4a Corp Strat Overview

8/2/2019 4a Corp Strat Overview

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July 2, 1999July 2, 1999

Corporate Level Strategy

Ian Lee, Ph.D

Carleton University

School of Business

July 2, 1999July 2, 1999

Corporate Strategy

Vertical integration (scale)

Horizontal diversification (scope)

International diversification

M&A versus Strategic Alliances

July 2, 1999July 2, 1999

Jack Welch, CEO-GE

When I was younger I thought therewas a room where all the strategic

concepts were worked out for theentire company.

Only later did I realize there was nosuch room and that the strategy does

not even exist in the mind of any oneperson. It is simply transmitted in aseries of decisions made.


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July 2, 1999July 2, 1999

Grand mothers Advice

Eat your brocolli!

Why? Because its good for you

Why is it good for me?

Because my grandmother told me

July 2, 1999July 2, 1999

American Medical Research

Brocolli is good for you

Why?

Because SGH is an anti-carcinogen

found in high quantities in brocolli

July 2, 1999July 2, 1999

Coca Cola Manager, Prague

Corporate Strategy is very useful

because now I know WHY

my Head Office chose the strategies it

chose


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July 2, 1999July 2, 1999

When an industry with a reputation for

difficult economics meets a manager with

a reputation for excellence, it is usually

the industry that keeps its reputation

intact.

Warren BuffetWarren Buffet

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Diversified Company hasDiversified Company has 22 levels of strategylevels of strategy

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CorporateCorporate--Level StrategyLevel Strategy (Company(Company--wide Strategy)wide Strategy)


BusinessBusiness--Level StrategyLevel Strategy(Competitive Strategy)(Competitive Strategy)


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July 2, 1999July 2, 1999

How to create CA in each BU in which firm competesHow to create CA in each BU in which firm competes


BusinessBusiness--Level StrategyLevel Strategy (Competitive Strategy)(Competitive Strategy)

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- low cost

- differentiation

- integrated low cost/differentiation

- low cost

- differentiation


- focused low cost

- focused differentiation

- focused low cost


A Diversified Company hasA Diversified Company has 22 levels of strategylevels of strategy

How to create CA in each BU in which firm competesHow to create CA in each BU in which firm competes

BusinessBusiness--Level StrategyLevel Strategy (Competitive Strategy)(Competitive Strategy)

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- low cost

- differentiation


-- low costlow cost

-- differentiationdifferentiation

-- integrated low cost/differentiationintegrated low cost/differentiation

- focused low cost


-- focused low costfocused low cost

-- focused differentiationfocused differentiation

How to create value for corporation as a wholeHow to create value for corporation as a whole

A Diversified Company hasA Diversified Company has 22 levels of strategylevels of strategy

How to create CA in each BU in which competesHow to create CA in each BU in which competesHow to create CA in each BU in which competes

CorporateCorporate--Level StrategyLevel Strategy (Company(Company--wide Strategy)wide Strategy)

BusinessBusiness--Level StrategyLevel Strategy(Competitive Strategy)(Competitive Strategy)


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July 2, 1999July 2, 1999

Purp ose of Corporate Strategy

Maximize shareholder value

why?

Who cares?

Why value value?

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Valuing Value Creation

Why are some countrys rich?

Why care if some business people are

rich?

Why should employees care?

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Valuing Value Creation

Shareholder wealth is a residual

maximize it - you maximize all

stakeholders

capital flows to returns i.e. moreprofitable firms & countries


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July 2, 1999July 2, 1999

Stakeholder Involvement

Each of the key stakeh olders involved

wants a piece of the same pie

1 How do you divide the pie

in order to keep all

stakeholders in volved?

How do you divide the pie

in order to keep all

stakeholders in volved?

2

How do you increase the

size of pie so that there is

more to go around?

How do you increase th e

size of pie so that there is

more to go around?

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Corporate Strategy concernsCorporate Strategy concerns 22 key questions:key questions:

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WhatWhat businessesbusinesses should corporation be in?should corporation be in?



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July 2, 1999July 2, 1999

WhatWhat businessesbusinesses should corporation be in?should corporation be in?

How should Head OfficeHow should Head Office managemanage array ofarray ofBUsBUs??


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WhatWhat businessesbusinesses should the corporation be in?should the corporation be in?

How should Head OfficeHow should Head Office managemanage itsits BUsBUs??

