CORPORATE STRATEGY FINAL

PART I - INTRODUCTION TO CORPORATE STRATEGY.........................................................................2

Session 1 - Introduction to Corporate Strategy................................................................................ 2
READING 1 - What is corporate strategy?.................................................................................. 4
Session 2 - Corporate Governance and Firm Ownership................................................................10
READING 1 - How the board of directors should handle strategy?..........................................19
READING 2 - Who will guard the guardians? International corporate governance................. 20
PART II - DIVERSIFICATION AND SCOPE OF THE MULTIBUSINESS FIRM........................................... 23
Session 3 - Horizontal Scope and Diversification - Related and Unrelated..................................... 23
READING 1 - Synergies: Benefits to Collaboration................................................................... 24
Session 4 - Vertical Scope and Firm Boundaries............................................................................. 31
READING 1 - Vertical Integration and the Scope of the Firm................................................... 31
READING 2 - Vertical Integration is Dead, or is it?................................................................... 34
Session 5 - Geographical Scope and International Diversification..................................................39
READING 1 - Managing Global Expansion: A Conceptual Framework..................................... 41
READING 2 - Distance Still Matters: The Hard Reality of Global Expansion Pankaj Ghemawat's.
47
Session 6 - Corporate Development through Organic Growth...................................................... 51
READING 1 - Finding the Right Path......................................................................................... 54
Session 7 - Corporate Development through Inorganic Growth: M&A.......................................... 56
READING 1 - The New M&A Playbook..................................................................................... 56
Session 8 - Corporate Development through Inorganic Growth: Alliances.................................... 59
READING 1 - How to Manage Alliances Strategically............................................................... 59
READING 2 - When to Ally and When to Acquire.....................................................................62
PART IV - MANAGING THE MULTIBUSINESS FIRM.......................................................................... 64
Session 9 - Organizing the Multi-Business Corporation. The role of the Corporate Center in
Creating Group Advantage............................................................................................................. 64
READING 1 - Corporate Strategy: The Quest for Parenting Advantage.................................... 65
READING 2 - Four Logics of Corporate Strategy....................................................................... 67
Session 10 - Corporate Entrepreneurship and Corporate Venture Capital..................................... 70
READING 1 - The Four Models of Corporate Entrepreneurship............................................... 70
Session 11 - Corporate Strategy & Sustainability............................................................................73
READING 1 - Resilience in a Hotter World................................................................................73
Session 12 - Guest Speaker.............................................................................................................77
PART I - INTRODUCTION TO CORPORATE STRATEGY

Session 1 - Introduction to Corporate Strategy

Key differences between Corporate Strategy and Business Strategy

Corporate Strategy
●​ Scope of organization
●​ Determines markets/industries to operate
●​ M&A, Diversification Resource allocation

Business Strategy
●​ Business unit level
●​ How to competes in a specific industry/market
●​ Differentiation, market positioning

Examples of companies that successfully implemented Corporate Strategies

Examples of companies that have NOT successfully implemented Corporate Strategies

How do corporate-level decisions impact the business-level strategies within an

organization?

What challenges might companies face when aligning their corporate and business
strategies?
●​ Resource Allocation Issues
●​ Market Adaptability
●​ Cultural Resistance
 ●​ Operational Complexity
●​ Communication Gaps

READING 1 - What is corporate strategy?

Understanding Corporate Strategy: Where to Compete, How to Grow, and Value Creation

Corporate Strategy Defined

- Corporate strategy is a key driver of rapid growth when properly developed, enabling a company to
leverage its advantages and mitigate disadvantages.
- Common misconceptions include associating corporate strategy with human resources or marketing
strategies, while the essence lies in determining where to compete and how to create value for the
entire corporation.

Three Fundamental Issues in Corporate Strategy for Growth

1. Where to Grow: Corporate Growth Options

- Corporate strategy opens growth avenues, including internationalization, globalization, business
diversification, and vertical integration along the value chain.
- Growth methods encompass mergers, acquisitions, strategic alliances, and organic growth, each
presenting distinct advantages and disadvantages.

2. How to Grow: Redefining Competence Along the Value Chain

- Companies can redefine their competence by altering the degree of vertical integration, focusing
on businesses within the same value chain.
- Vertical integration decisions depend on the market dynamics and involve considerations such as
internalizing key activities and ensuring the company's competitiveness.

3. How to Provide Value from the Corporate Centre

- Corporate advantage is generated when the corporate center adds value to the business mix of
the entire corporation.
- The article aims to address the crucial aspects of where to grow, how to grow, and creating value
from the corporate center in the growth process, examining corporate strategic options through
real-world corporate experiences.

Example: Redefining Competence Along the Value Chain

- Companies can modify their degree of vertical integration based on their core competencies and
the market dynamics.
- Vertical integration decisions are influenced by factors like internalizing key activities contributing to
product quality and the assumption that the company is the best performer.
- Market dynamics play a role, and decisions should align with the functioning of markets, as
illustrated in the example of a cement company focusing on its core business and sourcing raw
materials from market suppliers.

Key Takeaways
- Corporate strategy is not confined to specific departments like human resources or marketing; it
revolves around determining where to compete and creating overall value.
- Growth decisions involve strategic choices on where and how to grow, with each option presenting
its own set of advantages and considerations.
- Corporate advantage is achieved when the corporate centre enhances the value of the entire
business mix, underscoring the strategic importance of adding value from the corporate centre in the
growth process.

Understanding Corporate Strategy: Vertical Integration and Geographical Expansion

Vertical Integration: Cement Industry Example

1. Supply Chain Dynamics:

- Concentration in raw material supply companies often leads to attempted price rises, affecting
industries like cement that heavily depend on specific resources, such as limestone.
- Cement companies tend to integrate the supply of raw materials due to dependencies on specific
resources with varying quality and locations.

2. Risks in Value Chain Dependencies:

- Dependencies on a single supplier or organized group of suppliers can lead to profit appropriation,
as illustrated by examples from the beverage and snack industry.
- Similarly, if a company relies heavily on one purchaser or distribution channel, profit accumulation
may occur on the distribution side, influenced by buyer concentration.

3. Vertical Integration Strategies:

- Cement companies like Cementos Molins, Uniland, Cemex, Lafarge, and Holcim engage in vertical
integration both towards consumers and suppliers, driven by market failures (defensive reasons) and
competitive strengths (offensive reasons).

4. Flexible Integration Decisions:

- Companies can adjust the degree of vertical integration based on circumstances, choosing
between integration, outsourcing, or a combination of both.
- Soboce, a Bolivian cement company, maintains raw material exploitation capacity, negotiates
favorable conditions with suppliers, and strategically distributes its production to maintain suitable
cement prices.

