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Corporate Strategy

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Corporate Strategy lessons

Corporate Strategy

  1. 1. Competitive Advantage to Corporate Strategy Group 6 Sachin . Arun KA . Balaji . Swapnil . Arobinda
  2. 2. Corporate Strategy <ul><li>Darling of the contemporary management practice </li></ul><ul><li>2 basis level of strategies for any company </li></ul><ul><ul><ul><li>Business Strategy </li></ul></ul></ul><ul><ul><ul><li>Corporate Strategy </li></ul></ul></ul><ul><li>2 Questions answered by Corporate Strategy </li></ul><ul><ul><ul><li>What business the corporation should be in ? </li></ul></ul></ul><ul><ul><ul><li>How the corporate office should manage the array of business units </li></ul></ul></ul><ul><li>How to measure diversification? </li></ul><ul><ul><ul><li>Market values after mergers….short term!!! </li></ul></ul></ul><ul><ul><ul><li>Main Objective --- to create shareholders value </li></ul></ul></ul>17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy
  3. 3. Corporate Strategy <ul><li>Premises </li></ul><ul><li>Competition occurs at the business unit level </li></ul><ul><li>Diversification inevitably adds to costs & constraints </li></ul><ul><li>Shareholders can diversify themselves </li></ul><ul><li>Essential Tests </li></ul><ul><li>The Attractiveness Test </li></ul><ul><li>The Cost of Entry test </li></ul><ul><li>The Better-off test </li></ul>17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy Out of 33 major companies, >60% divested
  4. 4. How attractive is an Industry <ul><li>Industry with high return </li></ul><ul><li>Diversification cannot create value for shareholders, unless have favourable structure </li></ul><ul><li>If not, should consider restructuring of the firm </li></ul><ul><li>Poor industry structure can lead to unhappy diversification </li></ul><ul><ul><li>Example: Dutch Shell’s unsuccessful acquisitions like Billiton (Mining) , Bechtel (Power generation) </li></ul></ul><ul><li>Don’t rush into fast-growing industries </li></ul><ul><ul><li>Mistook early growth for long term potential </li></ul></ul><ul><ul><li>Example: Video Games, Personal Computers, Robotics </li></ul></ul>17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy
  5. 5. Attractiveness Test <ul><li>Evaluation based on relative attractiveness </li></ul>17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy Measures Weighting Ind. Rating Ind. Attract.     Co. A Co. B Co. C Co. A Co. B Co. C Mkt size 0.10 6.0 2.0 5 0.6 0.2 0.5 Growth Rate 0.15 1.0 8.0 5 0.15 1.2 0.75 Intensity (comp) 0.30 2.0 9.0 5 0.6 2.7 1.5 Resource reqs 0.10 3.0 5.0 5 0.3 0.5 0.5 Strategic fit 0.15 6.0 8.0 5 0.9 1.2 0.75 Opps / threats 0.05 1.0 6.0 5 0.05 0.3 0.25 Social, political… 0.05 1.0 4.0 5 0.05 0.2 0.25 Degree of risk 0.05 1.0 4.0 5 0.05 0.2 0.25 Industry profitability 0.05 7.0 5.0 5 0.35 0.25 0.25 1.0 3.05 6.75 5.00
  6. 6. Cost of Entry Test <ul><li>If cost of entry > expected returns ……. No shareholder value </li></ul><ul><li>If the acquirer beats market prices, not reflecting the prospects…pressure </li></ul><ul><ul><li>Example: Philip Morris acquires 7-up (4 times the book value) </li></ul></ul><ul><li>More attractive an industry, more the cost of entry </li></ul>17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy
  7. 7. Better-Off Test <ul><li>Corporation should bring in competitive advantage to the new unit or vice versa </li></ul><ul><li>If the benefit is one-time, it is best to sell the unit once got the benefits…as does not add value to shareholders </li></ul><ul><ul><li>Example: Baxter Travenol and American Hospitality Supply </li></ul></ul>17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy
  8. 8. Concepts of Corporate Strategy <ul><li>Major reasons for diversification failures </li></ul><ul><ul><li>Failure to address the 3 tests </li></ul></ul><ul><ul><li>Lack of clearness in the concept of corporate strategy </li></ul></ul><ul><ul><li>Poor Implementation of the strategies </li></ul></ul><ul><ul><li>4 Major concepts of corporate strategy are </li></ul></ul><ul><ul><li>Portfolio Management </li></ul></ul><ul><ul><li>Restructuring </li></ul></ul><ul><ul><li>Transferring Skills </li></ul></ul><ul><ul><li>Sharing Activities </li></ul></ul>17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy Requires No Connection among Business Units Depends on connection among Business Units To create value through company’s each autonomous unit Exploits the relationship between businesses.