Corporate Strategy = corporate whole add up to >Corporate Strategy = corporate whole add up to >

sum of its BU partssum of its BU parts


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Corporate Strategy

diversified firm is COLLECTIONof

individual businesses (BUs)

Corp.Strat. should create Corporate

Advantage (Cynthia Montgomery)

or Parenting Advantage (Goold/Campbell)


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July 2, 1999July 2, 1999

Corporate Strategy & Diversification

In diversified firm, corporate mgrs must

craft a MULTI-BUSINESS, MULTI-

INDUSTRYstrategy for

different businesses

competing in

diverse industry environments

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Focus of Corp orate Strategy

1. Diversification strategies

internal growth, acquisitions, alliances

2. economies of scope

i.e. strategic fit, synergy

3. corporate governance

i.e. corporate-business relationship

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Main Tasks for Corporate Strategy

choose scope of diversification

horizontal

vertical

international

choose strategy of diversification acquisition

growth from within

strategic alliance

oversee LR performance of firmsbusinesses


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July 2, 1999July 2, 1999

Corporate Strategies - Scale

Growth (internal, acquisition, alliance)

stability

retrenchment (turnaround, divest,liquidate)

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Corporate Strategies - Scope

vertical integration (backward/forward orupstream/downstream)

horizontal diversif (related or unrelated)

international diversification

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Corporate Strategies - International

Exporting

Licensing

Joint ventures (alliances)

Acquisitions

Green-field development

Production sharing


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Synergy

Synergy from Greek word synergos

i.e. working together

2 or more BUs or divisions to create moreS/H value

than as separate firms

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Synergy

Synergy = economies of scope

economies of scope = strategic fit

strategic fit = closely related businesses

closely related businesses = scopeeconomies = synergy

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Economies of Scope

eliminate costsby operating 2 or more

businesses under same corporate umbrella

Exist when less costlyfor 2 or more

businesses to operate under centralized

mgmt

Cost savingsfrom interrelationships

anywhere along businesses VCs


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July 2, 1999July 2, 1999

Goold & Campbell: 6 Types of

Synergy

1. Shared know-how

2. Shared tangibleresources

3. Pooled negotiatingpower

4. Coordinated

strategies

5. Vertical integration

6. Combined businesscreation

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Value Chains are part of a Total Value SystemValue Chains are part of a Total Value System

Supplier VC Firm VCFirm VC Channel VC Buyer VC

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Value Chains are part of a Total Value SystemValue Chains are part of a Total Value System

Firm VC Channel VC Buyer VC

Supplier VCSupplier VC

Upstream ValueUpstream Value

Perform valuable activities that

complement the firms activities


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July 2, 1999July 2, 1999

Firms Vary by Degree of DiversificationFirms Vary by Degree of Diversification

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Single-businessSingle-business > 95% revenues from single BU> 95% revenues from single BU

Low Levels of DiversificationLow Levels of Diversification

Dominant-businessDominant-business Between 70% & 95% of revenuesBetween 70% & 95% of revenuesfrom single BUfrom single BU

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SingleSingle--businessbusiness > 95% revenues from single BU> 95% revenues from single BU


DominantDominant--businessbusiness Between 70% & 95% of revenuesBetween 70% & 95% of revenuesfrom single BUfrom single BU

Related-DiversifiedRelated-Diversified


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SingleSingle--businessbusiness > 95% revenues from single BU> 95% revenues from single BU


DominantDominant--businessbusiness Between 70% & 95% of revenuesBetween 70% & 95% of revenues

from single BUfrom single BU

RelatedRelated--DiversifiedDiversified


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Premises of Corporate StrategyPremises of Corporate Strategy

Competition occurs atCompetition occurs at BU levelBU level

Diversified firms do not compete with each otherDiversified firms do not compete with each other----

only theironly their BUsBUs compete.compete.


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Competition occurs at BU levelCompetition occurs at BU level



Diversification adds costs & constraints toDiversification adds costs & constraints to BUsBUs

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DiversificationDiversification adds costs & constraints toadds costs & constraints to BUsBUs

Corporate overheadCorporate overhead

Communication betweenCommunication between BUsBUs & top mgmt& top mgmt

No direct equity ownership by employeesNo direct equity ownership by employees


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Diversification adds costs and constraints to BUDiversification adds costs and constraints to BU


Communication between BU & top mgmtCommunication between BU & top mgmt


ShareholdersShareholders cancan diversifydiversify more cheaply for themselvesmore cheaply for themselves

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Competition occurs at the BU levelCompetition occurs at the BU level



Diversification adds costs & constraints toDiversification adds costs & constraints to BUsBUs


Communication betweenCommunication between BUsBUs and top mgmtand top mgmt


ShareholdersShareholders cancan diversifydiversify more cheaply for themselvesmore cheaply for themselves

