CORPORATE STRATEGY

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CORPORATE STRATEGY

  1. 1. Corporate Strategy Creating Corporate Advantages
  2. 2. Defining Corporate Strategy <ul><li>Corporate Strategy is the way a company creates value through the configuration and coordination of its multi-market activities </li></ul><ul><li>The definition has three important aspects: </li></ul><ul><ul><li>Value Creation - the generation of superior financial performance (rents) from multi-market activities that create corporate advantages </li></ul></ul><ul><ul><li>Configuration - the multi-market scope of the corporation (product/market diversification, geographic focus, and vertical boundaries) </li></ul></ul><ul><ul><li>Coordination - the management of activities and businesses that lie within the corporate hierarchy </li></ul></ul><ul><li>Source: Collis and Montgomery, Corporate Strategy, 1997 </li></ul>
  3. 3. Goal of Corporate Strategy: Corporate Advantage <ul><li>The goal of corporate strategy is to build corporate advantage so as to earn above normal returns </li></ul><ul><ul><li>analogous to a competitive advantage in a business unit </li></ul></ul><ul><li>Three tests of the existence of corporate advantage : </li></ul><ul><ul><li>Does ownership of the business create benefit somewhere in the corporation? (Does parentage matter?) </li></ul></ul><ul><ul><li>Are those benefits greater than the cost of corporate overhead? </li></ul></ul><ul><ul><li>Does the corporation create more value with the business than any other possible corporate parent or alternative governance structure? </li></ul></ul>Source: Collis and MOntgomergy, 1998
  4. 4. Three Dimensions of Corporate Strategy <ul><li>Business Diversification - Horizontal expansion </li></ul><ul><li>Vertical Integration - forward or backward expansion </li></ul><ul><li>Geographic Scope - geographic and/or global expansion </li></ul>
  5. 5. Corporate Strategy: Three Fundamental Issues <ul><li>1. Can the corporation create economic value by changing its scope? (Rent-generating opportunities) </li></ul><ul><ul><li>Diversification </li></ul></ul><ul><ul><li>Vertical integration </li></ul></ul><ul><ul><li>Geographic expansion </li></ul></ul><ul><li>2. Should activities be undertaken inside the corporation, or accessed through contracts, joint ventures, alliances, or other institutional arrangements? How should the corporation grow? </li></ul><ul><li>3. How should the corporation be structured and managed to enhance the combined value of its individual business units? </li></ul>
  6. 6. Levels of Strategy <ul><li>Business Strategy (competitive strategy) is concerned with how a firm competes within a particular market </li></ul><ul><li>Corporate strategy is concerned with where a firm competes </li></ul>
  7. 7. Levels of Strategy (cont’d) <ul><li>Business-Level Strategy (competitve strategy) </li></ul><ul><ul><li>How to create competitive advantage in each busness in which the company competes: </li></ul></ul><ul><ul><ul><li>low cost leadership </li></ul></ul></ul><ul><ul><ul><li>differentiation </li></ul></ul></ul><ul><ul><ul><li>focus low cost/ focus differentiation </li></ul></ul></ul><ul><ul><li>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 </li></ul></ul><ul><li>Corporate-Level Strategy (companywide strategy) </li></ul><ul><ul><li>Corporate (or Company-wide) Strategy is the overall plan for a multi-business unit company. </li></ul></ul><ul><ul><li>Corporate strategy is what makes the corporate whole add up to more than the sum of its business unit parts </li></ul></ul>
  8. 8. Premises of Corporate Strategy <ul><li>Competition occurs at the business unit level </li></ul><ul><ul><li>corporations don’t compete; only their business units do </li></ul></ul><ul><ul><li>value is created at the business unit level, it is only added at the corporate level </li></ul></ul><ul><ul><li>Successful corporate strategy must grow out of and reinforce competitive strategy </li></ul></ul><ul><li>Corporate Strategy inevitably adds costs and constraints to business units </li></ul><ul><ul><li>Corporate overhead and costs of communication between HQ and SBUs </li></ul></ul><ul><ul><li>bureaucratic costs, costs of coordination, costs of monitoring </li></ul></ul><ul><li>Shareholders can readily diversify themselves </li></ul><ul><ul><li>Shareholders can diversify their own portfolios of stocks, and they can often do it more cheaply with less risk than corporations </li></ul></ul><ul><ul><li>Shareholders can buy shares at market prices and avoid paying large acquisition premiums </li></ul></ul>
  9. 9. Implications from these Premises <ul><li>Corporate Strategy cannot succeed unless it truly adds value to business units: </li></ul><ul><ul><li>by providing tangible benefits that offset costs of lost independence </li></ul></ul><ul><ul><ul><li>economies of scope in operations </li></ul></ul></ul><ul><ul><ul><li>economies of scale in administration and internal financing </li></ul></ul></ul><ul><ul><li>add value to shareholders in a way that shareholders could not replicate by themselves </li></ul></ul>

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