Geographical Expansion: Marks & Spencer Case Study

1. Internationalisation Strategies:
- Marks & Spencer initially pursued internationalization to compete globally, assuming that its
unique resources and capabilities in the UK could be leverageable internationally.
2. Challenges in Leveraging Resources:
- However, challenges arose as not all resources and capabilities are easily leverageable globally.
- The company's unique combination of tangible and intangible resources in the UK, difficult to
copy, also made it challenging for the company to replicate its competitive advantage in the
international market.

3. Complexity in Geographical Expansion:

- Geographical expansion for achieving economies of scale is complex, even for large corporations
like Wal-Mart.
- Despite its significant turnover, Wal-Mart still has a relatively small percentage of its sales outside
its original market, emphasizing the complexity of international market penetration.

4. Lesson from Marks & Spencer:

- Marks & Spencer's shift to concentrate geographically on the UK, after initially expanding
internationally, highlights the difficulty of leveraging unique resources globally.
- The company's sources of competitive advantage were deeply rooted in social complexity, making
them challenging to imitate or replicate.

Key Takeaways:
- Vertical integration in industries like cement addresses risks associated with supply chain
dependencies.
- Geographical expansion is not a guaranteed path to achieving economies of scale, and the
complexity of leveraging resources globally requires careful consideration.
- Unique and socially complex resources can be difficult to copy, but they also pose challenges for
companies in replicating their own sources of competitive advantage globally.

Diversifying businesses
●​ Business diversification is a strategic option for companies to enter new markets.
●​ Examples: Disney diversified into various businesses, while Vivendi faced challenges with
unrelated diversification.
○​ Disney's Diversification:
■​ Started as a cartoon production company; expanded into feature films,
merchandise, cruise ships, theme parks, TV channels, and publishing.
■​ Shared strategically valuable resources, such as iconic characters (Mickey
Mouse) across different businesses.
■​ Considered related diversification for synergies, leveraging characters
without them being on the payroll.
○​ Agbar's Related Diversification:
■​ Agbar (Aguas de Barcelona) diversified from water management to insurance
(Adeslas) and certification (Applus).
■​ Focus on common synergies, particularly in managing public service
concessions.
○​ Vivendi's Unrelated Diversification:
■​ Vivendi, in water management, diversified into content (Universal) facing
challenges due to lack of shared resources or synergies.
 ■​ Unrelated diversification led to significant issues and leadership changes.
Not all resources and capabilities are easily leverageable: the same characteristics that make a
resource difficult to copy also render it difficult to replicate for the company itself.

Specialisation vs. Diversification:

●​ Some companies, like Walmart, choose to specialise in a single business sector (large
distribution).
●​ Others, like Vivendi and Iberdrola, opted to return to or specialise in their original businesses.
Foundations of strategic growth options:

*This chart summarises the main issues that lie behind each growth option

Three options for business expansion/growth:

1.​ Mergers/acquisitions
a.​ Rapid access to complementary resources; neutralizes potential competitors.
b.​ Can be defensive (e.g., against market opening) or offensive (e.g., consolidation in
other countries).
c.​ Drawbacks include cultural integration challenges, high prices, and acquiring
unhealthy businesses.
2.​ Strategic alliances
a.​ Partnerships with common interests; types include complementary, addition, and
joint development alliances.
b.​ Advantages include access to resources, risk reduction, and relative ease of
reversibility.
c.​ Disadvantages include slow decision-making, difficulty in management, and potential
damage to relationships.
d.​ A strategic alliance usually makes decisions slow and more difficult to reach, as the
partners have to find a minimum common ground
3.​ Internal development.
a.​ A company can pursue strategic initiatives independently, without mergers,
acquisitions, or alliances.
b.​ Advantages include compatibility with corporate culture.
 c.​ Disadvantages involve a lengthy development process as most capabilities and
resources are built within the company.
d.​ Challenges in Internal Development:
i.​ Major challenge: Transforming a large corporation to behave like a small one.
ii.​ Difficulty lies in ensuring ideas and projects survive and reach
decision-making levels.

How do we create value from the Corporate Centre Parenting?

Four types of parenting:
1.​ Individual support - Help as need arise
2.​ Linking synergies - B.U connected
3.​ Central functions & services - Support to B.U
4.​ Corporate development - Developing new businesses

Do you think the goal of corporate strategy is to individually maximize the Net Present Value of each
business in the corporation? → It is focused in doing better than the sum of parts (individual
businesses)
Session 2 - Corporate Governance and Firm Ownership

Why is Corporate Governance important?

1.​ Corporations hold significant power in society
2.​ Good governance ensures value for shareholders and stakeholders
3.​ Poor governance can lead to financial crises and loss of public trust
Key challenge: Balancing corporate autonomy with social & legal responsibility.

Corporate governance is increasingly understood to encompass corporate boards as well as matters

such as laws, accounting standards, and ethical norms that regulate corporate life.
Mechanisms of Corporate Governance

Board of Directors “The Board”

Governing body that leads a company (corporation or limited liability company).

Composed of the representatives selected by the general shareholders' meeting, acting in

accordance with the provisions set forth in the organization's bylaws.
The board of directors appoints the Chief Executive Officer of the corporation and sets out the
overall strategic direction, and supervises the activities of an organization

Other Names:
●​ board of directors and advisors
●​ board of governors
●​ board of managers
●​ board of regents
●​ board of trustees (ESADE)
●​ board of visitors
●​ It may also be called the executive board

Board of Directors & the Executive Management form a Leadership Team

Chief Executive Officer (CEO) Is the highest officer charged with the management of an organization
Other Names:
●​ Executive Officer
●​ Chief Executive (CE)
●​ Managing Director (MD) in the UK
●​ Director General (ESADE)

Difference between government and management

“There is a radical difference between controlling the activities of an organization and performing
these activities” J.S. Mill (1867)

Board: Composition & Characteristics

Board: Structure
●​ Chairman
●​ Vice Chairman
●​ Board Member: different board types
●​ Board Secretary: maintains records, ensures compliance, and supports governance processes

Board Members: Types

Board: Committees

Corporate Governance
To succeed and remain sustainable over time, the company needs to address the concerns of
multiple stakeholders both inside and outside the corporation
CG differences across Capitalism Models

MODEL ie, COUNTRIES CHARACTERISTICS

LME USA, UK, Canada Market-driven,

shareholder-focused, strict
regulations.

CME Germany, Japan, Sweden Strong ties between firms,

government & labor unions.

FLME Italy, South Korea, Brazil Family-controlled firms with

hereditary structures.