Shareholders can buy shares atShareholders can buy shares at mktmkt price & avoidprice & avoid

paying large acquisitionpaying large acquisition premiapremia

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Implications for these PremisesImplications for these Premises

Corporate Strategy cannot succeed unlessCorporate Strategy cannot succeed unless addsaddsvalue tovalue to BUsBUs::


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July 2, 1999July 2, 1999


by providingby providing tangible benefits that offsettangible benefits that offset

inherent costsinherent costs of lost independenceof lost independence

Corporate Strategy cannot succeed unless addsCorporate Strategy cannot succeed unless adds

value tovalue to BUsBUs::

--

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by providing tangible benefits that offsetby providing tangible benefits that offset

inherent costs of lost independenceinherent costs of lost independence

add value to shareholders in a way thatadd value to shareholders in a way that

shareholders could not replicate by themselvesshareholders could not replicate by themselves

Corporate Strategy cannot succeed truly addsCorporate Strategy cannot succeed truly adds

value tovalue to BUsBUs::

--

--

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Adding Value by DiversificationAdding Value by Diversification

Diversification most effectively adds value byDiversification most effectively adds value byeither of 2 mechanismseither of 2 mechanisms


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By developing economies of scope betweenBy developing economies of scope between

BUsBUs

which leads to synergistic benefitswhich leads to synergistic benefits

Diversification most effectively adds value byDiversification most effectively adds value by

either of 2 mechanismseither of 2 mechanisms

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By developing economies of scope betweenBy developing economies of scope between BUsBUs

which leads to synergistic benefitswhich leads to synergistic benefits

By developing market power which lead toBy developing market power which lead togreater returnsgreater returns

Diversification most effectively adds value byDiversification most effectively adds value by

either of two mechanismseither of two mechanisms

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Transferring Core CompetenciesTransferring Core Competencies

Sharing ActivitiesSharing Activities

Corporate Strategy: Reasons to DiversifyCorporate Strategy: Reasons to Diversify

Efficient Internal KEfficient Internal K MktMkt AllocationAllocation

RestructuringRestructuring

Related Diversification Strategies

Unrelated Diversification Strategies

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Key Characteristics

Sharing Activities oftenSharing Activities often lowers costslowers costs oror raisesraises differentiationdifferentiation

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Key Characteristics

Sharing Activities often lowers costs or raises differentiationSharing Activities often lowers costs or raises differentiation

ExampleExample: Using common physical distribution system &: Using common physical distribution system &

sales force such as Procter & Gambles disposablesales force such as Procter & Gambles disposable

diaper & paper towel divisionsdiaper & paper towel divisions


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July 2, 1999July 2, 1999


Key Characteristics


Sharing Activities can lower costs if it:Sharing Activities can lower costs if it:


sales force such as P&s disposable diaper & papersales force such as P&s disposable diaper & paper

towel divisionstowel divisions

** Achieves economies of scaleAchieves economies of scale

** Boosts efficiency of utilizationBoosts efficiency of utilization

** Helps move more rapidly down Learning CurveHelps move more rapidly down Learning Curve

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Key Characteristics


Sharing Activities can lower costs if it:Sharing Activities can lower costs if it:


sales force such as P&Gs disposable diaper & papersales force such as P&Gs disposable diaper & paper

towel divisionstowel divisions

** Achieves economies of scaleAchieves economies of scale

** Boosts efficiency of utilizationBoosts efficiency of utilization

** Helps move more rapidly down Learning CurveHelps move more rapidly down Learning Curve

ExampleExample: GEs costs to advertise, sell & service major: GEs costs to advertise, sell & service major

appliances spread over many different productsappliances spread over many different products

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Sharing Activities can enhance potential for or reduce costSharing Activities can enhance potential for or reduce cost

of differentiationof differentiation

Key Characteristics


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ExampleExample: Shared order processing system may allow new: Shared order processing system may allow new

features which customers value or make more advancedfeatures which customers value or make more advancedremote sensing technology availableremote sensing technology available

Key Characteristics

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Must involve activitiesMust involve activities crucial to CAcrucial to CA


features customers value or make more advanced remotefeatures customers value or make more advanced remote

sensing technology availablesensing technology available

Key Characteristics

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Must involve activities crucial to CAMust involve activities crucial to CA


features customers value or make more advanced remotefeatures customers value or make more advanced remote

sensing technology availablesensing technology available

ExampleExample: P&Gs sharing of sales & physical distribution: P&Gs sharing of sales & physical distribution

for disposable diapers and paper towels effective becausefor disposable diapers and paper towels effective because

these items are bulky & costly to shipthese items are bulky & costly to ship

Key Characteristics


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Sharing ActivitiesSharing Activities11

