals.
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Value-Creating Diversification, continued
Market Power
Multipoint Competition
Vertical Integration
Creating Economies of Scope
Firms seek operational and corporate relatedness
Diseconomies
Firms using a related diversification strategy may gain market power when successfully using their related constrained or related linked strategy. Market power exists when a firm is able to sell its products above the existing competitive level or to reduce the costs of its primary and support activities below the competitive level, or both.
In addition to efforts to gain scale as a means of increasing market power, firms can create market power through multipoint competition. Multipoint competition exists when two or more diversified firms simultaneously compete in the same product areas or geographic markets.
Some firms using a related diversification strategy engage in vertical integration to gain market power. Vertical integration exists when a company produces its own inputs or owns its own source of output distribution. In some instances, firms partially integrate their operations, producing and selling their products by using company businesses as well as outside resources.
Some firms simultaneously seek operational and corporate relatedness to create economies of scope. It is difficult for competitors to understand and learn how to simultaneously create economies of scope involving the sharing of activities and transferring of core competencies. An important note to remember is if the cost of both types of relatedness is not offset by the benefits created, then the result is diseconomies. This is due to the cost of organization and incentive structure being very expensive.
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Check Your Understanding
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Unrelated Diversification, continued
What are Financial Economies
Market Economies
Capital markets are thought to allocate capital
Efficiency results from investors taking equity positions
Large Diversified Firms
Firms do not seek either operational relatedness or corporate relatedness when using the unrelated diversification corporate-level strategy. An unrelated diversification strategy can create value through two types of financial economies. Financial economies are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm.
In a market economy, capital markets are thought to efficiently allocate capital. Efficiency results as investors take equity positions with high expected future cash-flow values. Capital is also allocated through debt as shareholders and debt holders try to improve the value of their investments by taking stakes in businesses with high growth and profitability prospects.
In large diversified firms, the corporate headquarters office distributes capital to its businesses to create value for the overall corporation. The nature of these distributions may generate gains from internal capital market allocations that exceed gains that would accrue to shareholders as a result of capital being allocated by external capital market.
Financial economies can also be created when firms learn how to create value by buying, restructuring, and then selling other companies’ assets in the external market.
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Unrelated Diversification, continued
Financial Economies
When a Company Has Become Diversified
High Technology Businesses
Highly complex resource allocation decisions
Human resource dependent
Buying and Restructuring Service-Based Assets
Financial economies can also be created when firms learn how to create value through the buying, restructuring, and selling of restructured company assets in the external market. Think of this as something like the real estate business. People want to buy assets at low prices, restructure the assets and then sell the assets at prices that make them positive returns. When a company is diversified, it pursues a strategy that will create financial economies by acquiring and restructuring other companies’ assets. This, however, involves significant tradeoffs.
In high technology businesses, resource allocation decisions are highly complex. Since these decisions are so complex, it is common for information processing overload to occur in the small corporate headquarters offices. High technology businesses are often human resource dependent. With that being said, it is these people that can leave or demand higher pay, as well as raise or lower the value of an acquired firm.
Buying and then restructuring service-based assets so they can be profitably sold in the external market is also difficult. Sales like these are often a product of close personal relationships between a client and the representative of the firm being restructured. It is important to note that for both high technology firms and service-based companies, few tangible assets can be restructured to create value and sell profitably. This is due to it being difficult to restructure intangible assets such as human capital, and is also due to effective relationships that have evolved over time between buyers and sellers. Firms must be cognizant of economic downturn in order to restructure, as well as buying and selling at the appropriate time. A downturn can present opportunities but also some risks. Executives follow a strategy of buying businesses when prices are lower and then selling them at late stages in an expansion.
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Value-Neutral Diversification
Incentives to Diversify
External
Antitrust regulations
Tax laws
Internal
Low performance
Uncertain cash flows
Pursuit of synergy and reduction
Government Antitrust Policies and Tax Laws
Incentives to diversify come from both the external environment and a firm’s internal environment. External incentives include antitrust regulations and tax laws. Internal incentives include low performance, uncertain cash flows, and the pursuit of synergy and reduction of risk for the firm.
Government antitrust policies and tax laws provided incentives for U.S. firms to diversify in the 1960s and 1970s. During the 1980s, antitrust enforcement lessened, resulting in more and larger horizontal mergers. In the late 1990s and early 2000s, antitrust concerns emerged again with the large volume of mergers and acquisitions. The tax effects of diversification stem not only from corporate tax charges, but also from individual tax rates.
Some research shows that low returns are related to greater levels of diversification. If high performance eliminates the need for greater diversification, then low performance may provide an incentive for diversification.
As a firm’s product line matures or is threatened, diversification may be taken as an important defensive strategy. Small firms and companies in mature or maturing industries sometimes find it necessary to diversify for long-term survival.
Diversified firms pursuing economies of scope often have investments that are too inflexible to realize synergy between business units. As a result, a number of problems arise. Synergy exists when the value created by business units working together exceeds the value that those same units create working independently. But as a firm increases its relatedness between business units, it also increases its risk of corporate failure, because synergy produces joint interdependence between businesses that constrains the firm’s flexibility to respond.