SLME China, RUssia, Malaysia State-owned enterprises with

government influence

Codetermination - Dual Board (2 tier system)

Family Business CG model

Ownership Models

Types of ownerships
Ownership matters!!!
●​ Impact on Vision, Strategy, and Management
●​ Family-owned, Publicly Traded, StateOwned, Private Equity, Non-Profit…
●​ Each has Pros & Cons when it comes to Management, Governance, and their interface
●​ “Specific” aspects to consider in each case

Public companies ●​ Listed on the stock exchange.

●​ Subject to strict financial regulations and disclosures.
●​ BOD and executives are accountable to shareholders and
the general public
●​ Pressure for short term results from shareholders
●​ Vulnerability to market fluctuations and investor sentiment

Family businesses ●​ Decision-making may be influenced by family relations

●​ Generational transition and succession
●​ Limited access to external capital

Private companies ●​ Governance may be more flexible and less regulated than
for public companies
●​ Faster decision-making due to a more concentrated
ownership structure
●​ Limited access to external funding and capital for
expansion
●​ Reliance on personal networks for growth opportunities
●​ Difficult to attract top talent without public visibility
 State-owned enterprises ●​ Governance may be influenced by political and social
considerations
●​ Government backing provides stability and resources

NGOs (Non-Governmental ●​ Governed by a BOD but may have a more democratic

Org) decision-making structure
●​ Primary focus isn’t profit generation but fulfilling a social or
environmental mission
●​ Transparency and accountability are fundamental
●​ Dependency on donations → financial instability

Public companies
Family business

Private companies
State-owned enterprises

NGOs
READING 1 - How the board of directors should handle strategy?

Core Idea: The board of directors has a non-delegable responsibility to supervise corporate strategy
— even though many directors feel unprepared for it. This article explains how directors should
engage in strategy to create sustainable long-term value while mitigating risks.

Key Points:
Board’s Role in Strategy:
●​ Directors must prioritize the company’s long-term value, not the immediate interests of
shareholders.
●​ Following "Noses in, fingers out," they challenge management constructively without
micromanaging.
●​ Asking the right questions is crucial.
Understanding Value Creation and Destruction:
●​ Managers’ decisions always carry risk — they can create or destroy value.
●​ Directors must recognize cognitive biases and set rigorous decision-making processes.
●​ Ownership structures (family, state, PE, etc.) impact governance dynamics.
Major Risks to Corporate Value:
●​ Diversification (horizontal or vertical) and M&A are high-risk areas.
●​ Boards should be skeptical of diversification — ask about real synergies, industry fit, and
management capabilities.
●​ International expansion must be cautious — don’t expand internationally when the home
market is weak.
Correcting Value Destruction:​

●​ Reference shareholders (activists, families, governments) can push for strategic changes.
 ●​ The market for corporate control (takeovers, buyouts) also disciplines value destruction.
Mergers & Acquisitions Dangers:
●​ Most acquisitions destroy value due to overpaying, poor integration, and selling off
non-strategic assets cheaply.
●​ Asymmetries of information heavily favor sellers.
Sustaining Long-Term Value:
●​ Companies with strong ESG (Environmental, Social, Governance) commitments outperform
in the long term.
●​ Boards must oversee ESG strategy, risk management, and sustainability reporting.
Making Strategy Central to the Board Agenda:
●​ Strategy discussions must be regular, well-prepared, and data-driven.
●​ Strategy options presented should include scenarios, risks, assumptions, and contingency
plans.
●​ Directors should have access to independent information and primary sources.
Director Preparation:
●​ Directors should educate themselves on industry trends, business models, and company
dynamics.
●​ Participate in conferences, sector meetings, and strategy days.
●​ Onboarding programs and ongoing training are essential.
Final Advice:
●​ Strategy is a dynamic, continuous process.
●​ Directors must revisit assumptions regularly and adapt to changing environments,
competition, and technology.
●​ Always align strategic decisions with long-term sustainable value.​

READING 2 - Who will guard the guardians? International corporate governance

Dilemma: balance the tension between releasing the creative power of corporations and
constraining them to work for the overall well-being of society.

Societies use institutions to govern corporations, executive behaviour and economic transactions.
-​ Formal institutions: codified guidelines for corporate behaviour, including laws and
regulations.
-​ Informal institutions: non-codified social norms and encompass values, beliefs and
behavioural norms that define “proper” corporate behaviour.

Governance: the quality of institutions interacting to influence an overall society.

-​ Corporate governance system: focuses on how corporate power is channelled.
○​ Finance oriented scholars define corporate governance as shareholder-oriented
governance, the ways in which suppliers of finance to corporations assure
themselves of getting a return on their investment.
 ○​ When firms become so large that their owners can no longer manage them, the
owners hire professional managers to run their firms.
○​ Misalignment between managers and owners. For example, managers in a large firm
might seek to quickly generate short-term and high-risk profits at the expense of
increasing the firm's long-term value, while owners might be more concerned with
sustaining long-term dividends and maintaining strong relationships with community
stakeholders.

The board of directors:

-​ It is one of the core governance mechanisms that firms use to minimise agency costs.
-​ It is responsible for aligning the interests of the financial owners and mangers through
governance practices.

Stakeholders: any group or individual that has an interest in its interaction with the firm and can be
affected by the firm's actions, objectives, policies and its interactions with other stakeholders.
-​ Stakeholder view of corporate governance: attempt to balance shareholder needs with the
needs of other important stakeholders.

Corporate governance involves a set of relationships between a company's management, its board,
its shareholders and other stakeholders. Corporate governance also provides the structure through
which the objectives of the company are set, and the means of attaining those objectives and
monitoring performance are determined.

Capitalism is an economic system that is based on the private ownership of capital goods as the
means of production, using the creation of goods and services for profit.'
-​ Categorization of capitalism into shareholder-oriented, or market-based, countries (that have
liberal market economies), and stakeholder-oriented, or bank-based, countries (that have
coordinated market economies).

The four models of capitalism:

-​ Liberal market economies (LMEs)
○​ Characterised by the predominance of markets (as opposed to direct or indirect
governmental control), managerial and investor opportunism (as opposed to
cooperation), well-defined property rights, and relatively individualistic and
low-power distance social norms.
○​ Ex. USA, UK, Canada, Australia
-​ Coordinated market economies (CMEs)
○​ Characterised by non-market relationships orchestrated through relatively high levels
of corporatism - "various types of institutional arrangements whereby important
political-economic decisions are reached via negotiation between or in consultation
with peak-level representatives of employees and employers (or other interest
groups and the state).
○​ Ex. Germany, Japan, Scandinavian countries.
 -​ Family-led market economies (FLMEs)
○​ The economy is sustained in great part by family businesses, and their businesses are
often sheltered by the state.
○​ Ex. Italy is a family-led capitalist country. It is also prevalent in Asia.
-​ State-led market economies (SLMEs)
○​ The state plays a salient role in economic life. Sometimes, the state directly controls
a firm through full or partial ownership and management; other times, the state
controls a firm indirectly through state subsidies or state lending.
○​ Ex. China, Hungary, Malaysia

When discussing ownership, we look at 3 factors:

1)​ The concentration of ownership
2)​ The type of primary owners
3)​ The separation of voting and cash flow rights.