  9. 9. Portfolio Management <ul><li>Acquire sound, attractive companies with competent mangers who stay </li></ul><ul><li>Companies acquired needs to be autonomous and should be compensated based on its results </li></ul><ul><li>Requires good but undervalued companies </li></ul><ul><li>But, the success of this is a ‘Past’ Thing. </li></ul><ul><li>More complex nature of portfolio, difficult to manage… </li></ul><ul><ul><li>Gulf & Western </li></ul></ul><ul><ul><li>Sara Lee </li></ul></ul>17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy
  10. 10. Restructuring <ul><li>Underdeveloped, sick, or threatened organizations or industries on the threshold of significant change </li></ul><ul><li>Parent intervenes frequently changing the management team, shifting strategy, or infusing the company with new technology </li></ul><ul><li>Business is sold when parent is no longer adding value </li></ul><ul><li>Some Restructuring companies </li></ul><ul><ul><ul><li>Hanson Trust </li></ul></ul></ul><ul><ul><ul><li>Loews </li></ul></ul></ul><ul><ul><ul><li>BTR </li></ul></ul></ul><ul><li>When well implemented, it passes all 3 tests </li></ul><ul><li>Major Pitfall – Companies find it difficult to divest once restructured </li></ul>17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy
  11. 11. Transferring Skills <ul><li>Knowledge about how to perform activities is transferred among the units </li></ul><ul><li>Characterized by units with similar buyers, channels, value activities and/or the same strategic concept </li></ul><ul><li>Example </li></ul><ul><ul><ul><li>A toiletries business unit, can give the marketing skills, positioning concepts, promotion techniques to a cough syrup business unit </li></ul></ul></ul><ul><li>Expertise must be a meaningful source of competitive advantage </li></ul><ul><li>Companies which diversified using this concept </li></ul>17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy
  12. 12. Sharing Activities <ul><li>Leads to lowering costs or raising differentiation </li></ul><ul><li>Must involve activities that are significant to competitive advantage and costs outweighed by benefits </li></ul><ul><li>Business unit collaboration is encouraged and reinforced </li></ul><ul><li>Example </li></ul>17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy Uses common physical distribution system and sales force in both paper towels and disposable diapers <ul><li>Shared Procurement and distribution system for food serves in all Marriott units </li></ul><ul><li>Fully Integrated Real Estate unit </li></ul>
  13. 13. Action Program <ul><li>Identify Interrelationships Among Units </li></ul><ul><li>Select Core Business </li></ul><ul><li>Facilitate Interrelationships </li></ul><ul><li>Diversify Via Shared Activities </li></ul><ul><li>Diversify Via Transfer of Skills </li></ul><ul><li>Diversify Via Restructuring </li></ul><ul><li>Pay Dividends Instead </li></ul><ul><li>Create a Corporate theme </li></ul><ul><ul><li>A way to ensure that corporation will create shareholder value </li></ul></ul>17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy
  14. 14. Corporate Theme - Examples <ul><li>NEC Corporation </li></ul><ul><li>Corporate Theme --- ‘C&C’ in 1978 </li></ul><ul><li>Started to integrate ‘Computers and Communications’ </li></ul>17 Jun 09 Group 6 - Business Strategy: Competitive Advantage to Corporate Strategy <ul><li>Columbia Broadcasting System </li></ul><ul><li>Corporate Theme --- ‘Entertaining Company’ </li></ul><ul><li>Started to diversify in toys, crafts, musical instruments, sport teams </li></ul><ul><li>But, failed miserably </li></ul><ul><li>None has any significant opportunity for sharing activity or transferring skills </li></ul>
  15. 15. Thank you

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