Corporate Strategy

Prof. Arindam Mondal

XLRI Jamshedpur
▪ Stability
▪ Growth
▪ Retrenchment

▪ Cost
Leadership
▪ Differentiation
Levels of Strategy
An Example: GE vs. Rolls-
Royce PLC
 Concepts of Corporate
Strategy
• Portfolio Management
▪ Acquire sound, attractive companies with competent
mangers who stay
▪ Requires good but undervalued companies
 Concepts of Corporate
Strategy
• Transferring skills
– Knowledge about how to perform activities is
transferred among the units
– Characterized by units with similar buyers, channels,
value activities and/or the same strategic concept
– Expertise must be a meaningful source of
competitive advantage
 Concepts of Corporate
Strategy
• Sharing activities
– Leads to lowering costs or raising differentiation
– Must involve activities that are significant to
competitive advantage
– and costs outweighed by benefits
– Business unit collaboration is encouraged and
reinforced
 Concepts of Corporate
Strategy
• Restructuring
– Underdeveloped, sick, or threatened organizations or
industries on the threshold of significant change
– Parent intervenes frequently changing the
management team, shifting strategy, or infusing the
company with new technology
– Business is sold when parent is no longer adding
value
 An Action Program
• Identify interrelationships Among existing business
units
• Select core business as foundation for strategy
• Create horizontal linkages between core businesses
• Diversify when that allows shared activities, or
• Diversify when that allows transfer of skills
• Pursue restructuring only if it fits existing
management skill sets
• Pay Dividends Instead
The Ansoff Matrix or Growth Options Matrix
 Different Growth Strategies
❑Integrative growth strategies
(Economies of scale, Reduced uncertainty, Barriers to entry)
– Horizontal Integration
– Vertical Integration
• Forward Integration
• Backward Integration
❑Diversification strategies
(Economies of scope, Saturated market, Spreads risks)
– Related Diversification
– Unrelated Diversification
Crafting a Corporate Strategy by Evaluating
the Portfolio Mix
1. Does the portfolio have enough businesses in attractive industries?
2. Does the portfolio contain too many marginal businesses or question
marks?
3. Does the company have enough cash cows to finance the stars and
emerging winners?
4. Do the core businesses generate dependable profits or cash flows?
5. Is the portfolio vulnerable to seasonal or recessionary influences?
6. Does the portfolio contain businesses that the company doesn't need
to be in?
7. Is the company burdened with too many businesses in average-to-
weak competitive positions?
8. Does the makeup of the portfolio put the company in a good
position for the future?
What is Horizontal Integration?
 Reasons to Integrate Vertically
The Logic of Value Chain Economies
Backward
Vertical
• The focal firm is able to Dairy Farmers Integration
(milk)
create synergy with the
other firm(s)
• cost reduction
Leprino Foods
• revenue enhancement (Mozzarella Cheese)

• The focal firm is able to

capture above normal
Food Distributors Forward
economic returns
Vertical
(avoid perfect competition) Integration
 Reasons to Integrate Vertically
• Avoids transactions costs of market contracts in
situations where there are:
- small numbers of firms
- transaction-specific investments
- opportunism and strategic misrepresentation
- taxes and regulations on market transactions
• Superior coordination
• Beat the industry cyclicality
Integration makes sense when the focal firm can capture more value than
a market exchange provides – Less transaction cost
 Competitive Advantage

If a vertical integration strategy meets the

VRIO criteria…
Is it Valuable?

Is it Rare?
Is it costly to Imitate?

Is the firm Organized to exploit it?

…it may create competitive advantage.

 Problems with Vertical Integration
• Increasing cost structure
• Disadvantages that arise when technology is
changing fast
• Disadvantages that arise when demand is
unpredictable
• Compounding of risk
• Vertical disintegration: When a company
decides to exit industries either forward or
backward in the industry value chain to its core
industry to increase profitability
 Different Types of Vertical
Relationship
• Full Vertical Integration
– Obtaining all the assets, resources and expertise needed to
replicate the upstream or downstream member of the supply chain.

• Quasi Vertical Integration

– Obtaining some stake in the supplier in the form of specialized
investments or an equity stake to obtain agency benefits by
increasing the ownership in the outcome.

• Long-term Contracts
– A diluted form of vertical integration in which some elements of
procurement are held constant to reduce inconsistencies in product
delivery while holding costs constant to a certain extent.

• Spot Contracts/ Arms length Contracting

– The point to which a firm is not vertically integrated is when the firm
relies on spot contracts to receive the immediate input necessary for
its production.
 APPLYING THE CRITERIA
Vertical Integration v. Outsourcing: Key Considerations
Characteristics of the vertical relationship Implications for VI
How many firms in the adjacent stage? The fewer the number, the more advantageous is VI

Do transaction-specific investments The greater the need for transaction-specific

necessary? investments, the greater the advantages of VI

Is information evenly distributed The greater are information asymmetries, the

across the stages? greater the advantages of VI

Is there uncertainty over the period of The greater the uncertainty, the more incomplete is
the relationship? the contract and the greater the advantages of VI
How similar is optimal scale between
the two stages?
The greater the dissimilarity, the less advantageous
How strategically similar are the two is VI
stages?

Do capabilities in the adjacent stage The greater the need for capability development the
need to be continually upgraded? greater the disadvantages of VI

Is market demand uncertain? Unpredictable demand reduces advantages of VI

Is the adjacent stage highly risky? VI tends to compound risk

Summary
Vertical Integration…

• makes sense when value chain economies

can be created and captured

• may allow a firm to leverage capabilities

• may be a response to the threat of opportunism

and uncertainty

• as a form of exchange per se, is not rare nor

costly to imitate
Summary
Vertical Integration…

• is an important consideration in the decision

to expand internationally (range of possibilities)

• makes sense when done for the right reasons,

under the right circumstances

• can be a costly mistake if done wrong

Ownership is costly—integrate only when the

benefits outweigh the costs of integration!
 Question and Comments

Thank You.
11/16/2021 Arindam Mondal 27