The nature of ownership determines the incentives and capabilities that define both how the
performance of a firm will be monitored and measured and how the daily operations of the firm will
be managed.
The nature of ownership shapes the goals of the firm. For example, state-owned firms are driven by
regulatory or policy considerations rather than, or in addition to, economic objectives; thus, the state
is a very different kind of shareholder from profit-driven investment firms.'

Board of directors: in LMEs boards are set up to be independent and to be increasingly more active
and responsible. They are governed by the principles of fiduciary duty, duty of care and duty of
loyalty. CME boards are often "dual tier," which implies that labor has a significant voice in the
strategy of the firm. CME boards also tend to have a majority of insiders instead of independent
directors, and major shareholders such as banks or other corporations are typically represented via a
director on the board. FLME boards tend to be composed of insider directors or family owners.
Boards are largely symbolic since most of the decision-making takes place at the family dinner table
and not in the boardroom.
SLME directors tend to be nominated and/or approved by the state; therefore, there are few if any
independent directors. Directorship interlocks are very common, meaning that directors serve on
boards for several different firms.
PART II - DIVERSIFICATION AND SCOPE OF THE
MULTIBUSINESS FIRM

Session 3 - Horizontal Scope and Diversification - Related and Unrelated

Pepsico Case:
Before Roger Enrico (Pre-1996 Strategy)
●​ Focused on inorganic growth via mergers & acquisitions (M&A).
●​ Diversified beyond beverages into:
○​ Quick-service restaurants: Acquired Pizza Hut (1977), Taco Bell (1978), and KFC
(1986).
○​ Snack foods: Merged with Frito-Lay in 1965.

●​ Maintained a strong international focus, especially in restaurants and beverages.

●​ Despite scale, the restaurant division had declining returns domestically.
●​ Strategy was to become a multi-industry conglomerate.

Under Roger Enrico (Post-1996 Strategy)

●​ Spun off the restaurant division into Tricon Global Restaurants (1997).
●​ Refocused on beverages and snacks (core areas).
●​ New strategic emphasis on innovation as the key growth driver.
●​ Entered new markets and categories via:
○​ Acquisition of Tropicana (juice).
○​ Merger with Quaker Oats (health foods & Gatorade).​

●​ Adopted a broader "worldview":

○​ No longer just competing with Coca-Cola.
○​ Competitors now include Nestlé, Kraft, Unilever.​

●​ Pivoted toward health and wellness trends:

○​ Developed product categories: "Fun-For-You", "Better-For-You", "Good-For-You".​

●​ Targeted emerging markets (e.g., China, India, Latin America).

Diversification Strategy

●​ Horizontal diversification: Expanded into:

○​ Non-carbonated beverages (e.g., juice, sports drinks).
○​ Snacks and health-conscious food segments.​

●​ Vertical integration:
○​ Controlled R&D, manufacturing, packaging, and distribution.
 ○​ Created Pepsi Bottling Group (1998) for streamlined bottling.​

●​ Geographic diversification: Customized strategies per region (e.g., Pokémon campaign in

Mexico).
●​ Leveraged:
○​ Cross-brand synergies (snacks & drinks consumed together).
○​ Advanced technology and R&D.
○​ Strong financial base and acquisition expertise.​

●​ Competitive resources assessed as valuable, rare, inimitable, and organized (VRIO).

Corporate Advantage

●​ Achieved synergies across business units:

○​ Cross-selling (e.g., Gatorade & Frito-Lay).
○​ Shared distribution networks.​

●​ M&A (e.g., Tropicana, Quaker) supported entry into new dayparts (e.g., breakfast) and
health-focused segments.
●​ Diversified portfolio reduced exposure to market volatility and demographic shifts.
●​ Maintained advantage over rivals by:
○​ Offering variety.
○​ Enhancing cost-efficiency.
○​ Global brand reach and logistics.

READING 1 - Synergies: Benefits to Collaboration

Key Points

●​ Synergies occur when two businesses together create more value than separately, likely
through coordinated operations.
●​ They seem to come from linking value chains and resources, such as shared production or
R&D.
●​ Value chains are activities like production and marketing, supported by resources like
factories or expertise.
●​ There are four types: consolidation (merging similar activities), combination (pooling for
scale), customization (tailoring dissimilar resources), and connection (linking outputs).
●​ Benefits can go to one or both businesses, with effects being one-sided or two-sided.
●​ Negative synergies, where joint operation reduces value, do exist, such as through brand
dilution.
●​ Common questions cover classification, acquisition types, and distinctions from corporate
advantage.
What Are Synergies?

Synergies, especially operational ones, happen when two businesses working together create more
value than if they operated alone. This is often tested by comparing the combined value to the sum
of individual values, suggesting coordination is key. It’s important for justifying business deals like
acquisitions, as it creates value investors can’t easily replicate.

Where Do Synergies Come From?

Research suggests synergies arise from coordinating decisions across businesses, particularly through
their value chains and resources. Value chains include activities like production and marketing, while
resources are the assets and capabilities, like factories or R&D teams, that support these. Linking
these can lead to cost savings or revenue growth.

Value Chains and Resources

Value chains are the set of activities needed to deliver a product or service, split into primary (e.g.,
manufacturing) and secondary (e.g., HR). Resources, such as equipment or expertise, enable these
activities. Synergies emerge when these are shared or coordinated, like using the same factory for
multiple products.

Types of Synergies

There are four types, each with examples:

●​ Consolidation: Merging similar activities, like closing redundant factories to save costs.
●​ Combination: Pooling similar resources for scale, like negotiating better supplier deals.
●​ Customization: Tailoring dissimilar resources, like adapting software for specific hardware.
●​ Connection: Linking outputs, like bundling products to reduce customer costs.

Charts in the reading (Figures 2.3 to 2.6) illustrate these, with tables (Tables 2.1, 2.2) detailing
attributes.

Who Benefits and Effects

Benefits can be one-sided, where only one business gains, or two-sided, where both do. This
depends on how value is split, often requiring payments like premiums in one-sided cases.