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Key Characteristics

** ExploitsExploits InterrelationshipsInterrelationships among divisionsamong divisions

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Key Characteristics


** Start withStart with Value ChainValue Chain analysisanalysis


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July 2, 1999July 2, 1999


Key Characteristics


** Start withStart with VCVCanalysisanalysis

ID ability to transfer skills or expertiseID ability to transfer skills or expertise

among similar VCsamong similar VCs

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Key Characteristics


** Start withStart with VCVCanalysisanalysis

ID ability to transfer skills or expertiseID ability to transfer skills or expertise

among similar VCsamong similar VCs

Exploit ability toExploit ability to share activitiesshare activities

2 firms can share same sales force, logistics2 firms can share same sales force, logistics

network or distribution channelsnetwork or distribution channels

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Assumptions

Transferring CC leads to CA only if similarities amongTransferring CC leads to CA only if similarities among BUsBUs meetmeetfollowing conditions:following conditions:

Activities involved inActivities involved in BUsBUs are similarare similar enufenufthatthat

sharing expertise is meaningfulsharing expertise is meaningful11



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Assumptions

Transferring CC leads to CA only if similarities amongTransferring CC leads to CA only if similarities among BUsBUs meetmeet

following conditions:following conditions:

Activities involved inActivities involved in BUsBUs are similarare similar enufenufthatthatsharing expertise is meaningfulsharing expertise is meaningful11

22 Transfer of skills involves activitiesTransfer of skills involves activities importantimportant

to CAto CA


July 2, 1999July 2, 1999

Assumptions

Transferring CC leads to CA only if similarities amongTransferring CC leads to CA only if similarities among BUsBUs meetmeet

following conditions:following conditions:

Activities involved inActivities involved in BUsBUs are similarare similar enufenufthatthat

sharing expertise is meaningfulsharing expertise is meaningful11

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Transfer of skills involves activities which areTransfer of skills involves activities which are

important to competitive advantageimportant to competitive advantage

Skills transferred represent significant sources ofSkills transferred represent significant sources of

CA for receiving unitCA for receiving unit


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Corporate StrategyCorporate Strategy -- Reasons to DiversifyReasons to Diversify




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Key Characteristics

Firms pursuing this strategy frequently diversify by acquisitionFirms pursuing this strategy frequently diversify by acquisition::

Acquire sound, attractive companiesAcquire sound, attractive companies


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Key Characteristics



AcquiredAcquired BUsBUs are autonomousare autonomous


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Key Characteristics




Acquiring corporation supplies needed KAcquiring corporation supplies needed K



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July 2, 1999July 2, 1999

Key Characteristics



AcquiredAcquired BUsBUs are autonomousare autonomousAcquiring corporation supplies needed KAcquiring corporation supplies needed K

Portfolio managers transfer resources fromPortfolio managers transfer resources from BUsBUs thatthat

generate cash to those with high growth potential &generate cash to those with high growth potential &

substantial cash needssubstantial cash needs


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Key Characteristics





Portfolio managers transfer resources fromPortfolio managers transfer resources from BUsBUs thatthat

generate cash to those with high growth potential andgenerate cash to those with high growth potential and

substantial cash needssubstantial cash needsAdd professional management & control toAdd professional management & control to BUsBUs


July 2, 1999July 2, 1999

Key Characteristics





Portfolio managers transfer resources from units thatPortfolio managers transfer resources from units that

generate cash to those with high growth potential andgenerate cash to those with high growth potential and

substantial cash needssubstantial cash needs

Add professional management & control toAdd professional management & control to BUsBUs

BU mgrs compensation based on BU resultsBU mgrs compensation based on BU results



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Assumptions

Mgrs have more detailed knowledge of firm visMgrs have more detailed knowledge of firm vis--aa--visvis

outside investorsoutside investors

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Assumptions



Firm need not risk competitive edge by disclosingFirm need not risk competitive edge by disclosing

sensitive competitive info to investorssensitive competitive info to investors

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Assumptions



Firm can reduce risk by allocating resources amongFirm can reduce risk by allocating resources among

diversified businesses,diversified businesses, althoaltho shareholders can generallyshareholders can generally

diversify more economically on their owndiversify more economically on their own

Firm need not risk competitive edge by disclosingFirm need not risk competitive edge by disclosing

sensitive competitive info to investorssensitive competitive info to investors


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Corporate StrategyCorporate Strategy -- Reasons to DiversifyReasons to Diversify