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Value-Neutral Diversification, continued
Corporate Level Diversity Strategy Requirements
Types and levels of resources
Capabilities
Importance of Resources
Example of free cash lows
We previously discussed that firms may have several value-neutral incentives, as well as value-creating incentives, to diversify. However, it is important to note that a firm must have the types and levels of resources and capabilities needed to successfully use a corporate level diversification strategy. Even though tangible and intangible resources facilitate diversification, they differ in their abilities to create value. Resources that are valuable, rare, and difficult to imitate influences a firm’s ability to create value through diversification. For example, free cash flows are tangible financial resources that may be used to diversify the firm. However, when compared with diversification that is grounded in intangible resources, the diversification of financial resources is only visible to competitors. As a result, the resource is more imitable and less likely to create value on a long-term basis.
Tangible resources usually include the plant and equipment necessary to produce a product. These resources also tend to be less flexible assets. Excess capacities are often used for closely related products. These products can be those that require similar manufacturing technologies.
Excess capacities of other tangible resources, such as a sales force, can also be used to diversify. It is important to keep in mind that excess capacity in a sales force is more effective with related diversification. This is because the capacity may be utilized to sell similar products. Tangible resources may create resource interrelationships in the following:
Production;
Marketing;
Procurement; and
Technology.
Intangible resources are more flexible than tangible physical assets in facilitating diversification. Although the sharing of tangible resources may include diversification, intangible resources like tacit knowledge can encourage even more diversification. Sometimes the benefits expected from using resources to diversify the firm for either value-creating or value-neutral reasons are not gained.
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Value- Reducing Diversification: Managerial Motives to Diversify
Managerial Motives to Diversify
Reasons
Value-neutral
Vale-creating
Additional Benefits for Top-Level Managers
As firm size increases so does executive compensation
Governance Mechanisms to Limit Managerial Tendencies
Managerial motives to diversify can exist for value-neutral and value-creating reasons. Two motives for top-level officials to diversify their firms beyond value-creating and neutral levels are, one their desire for increased compensation; and two – reduced managerial risk.
Diversification provides additional benefits to top-level managers that shareholders do not enjoy. Studies have shown that diversification and firm size are closely correlated. These studies have also shown that as firm size increases, so does executive compensation. Since large firms are complex, difficult-to-manage organizations, top-level managers commonly receive large levels of compensation to manage everything. As greater levels of diversification increase a firm’s complexity, this can result in more compensation for executives to manage the diversified organization.
Governance mechanisms, such as the following, may limit managerial tendencies to overdiversify:
Board of directors;
Monitoring by owners;
Executive compensation practices; and
The market for corporate control.
Most large publicly-held firms are profitable because the managers leading them use many different resources and strategies. In general, governance mechanisms should be designed to deal with exceptions to the managerial norms of making decisions. This mechanism could then take actions that will increase the firm’s ability to earn above-average returns.
Please go to the next slide.
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Check Your Understanding
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Summary
Levels of Diversification
Reasons for Diversification
Value-Creating Diversification: Related Constrained and Related Linked Diversification
Unrelated Diversification
Value-Neutral Diversification
Value-Reducing Diversification: Managerial Motives to Diversify
We have reached the end of this lesson. Let’s take a look at what we have covered.
We started off the lesson by discussing the levels of diversification. We saw that firms that are diversified vary based on their level of diversification and the connections among their businesses. We talked about and examined the five categories of businesses according to increasing levels of diversification. We also compared and contrasted high and low levels of diversification among firms.
Next we discussed reasons for diversification. We learned that a firm uses corporate level diversification strategies for several reasons. We saw that diversification strategies are used to increase the firm’s value by improving its overall performance. We saw that utilizing this strategy allows a company’s businesses to increase revenues or reduce costs while implementing their business level strategies. We also saw that other reasons for using a diversification strategy may have nothing to do with increasing the firm’s value. We looked at how firms can create operational relatedness by sharing either a primary activity or a support activity.
Then we went over value-creating diversification. We saw that corporate-level core competencies are complex sets of resources and capabilities that link different businesses, primarily through managerial and technological knowledge, experience, and expertise. Firms seeking to create value through corporate relatedness use the related linked diversification strategy. We then discussed market power. Market power exists when a firm is able to sell its products above the existing competitive level, to reduce the costs of its primary and support activities below the competitive level, or both.
Later we talked about unrelated diversification. In a market economy, capital markets are thought to efficiently allocate capital. Efficiency results as investors take equity positions with high expected future cash-flow values. Capital is also allocated through debt as shareholders and debt holders try to improve the value of their investments by taking stakes in businesses with high growth and profitability prospects.
Next we looked at value-neutral diversification. We had a discussion on incentives to diversify. These can come from both the external environment and a firm’s internal environment. External incentives include antitrust regulations and tax laws. Internal incentives include low performance, uncertain cash flows, and the pursuit of synergy and reduction of risk for the firm. We also looked at tangible and intangible resources and how they facilitate diversification. We used the example of free cash flows as a tangible financial resource that may be used to diversify the firm. We saw that when compared with diversification that is grounded in intangible resources, the diversification of financial resources is only visible to competitors.
Finally, to conclude the lesson, we discussed value-reducing diversification. We learned that managerial motives to diversify can exist for value-neutral and value-creating reasons. We looked at the two motives for top-level officials to diversify their firm beyond value-creating and neutral levels. We also looked at the benefits that diversification gives toward high-level managers.
This completes this lesson.
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