Negative Synergies

Yes, negative synergies exist, where joint operation reduces value, such as brand dilution (e.g., a
luxury brand harmed by a budget line) or increased complexity slowing decisions.

Frequently Asked Questions

The reading lists seven questions, covering why use the 4C’s framework, how synergies differ in
acquisitions, if buying competition is synergy, mixing up types, relatedness as a measure,
mathematical differences from corporate advantage, and if internal capital markets are synergies.

Detailed Survey Note: Comprehensive Analysis of Synergies in Corporate Strategy

This note provides an in-depth exploration of synergies, drawing from the provided reading material,
"Corporate Strategy: Tools for Analysis and Decision-Making" by Phanish Puranam and Bart Vanneste,
published by Cambridge University Press. The analysis addresses all aspects of the user’s query,
ensuring a thorough understanding for corporate strategists and lay readers alike. All information is
sourced from the attached PDF document, ensuring accuracy and completeness.

Introduction to Synergies

Synergies, particularly operational synergies, are defined as the additional value created when two
businesses are operated jointly compared to their individual operations. This is distinct from financial
synergies, such as tax benefits, and focuses on coordinating decisions across primary and supporting
activities in the value chains. The synergy test, V(AB)>V(A)+V(B) V(AB) > V(A) + V(B) V(AB)>V(A)+V(B),
where V(A) V(A) V(A) and V(B) V(B) V(B) are the net present values of businesses A and B operated
independently, and V(AB) V(AB) V(AB) is their combined value, underscores the need for active
coordination beyond mere ownership. This concept is crucial for justifying acquisitions, alliances, and
premium payments, as it creates private value that investors cannot replicate through diversification
alone. For example, if Very Good, Inc., a toy maker, acquires another company and their combined
operations increase efficiency or revenue, the value created exceeds what each could achieve alone.

Origins of Synergies: Value Chains and Resources

Synergies originate from coordinated decisions about the operations of two businesses, specifically
through their value chains and the resources that underpin these activities. The value chain, as
defined by Porter (1985), includes primary activities (e.g., production, marketing) and secondary
activities (e.g., HR, procurement) that deliver a product or service to customers. Resources, as per
Barney (1991), encompass assets, capabilities, processes, and knowledge that enable these activities,
forming the basis for competitive and corporate advantages. Operational synergies emerge when
there are valuable links between the value chains of two businesses and the resources supporting
them. For instance, Very Good, Inc. might share manufacturing facilities with a plastic component
maker (Company A) or engage in joint R&D with another toy maker (Company B), leveraging
resources like factories, R&D teams, or distribution networks to reduce costs or increase revenues.

The reading provides visual aids to clarify these concepts:

●​ Figure 2.1: Illustrates the value chain of a toy maker, showing activities like production and
marketing.
●​ Figure 2.2: Depicts a value chain and the resources underlying value, such as labs or skilled
teams, highlighting how resources support value chain activities.
To identify synergies, analysts must examine how value chain activities (e.g., procurement, R&D) and
their underlying resources can be coordinated. For example, sharing R&D resources between two
companies might lead to innovative products, reducing costs or boosting revenues.

Detailed Examination of Value Chains and Resources

A value chain is a structured set of activities required to produce and deliver a product or service,
divided into primary activities directly related to production levels (e.g., manufacturing) and
secondary activities that support these (e.g., technology development, HR). Resources, including
tangible assets like equipment and intangible assets like expertise, enable these activities. The
reading emphasizes that synergies arise when these value chains and resources are linked across
businesses to enhance efficiency or value. For instance, Very Good, Inc.’s value chain might include
design, production, and distribution, and acquiring Company A (plastic components) could lead to
synergies by sharing production resources like factories, reducing overhead costs.

Classification of Synergies: The 4 C’s Framework

The document introduces the "4 C’s" framework to classify operational synergies, based on two
dimensions: similarity of resources (similar vs. dissimilar) and degree of resource modification
required (high vs. low). This framework provides a structured approach to identify, value, and
manage synergies, contrasting with the less insightful cost-revenue classification. Below, each type is
detailed with charts and examples:

●​ Consolidation (Similar Resources, High Modification): This involves rationalizing similar

resources by eliminating redundancies, affecting costs and capital. High modification, such as
trimming or adjusting resources, is needed.
○​ Chart: Figure 2.3 shows how value chains might look after consolidation, e.g.,
merging procurement activities.
○​ Examples: Reducing headcount by merging departments, closing factories to
increase capacity utilization (e.g., consolidating four factories at 60% capacity to
three at 80%), or forming shared services centers at the corporate level.
●​ Combination (Similar Resources, Low Modification): Entails pooling similar resources
without significant modification to gain economies of scale or market power, impacting costs
(e.g., volume discounts) or revenues (e.g., higher prices). This can raise regulatory concerns
about anti-trust issues.
○​ Chart: Figure 2.4 illustrates combined value chains, e.g., merging procurement for
volume discounts.
○​ Examples: Combining purchasing to negotiate better supplier deals, acquiring a
competitor to raise prices due to increased market power, or corporate HQ gaining
better bargaining power with talent or financiers.
●​ Customization (Dissimilar Resources, High Modification): Involves co-specializing dissimilar
resources to create greater joint value, requiring significant modification. This can enhance
product quality or reduce costs through tailored solutions.
○​ Chart: Figure 2.5 depicts value chains linked through customization, e.g., adjusting a
software company’s technology to work with a mobile phone company’s hardware.
○​ Examples: A software and mobile phone company developing customized
hardware-software solutions, transferring best practices or knowledge to improve
another company’s operations, or building a dedicated warehouse next to a
manufacturing site.
●​ Connection (Dissimilar Resources, Low Modification): Generates value by pooling outputs of
dissimilar value chain activities with little modification, such as bundling products or
cross-selling to reduce customer transaction costs.
○​ Chart: Figure 2.6 shows connected value chains, e.g., linking sales teams to sell
bundled products.
○​ Examples: Offering a one-stop shop to reduce customer search costs, a bank
cross-selling insurance to its customers, or applying a common brand across
businesses to boost revenues.

The reading also includes tables to summarize these operators:

●​ Table 2.1: Summarizes the four operators (Consolidation, Combination, Customization,

Connection).
●​ Table 2.2: Details their attributes, such as resource modification, collaboration needs, and
impact type (cost, revenue, or both).
This framework is particularly useful for identifying synergy opportunities comprehensively, though
the reading notes it’s a search tool, not a strict classification, acknowledging that mixing up the C’s is
not a problem.

