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Summary Corporate Strategy lectures + readings modules 5-8 (Patia McGrath)
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Corporate Strategy lectures + readings modules 5-8 (Patia McGrath)
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Corporate strategyModule 5 – corporate value added
Readings session 5
1 – From competitive advantage to corporate strategy
Corporate strategy = the overall plan for a diversified company. This has two levels
of strategy:
1. Business unit (or competitive) strategy = how to create competitive
advantage in each of the businesses in which a company competes.
2. Corporate (or companywide) strategy = what businesses the corporation
should be in and how the corporate office should manage the array of business
units. It is what makes the corporate whole add up to more than the sum of its
business unit parts.
There are a few premises related to diversification on which any successful corporate
strategy builds:
1. Competition occurs at the business level. Diversified companies do not
compete, only their business units do.
2. Diversification inevitably adds costs and constraints to business units. These
costs and constraints can be reduced but not entirely eliminated.
3. Shareholders can readily diversify themselves. Shareholders can diversify their
own portfolios of stocks by selecting those that best match their preferences
and risk profiles.
To understand how to formulate corporate strategy, it is necessary to specify the
conditions under which diversification will truly create shareholder value. These
conditions can be summarized in three essential tests:
1. The attractiveness test. The industries chosen for diversification must be
structurally attractive or capable of being made attractive.
a. A company might benefit from entering before the industry shows its full
potential as in that case there will likely be less competition.
b. There are a few common reasonings for ignoring the attractiveness test:
i. Confusing fit / comfort as attractiveness.
ii. Low entry costs.
iii. Mistaking early growth for long-term profit potential.
2. The cost-of-entry test. The cost of entry must not capitalize all future profits.
3. The better-off tests. Either the new unit must gain competitive advantage from
its link with the corporation or vice versa.
Four concepts of corporate strategy:
1. Portfolio management. Primarily based on diversification through acquisition.
a. Requires no connections among business units.
b. Seeks to create shareholder value through:
i. Uses its expertise and analytical resources to spot attractive
acquisition candidates that the individual shareholder could not.
ii. The company provides capital on favorable terms that reflect
companywide fundraising ability.
iii. It introduces professional management skills and discipline.
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, Corporate strategy
iv. It provides high-quality review and coaching, unencumbered by
conventional wisdom or emotional attachments to the business.
c. Rests on a number of vital assumptions:
i. If a company’s diversification plan is to meet the attractiveness
and cost-of-entry tests, it must find good but undervalued
companies.
ii. To meet the better-off test, the benefits the corporation provides
must yield a significant competitive advantage to acquired units.
iii. The style of operating through highly autonomous business units
must both develop sound business strategies and motivate
managers.
2. Restructuring. Contrary to the passive portfolio manager, a company that
bases its strategy on restructuring becomes an active restructurer of business
units.
a. Requires no connections among business units.
b. Seeks out underdeveloped, sick, or threatened organizations or
industries on the threshold of significant change. The parent company
intervenes, and it may make follow-up acquisitions to build a critical mass
and sell off unneeded or unconnected parts, and thereby reduce the
effective acquisition costs. The result is a strengthened company or a
transformed industry.
c. The parent sells off the stronger unit once results are clear because the
parent is no longer adding value and top management decides that its
attention should be directed elsewhere.
d. The greatest pitfall is that companies find it very hard to dispose of
business units once they are restructured and performing well.
3. Transferring skills.
a. Depends on connections among business units.
b. Every business unit is a collection of discrete activities ranging from sales
to accounting that allow it to compete – value activities. At this level, the
company achieves competitive advantage. These can be grouped into
nine categories:
i. Primary activities. Create the product or service, deliver and
market it, and provide after-sale support.
1. Inbound logistics.
2. Operations.
3. Outbound logistics.
4. Marketing.
5. Sales.
6. Service.
ii. Support activities. Provide the input and infrastructure that allow
the primary activities to take place.
1. Company infrastructure.
2. Human resource management.
3. Technology development.
4. Procurement.
c. The value chain defines the two types of interrelationships that may
create synergy:
i. A company’s ability to transfer skills or expertise among similar
value chains.
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, Corporate strategy
ii. The ability to share activities.
d. Transferring skills leads to competitive advantage only if the similarities
among businesses meet three conditions:
i. The activities involved in the businesses are similar enough that
sharing its expertise is meaningful.
ii. The transfer of skills involves activities important to competitive
advantage.
iii. The skills transferred represent a significant source of competitive
advantage for the receiving unit.
e. the transfer of skills can be one-time or ongoing.
4. Sharing activities. Often enhances competitive advantage by lowering costs
or raising differentiation
a. Depends on connections among business units.
b. Sharing must involve activities that are significant to competitive
advantage, not just any activity.
c. There are also inevitable costs which the benefits must outweigh:
i. Greater required coordination to manage a shared activity.
ii. Need to compromise the design of performance of an activity so
that it can be shared.
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, Corporate strategy
A company must first take an objective look at its existing businesses and the value
added by the corporation before translating the principles of corporate strategy into
successful diversification:
1. Identifying the interrelationships among already existing business units.
2. Selecting the core businesses that will be the foundation of the corporate
strategy.
3. Creating horizontal organizational mechanisms to facilitate interrelationships
among the core businesses and lay the groundwork for future related
diversification.
4. Pursuing diversification opportunities that allow shared activities.
5. Pursuing diversification through the transfer of skills if opportunities for shared
activities are limited or exhausted.
6. Pursuing a strategy of restructuring if this fits the skills of management or no
good opportunities exist for forging corporate interrelationships.
7. Paying dividends so that the shareholders can be the portfolio managers.
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