Corporate

Corporate Strategy
Strategy

Creating Corporate Advantages

 Defining
Defining Corporate
Corporate Strategy
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 2
 Goal
Goal of
of Corporate
Corporate Strategy:
Strategy:
Corporate
Corporate Advantage
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?

Corporate Strategy 3
Source: Collis and MOntgomergy, 1998
 Three
Three Dimensions
Dimensions of
of Corporate
Corporate Strategy
Strategy

Business Diversification - Horizontal expansion

Vertical Integration - forward or backward expansion
Geographic Scope - geographic and/or global expansion
Corporate Strategy 4
 Corporate
Corporate Strategy:
Strategy:
Three
Three Fundamental
Fundamental Issues
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 5
 Levels
Levels of
of Strategy
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 6
 Levels
Levels of
of Strategy
Strategy (cont’d)
(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 7
 Premises
Premises of
of Corporate
Corporate Strategy
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 8
 Implications
Implications from
from these
these Premises
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

Corporate Strategy 9