Beneficiaries of Synergies: One-Sided vs. Two-Sided Effects

Synergies can benefit one or both businesses involved, with the total synergy value S S S defined as
the difference between joint value V(AB) V(AB) V(AB) and individual values V(A)+V(B) V(A) + V(B)
V(A)+V(B), split into S(A) S(A) S(A) (synergy for firm A) and S(B) S(B) S(B) (synergy for firm B), where
S=S(A)+S(B)>0 S = S(A) + S(B) > 0 S=S(A)+S(B)>0.

●​ Two-Sided Effects: Both firms benefit (S(A)>0 S(A) > 0 S(A)>0 and S(B)>0 S(B) > 0 S(B)>0),
such as both gaining from reduced costs or increased revenues.
●​ One-Sided Effects: Only one firm benefits significantly (S(A)>0 S(A) > 0 S(A)>0 and S(B)<0 S(B)
< 0 S(B)<0), but the total is positive, often requiring a side payment (e.g., acquisition
premium) to make the deal worthwhile for both.

Analysts must estimate the impact on each firm’s value separately to understand who benefits and
negotiate accordingly. For example, if Very Good, Inc. acquires Company A and only Very Good
benefits due to better factory use, it might pay a premium to Company A to share the benefits,
ensuring mutual agreement.

Existence of Negative Synergies

Negative synergies, where joint operation reduces total value compared to independent operation,
do exist. Examples include:

●​ Brand Dilution: A luxury watch brand operating a budget jewelry store under the same
brand, damaging its premium image.
●​ Organizational Complexity (“Dilbert” Costs): Coordination across businesses can slow
decision-making and reduce independence, outweighing synergy benefits if gains are small.
●​ Independence Concerns: If two businesses (e.g., supplier and buyer) under the same
umbrella face suspicion of collusion or information leakage, clients may leave, reducing
value.

An example is a film studio known for family values acquiring a violent action movie business, risking
brand dilution and alienating its core audience.

Frequently Asked Questions: Comprehensive Insights

The reading addresses seven frequently asked questions, providing clarity on various aspects of
synergies:

1.​ I am familiar with a synergy classification based on costs and revenues. Why do you
suggest the 4C's framework?
○​ The cost-revenue classification is too crude, offering little insight into value creation
logic, valuation, or organizational implications. The 4C’s framework provides a
 structured approach to identify, value, and manage synergies based on resource
similarity and modification needs.
2.​ Does the nature of synergies differ in so-called "horizontal," "vertical," and conglomerate
acquisitions?
○​ Yes. Horizontal (same business) acquisitions may involve all 4C’s; vertical
(subsequent stages) are less likely to use Consolidation or Combination;
conglomerate (unrelated) have fewer synergies between businesses but may involve
HQ-business links.
3.​ Is buying out the competition a form of synergy?
○​ Yes, it’s a Combination synergy, as the merged firm can raise prices or gain market
power, though regulators may oppose this due to antitrust concerns.
4.​ Help! I keep mixing up the different C's. Is that a problem?
○​ No, the 4C’s are a search tool, not a strict classification. The goal is to identify
synergy opportunities comprehensively, not to label them perfectly.
5.​ Is relatedness a good measure of synergy potential?
○​ No, industry-based relatedness (e.g., SIC codes) focuses on products and customers,
not value chains, where synergies originate. However, similarity in management
needs (e.g., investment cycles) can create synergies.
6.​ How do the mathematical definitions of corporate advantage and synergy differ?
○​ Corporate advantage is about jointly owning businesses (V[AB]>V(A)+V(B) V[AB] >
V(A) + V(B) V[AB]>V(A)+V(B)), while synergy is about jointly operating them
(V(AB)>V(A)+V(B) V(AB) > V(A) + V(B) V(AB)>V(A)+V(B)). Figure 2.8 illustrates this
distinction using quadrants.
7.​ Is an internal capital market a form of synergy?
○​ It’s a financial (non-operational) synergy, not the focus of this book. It involves HQ
funding businesses internally, which can be beneficial in underdeveloped or
inaccessible capital markets.

These questions highlight the complexity and nuance of synergy analysis, ensuring readers
understand both practical and theoretical aspects.

Conclusion: This survey note provides a comprehensive overview of synergies, covering their
definition, origins, classification, beneficiaries, potential negatives, and common queries. The
detailed examples, charts (Figures 2.1 to 2.6, 2.8), and tables (Tables 2.1, 2.2) from the reading
enhance understanding, making it a valuable resource for corporate strategy analysis. All information
is derived from the attached PDF, ensuring accuracy and relevance as of the current analysis date,
08:31 PM CEST on Tuesday, April 29, 2025.
Session 4 - Vertical Scope and Firm Boundaries
Esade exercise

READING 1 - Vertical Integration and the Scope of the Firm

This chapter examines VI as one dimension of corporate strategy (alongside product and
geographical scope), focusing on the choice between VI and outsourcing. It analyzes the relative
efficiencies of firms versus markets, the benefits and costs of VI, and alternative vertical
relationships, emphasizing that no universal solution exists—decisions depend on context.

Transaction Costs and the Scope of the Firm

●​ Economic Organization: Capitalist economies use two mechanisms:

○​ Markets: Coordinated by prices and individual decisions (Adam Smith’s “invisible
hand”).
○​ Firms: Coordinated by managerial hierarchies (Alfred Chandler’s “visible hand”).
●​ Determinant of Scope: Ronald Coase’s transaction cost theory explains firm boundaries:
○​ Transaction Costs (Markets): Costs of search, negotiation, contracting, monitoring,
and enforcement.
○​ Administrative Costs (Firms): Costs of internal coordination and management.
○​ Implication: Activities are internalized if transaction costs exceed administrative
costs.
●​ Examples:
○​ A basement remodel can be organized via market contracts with independent
specialists or within a firm.
○​ Industries vary: Petroleum is vertically integrated (e.g., ExxonMobil); restaurants are
fragmented.

Historical Trends

●​ 19th-20th Century: Firms grew due to:

○​ Technological Advances: Mechanization, transportation (canals, railways), and
innovations (electricity, automobiles).
○​ Organizational Innovations: Limited liability, line-and-staff structures, holding
companies, and multidivisional structures (e.g., DuPont, GM).
○​ Outcome: Large corporations dominated via vertical and horizontal integration.
●​ Late 20th Century (1980s-2000s): Reversal due to:
○​ Turbulent Environment: Increased uncertainty favored flexibility.
○​ ICT Advances: Reduced transaction costs, enabling outsourcing.
○​ Outcome: Firms focused on core businesses, reducing size and scope.
●​ 21st Century: Renewed consolidation in tech and other sectors due to scale and market
dominance.
Defining Vertical Integration

●​ Definition: Ownership of multiple stages in the value chain, either backward (suppliers) or
forward (customers).
●​ Measurement: Ratio of value added to sales revenue.
●​ Types:
○​ Full VI: Complete control of a stage (e.g., wineries using only homegrown grapes).
○​ Partial VI: Supplementing internal production with external sourcing (e.g., wineries
buying some grapes).
●​ Shifting Fashions:
○​ 20th Century: VI favored for coordination and risk reduction.
○​ 1990s: Outsourcing preferred for cost reduction, flexibility, and focus (Tom Peters,
1992).
○​ Nuance: Choices vary within industries (e.g., Disney’s VI vs. Harry Potter’s licensing).

