Corporate Strategy Creating Corporate Advantages

Corporate Strategy 2 Defining Corporate Strategy Corporate Strategy is the way a company creates value through the configuration and coordination of its multi-market activities The definition has three important aspects: –Value Creation - the generation of superior financial performance (rents) from multi-market activities that create corporate advantages –Configuration - the multi-market scope of the corporation (product/market diversification, geographic focus, and vertical boundaries) –Coordination - the management of activities and businesses that lie within the corporate hierarchy Source: Collis and Montgomery, Corporate Strategy, 1997

Corporate Strategy 3 Goal of Corporate Strategy: Corporate Advantage The goal of corporate strategy is to build corporate advantage so as to earn above normal returns analogous to a competitive advantage in a business unit Three tests of the existence of corporate advantage: Does ownership of the business create benefit somewhere in the corporation? (Does parentage matter?) Are those benefits greater than the cost of corporate overhead? Does the corporation create more value with the business than any other possible corporate parent or alternative governance structure? Source: Collis and MOntgomergy, 1998

Corporate Strategy 4 Three Dimensions of Corporate Strategy Business Diversification - Horizontal expansion Vertical Integration - forward or backward expansion Geographic Scope - geographic and/or global expansion

Corporate Strategy 5 Corporate Strategy: Three Fundamental Issues 1. Can the corporation create economic value by changing its scope? (Rent-generating opportunities) Diversification Vertical integration Geographic expansion 2. Should activities be undertaken inside the corporation, or accessed through contracts, joint ventures, alliances, or other institutional arrangements? How should the corporation grow? 3. How should the corporation be structured and managed to enhance the combined value of its individual business units?

Corporate Strategy 6 Levels of Strategy Business Strategy (competitive strategy) is concerned with how a firm competes within a particular market Corporate strategy is concerned with where a firm competes

Corporate Strategy 7 Levels of Strategy (cont’d) Business-Level Strategy (competitve strategy) –How to create competitive advantage in each busness in which the company competes: low cost leadership differentiation focus low cost/ focus differentiation –Business (or Competitive) Strategy is concerned with the use of resources and capabilities to create competitive advantages in each of businesses or industries in which a company competes Corporate-Level Strategy (companywide strategy) –Corporate (or Company-wide) Strategy is the overall plan for a multi-business unit company. –Corporate strategy is what makes the corporate whole add up to more than the sum of its business unit parts

Corporate Strategy 8 Premises of Corporate Strategy Competition occurs at the business unit level corporations don’t compete; only their business units do value is created at the business unit level, it is only added at the corporate level Successful corporate strategy must grow out of and reinforce competitive strategy Corporate Strategy inevitably adds costs and constraints to business units Corporate overhead and costs of communication between HQ and SBUs bureaucratic costs, costs of coordination, costs of monitoring Shareholders can readily diversify themselves Shareholders can diversify their own portfolios of stocks, and they can often do it more cheaply with less risk than corporations Shareholders can buy shares at market prices and avoid paying large acquisition premiums

Corporate Strategy 9 Implications from these Premises Corporate Strategy cannot succeed unless it truly adds value to business units: –by providing tangible benefits that offset costs of lost independence economies of scope in operations economies of scale in administration and internal financing –add value to shareholders in a way that shareholders could not replicate by themselves