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Key Characteristics

Seek out undeveloped, sick or threatened firms orSeek out undeveloped, sick or threatened firms or

industriesindustries

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Key Characteristics

Seek out undeveloped, sick or threatened organizationsSeek out undeveloped, sick or threatened organizations

or industriesor industries

Parent company (acquirer) intervenes& frequently:Parent company (acquirer) intervenes& frequently:

-- Changes BU mgmt teamChanges BU mgmt team

-- Shifts strategyShifts strategy

-- Infuses firm with new technologyInfuses firm with new technology

-- Divests part of firmDivests part of firm

-- Makes additional acquisitions to achieve critical massMakes additional acquisitions to achieve critical mass

-- Enhances discipline by changing control systemsEnhances discipline by changing control systems


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July 2, 1999July 2, 1999

Key Characteristics

Seek out undeveloped, sick or threatened organizationsSeek out undeveloped, sick or threatened organizations

or industriesor industries

Frequently sell BU after making 1Frequently sell BU after making 1--time changes sincetime changes since

parent no longer adds value to ongoing operationsparent no longer adds value to ongoing operations


Parent company (acquirer) intervenes and frequently:Parent company (acquirer) intervenes and frequently:

-- Changes BU mgmt teamChanges BU mgmt team

-- Shifts strategyShifts strategy

-- Infuses firm with new technologyInfuses firm with new technology

-- Divests part of firmDivests part of firm

-- Makes additional acquisitions to achieve critical massMakes additional acquisitions to achieve critical mass

-- Enhances discipline by changing control systemsEnhances discipline by changing control systems

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Assumptions

Requires keen mgmt insight to select firms withRequires keen mgmt insight to select firms with

depressed values or unforeseen potentialdepressed values or unforeseen potential


July 2, 1999July 2, 1999

Assumptions

Requires keen mgmt insight to select firms withRequires keen mgmt insight to select firms with

depressed values or unforeseen potentialdepressed values or unforeseen potential

Must do more than restructure companiesMust do more than restructure companies

Need to initiate restructuring of industries toNeed to initiate restructuring of industries to

create more attractive environmentcreate more attractive environment



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July 2, 1999July 2, 1999

During 1970s, consulting firms popularized portfolioDuring 1970s, consulting firms popularized portfolio

matrix techniques to evaluate firms mix of businessesmatrix techniques to evaluate firms mix of businesses

BCG matrixBCG matrix focused on relativefocused on relative mktmkt share & segmentshare & segmentgrowthgrowth

Portfolio Matrix Analysis TechniquesPortfolio Matrix Analysis Techniques

July 2, 1999July 2, 1999

During 1970s, consulting firms popularized portfolioDuring 1970s, consulting firms popularized portfolio

matrix techniques to evaluate firms mix of businessesmatrix techniques to evaluate firms mix of businesses

BCG matrix focused on relativeBCG matrix focused on relative mktmkt share & segmentshare & segment

growthgrowth

These techniques now largely discredited because theyThese techniques now largely discredited because they

led to excessive focus on shifting financial resources &led to excessive focus on shifting financial resources &

lacked strategic insight for diversification decisionslacked strategic insight for diversification decisions

Portfolio Matrix Analysis TechniquesPortfolio Matrix Analysis Techniques

July 2, 1999July 2, 1999


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Note on Diversification

Michael Porter

July 2, 1999July 2, 1999

Porter

Porter studied diversification efforts

1950-86

divestment rate for unrelatedacquisitions was 74%

mkt shows unrelated diversification afailure

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Porters Diversification Tests

1. attractiveness test

2. cost of entry test

3. better off test


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July 2, 1999July 2, 1999

1. Attractiveness Test

shd only diversify into attractive

industries

attractive means high entry barriers,modest buyer and supplier power, weaksubstitutes and stable rivalry

often use rapid growth as proxy for

attractiveness - not so

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2. Cost of Entry Test

entry costs must not capitalize future

profits

more attractive a firm, higher purchasecost

higher entry barriers for attractiveindustries

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3. Better Off Test

either new unit must obtain CA from its

link with corporate or vice versa

not = diversifying corp risk to create S/V

diversification of risk should be by-product of corporate strategy - not driver

CEOs confuse firm size with S/V


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July 2, 1999July 2, 1999

Porters Corporate Strategy Ad vice

1. identify interrelationships among SBUs

2.select core business that are foundation

of core strategy among SBUs

3.create horizontal mechanisms to

facilitate interrelationships among corebusinesses

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Porters Corporate Strategy

4.locate diversification activities that allow

shared activities

5.pursue diversif thro transfer of skills ifopportunities for sharing activities usedup

4a Corp Strat Overview

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