Benefits of Vertical Integration

1.​ Technical Economies:

○​ Description: Cost savings from physically integrating processes (e.g., steel production
and rolling; pulp and paper).
○​ Caveat: Co-location can occur without ownership, but VI reduces transaction costs in
interdependent processes.
2.​ Avoiding Transaction Costs:
○​ Context: High transaction costs arise in markets with transaction-specific
investments or uncertainty.
○​ Example: Steel strip and can production:
■​ Market Contracts: Low transaction costs for standardized products (e.g.,
steel strip to can makers) due to many buyers/sellers.
■​ VI: Preferred for steel and strip production due to integrated facilities,
creating bilateral monopolies with high bargaining costs and opportunism
risks.
○​ Empirical Evidence: VI is common for specialized components in autos and
aerospace.
3.​ Coordination Benefits:
○​ Context: VI simplifies coordination in innovative or complex products.
○​ Example: Tesla’s in-house production of 80% of components (batteries, powertrains)
reduces communication needs with suppliers.
○​ Other Cases: Semiconductor firms (e.g., Intel) integrate design and fabrication for
technical collaboration.

Costs of Vertical Integration

1.​ Differences in Optimal Scale:

○​ Issue: Stages have different minimum efficient scales, making VI inefficient for
smaller firms.
 ○​ Example: UPS avoids manufacturing vans (scale too small); small brewers outsource
containers.
2.​ Need for Distinctive Capabilities:
○​ Issue: Specialization develops superior capabilities; VI limits learning from diverse
clients.
○​ Example: Boeing outsources IT to specialists (e.g., IBM) with broader expertise.
○​ Exception: Walmart keeps IT in-house due to its integrated role in supply chain and
operations.
3.​ Managing Strategically Different Businesses:
○​ Issue: VI requires managing diverse businesses with different systems and cultures.
○​ Examples:
■​ Marriott splits hotel ownership and operations.
■​ Coca-Cola spins off bottling to focus on brand management.
4.​ Incentive Problems:
○​ Issue: VI replaces high-powered market incentives with low-powered internal
incentives.
○​ Example: In-house IT departments may respond slowly compared to external
specialists.
○​ Solution: Internal competition (e.g., shared-service organizations).
5.​ Competitive Effects:
○​ Issue: VI can alienate partners by competing with them.
○​ Example: Google’s smartphones risked pushing Android users (e.g., Samsung) to
alternative systems.
6.​ Flexibility:
○​ Market Advantage: Outsourcing enables rapid response to demand fluctuations
(e.g., construction).
○​ VI Advantage: System-wide flexibility for coordinated adjustments (e.g., Zara’s
fast-fashion model).
○​ Context: Outsourcing suits fast-cycle product development (e.g., iPhone, Kindle).
7.​ Investing in Unattractive Industries:
○​ Issue: VI may involve low-margin sectors (e.g., McDonald’s avoids agriculture).
8.​ Compounding Risk:
○​ Issue: VI ties stages together, amplifying risks from disruptions.
○​ Examples: Tyson Foods’ plant closure; Disney’s reliance on studio success.

Applying the Criteria: Make or Buy

●​ Decision Framework: Figure 10.4 lists key considerations:

○​ Favoring VI: High transaction-specific investments, uncertainty, unreliable partners,
similar scale, integrated capabilities.
○​ Favoring Outsourcing: Need for specialized capabilities, high-powered incentives,
demand uncertainty, dissimilar businesses.
●​ Context-Specific: No universal solution; choices depend on industry, firm resources, and
strategy.
Designing Vertical Relationships

●​ Beyond Binary Choice: Vertical relationships range from spot contracts to VI, varying in
resource commitment and formality.
●​ Types:
○​ Long-term Contracts: Secure investments but struggle with uncertainty (e.g., Shell’s
oil contracts).
○​ Vertical Partnerships: Trust-based, flexible relationships (e.g., Japanese automakers’
supplier collaboration).
○​ Franchising: Combines VI’s coordination with market incentives (e.g., McDonald’s,
Hilton).
●​ Choosing Relationships:
○​ Resources and Strategy: Zara’s VI supports fast-cycle development; Chipotle owns
restaurants for cultural control.
○​ Risk Allocation: Contracts distribute risks based on bargaining power (e.g.,
franchisees bear most risk).
○​ Incentives: Hybrid models balance market incentives with collaboration (e.g.,
Toyota’s supplier networks).

Recent Trends

●​ Hybrid Relationships: Collaborative partnerships (e.g., Toyota, Dell, Apple) combine market
flexibility with VI’s coordination.
●​ Extended Outsourcing: Contract manufacturers (e.g., Foxconn) handle complex products;
business services (e.g., IT, payroll) are outsourced.
●​ Limits of Outsourcing: Systems integrators (e.g., Boeing, Amazon) need architectural and
component capabilities to manage suppliers.
●​ Example: Boeing’s 787 challenges highlight complexities in managing outsourced networks.

Summary and Questions

●​ Key Insight: VI decisions balance transaction cost avoidance and coordination benefits
against outsourcing’s focus and flexibility. Collaborative relationships often combine both.
●​ Self-Study Questions:
1.​ Explain how technology and management innovations reduced administrative costs
historically.
2.​ Why did turbulent environments and ICT reduce firm scope in 1980-2000?
3.​ Analyze IT outsourcing benefits and transaction costs.
4.​ Compare Hello Kitty’s licensing with Disney’s VI for character exploitation.
5.​ Should Gap integrate manufacturing based on Figure 10.4 criteria?

READING 2 - Vertical Integration is Dead, or is it?

This article challenges the prevailing view that vertical integration is an outdated strategy, arguing
that its resilience across industries reflects new motivations, particularly learning-related benefits
from downstream integration. Despite academic and industry trends favoring outsourcing and core
competency focus, VI remains compelling, especially in pharmaceuticals, defense, utilities,
computers, autos, and media/entertainment.

Traditional Motives for Vertical Integration

Historically, VI was driven by two categories of motives:

1.​ Strategic Considerations:

○​ Objective: Enhance competitive positioning by altering industry structure to gain
market power.
○​ Mechanisms:
■​ Foreclosing markets: Limiting competitors’ access to inputs or customers,
increasing their costs.
■​ Cross-subsidization: Subsidizing one value chain stage to outcompete
focused rivals.
■​ Raising entry barriers: Requiring higher investments to deter new entrants.
■​ Protecting proprietary knowledge: Preventing suppliers or customers from
becoming competitors.
○​ Example: Tapered VI, where partial integration allows firms to negotiate better terms
with suppliers or distributors without full ownership.
○​ Theoretical Roots: Industrial organization literature (e.g., Bain, 1956) and Porter’s
competitive strategy (1980).
2.​ Efficient Governance Considerations:
○​ Objective: Minimize transaction and agency costs for cost efficiency.
○​ Theoretical Foundations:
■​ Transaction Cost Economics (TCE): VI is preferred when market transactions
are costly due to:
■​ Small numbers bargaining: Few suppliers or buyers create
opportunistic risks.
■​ Transaction-specific investments: Customized assets increase
vulnerability to opportunism.
■​ High uncertainty: Incomplete contracts in turbulent environments
necessitate VI.
■​ Technology markets: VI protects proprietary technology when
patents are weak.
■​ Agency Theory: VI is favored when monitoring partner performance is
challenging, reducing opportunism.
○​ Benefits:
■​ Better control of opportunistic behavior.
■​ Enforced cooperation within the firm.
■​ Improved auditing and decision-making through better information.
■​ Superior internal communication.
○​ Examples:
■​ Reducing demand/price uncertainty by controlling supply chains.
■​ Ensuring input or service quality through ownership.
 ■​ Improving coordination to eliminate inventory inefficiencies.
■​ Protecting knowledge in high-tech markets.

Disadvantages of Vertical Integration

Critics highlight several drawbacks, reinforced by trends toward demergers:

●​ Higher Performance Risk: VI represents a premature commitment in turbulent

environments, costly to reverse due to high exit barriers.
●​ Loss of Market Incentives: Internal transactions lack the competitive pressures of markets,
leading to higher production costs.
●​ Bureaucratization: Managing diverse value chain stages reduces focus and increases
inefficiencies.
●​ Strategic Complexity: Different stages require distinct management styles and cultures,
overwhelming managerial capabilities.

Impact of the Internet

●​ Conventional View: The Internet reduces transaction costs (e.g., searching, comparing,
switching partners), favoring smaller, less integrated firms. Evans and Wurster (2000) argue it
disrupts value chains by separating physical goods from information, benefiting focused
entrants without legacy systems.
●​ Authors’ Counterargument: The Internet’s impact is industry-specific. While it enabled new
entrants, established firms often leveraged their brands, capabilities, and e-commerce to
tighten industry control. “Clicks-and-bricks” models outperformed many “pure play”
dotcoms, suggesting VI can exploit new opportunities.

Contemporary Motives for Vertical Integration

The authors argue that traditional motives are less relevant due to:

●​ Technological Innovations: Just-in-time (JIT) systems, vendor-managed inventories, and

electronic point-of-sale links optimize coordination across firms, reducing the need for
upstream VI.
●​ Internet and Globalization: Lower transaction costs and eroded barriers (e.g., trade
liberalization) weaken strategic motives like market foreclosure.
●​ Collaborative Alliances: Firms like Nike and Benetton achieve tight supplier integration
without ownership.

New motives, particularly for downstream VI, include:

1.​ Value Migration:

○​ Context: In mature industries, value-added shifts downstream due to large installed
bases and complex products requiring extensive services.
○​ Examples:
■​ Computer firms (e.g., IBM, Compaq, HP) expand into consulting and services,
where after-sales spending far exceeds product costs.
 ■​ GE redefines markets (e.g., from $12B turbine sales to $40B in utilities’
maintenance spending), capturing higher margins through service contracts.
■​ Ford’s ventures into retailing and aftermarket parts aim to capture vehicle
life-cycle spending.
2.​ Differentiation:
○​ Context: Commoditized products face diminishing returns from technical
improvements, prompting differentiation through downstream services and
branding.
○​ Strategies:
■​ Offering tailored services (e.g., engineering support, performance
guarantees).
■​ Total brand management to control customer interactions and build
emotional connections.
○​ Examples:
■​ Ford and GM integrate into auto retailing to improve customer experience
and protect brand image.
■​ Industries like banking, airlines, and utilities adopt branding to differentiate
offerings.
3.​ Customer Demand for Integrated Solutions:
○​ Context: Clients outsource to focus on core competencies, demanding suppliers
provide comprehensive solutions.
○​ Examples:
■​ Automotive suppliers expand into innovation and assembly to supply
advanced subassemblies.
■​ Engineering firms (e.g., Bechtel, Fluor Daniel) offer full project services
(finance, design, operations) due to client downsizing and technological
complexity.
4.​ Synergies:
○​ Context: VI enables close coordination between stages, yielding operational
efficiencies.
○​ Examples:
■​ Marketing feedback informs product development, enhancing innovation.
■​ Forward integration into inventory planning enables “make-to-order”
systems, reducing costs.
■​ Design-build firms optimize “constructability” by integrating design and
construction, improving cost and schedule performance.
■​ Build-operate-transfer (BOT) contracts leverage operating expertise to design
for maximum “operability.”
5.​ Emerging Industries:
○​ Context: VI is critical in nascent industries for credibility and coordination.
○​ Sub-motives:
■​ Credibility: Pioneers lack supplier/customer trust, necessitating VI to prove
concepts (e.g., Ford’s early ownership of raw material extraction; Celanese’s
integration into garment production for rayon).
 ■​ System Compatibility/Standards: VI ensures coordinated components to set
standards (e.g., Time Warner’s ownership of content and cable distribution;
Enron’s power generation assets for energy trading).

Learning as the Core Driver

●​ Central Thesis: Contemporary VI, especially downstream, is driven by learning benefits from
owning the customer interface. This knowledge (e.g., customer preferences, future needs) is
tacit, context-specific, and “untradeable,” requiring ownership rather than outsourcing.
●​ Mechanisms:
○​ Direct customer interaction generates proprietary knowledge about desires, delivery
methods, and future offerings.
○​ Learning requires a common organizational language and routines, difficult to
achieve with independent partners.
●​ Implications:
○​ Firms are knowledge repositories, with customers as key sources of innovation.
○​ VI sharpens entrepreneurial “alertness” to market opportunities.
○​ Unlike upstream VI, where benefits can be replicated through alliances, downstream
VI’s learning benefits are unique to ownership.

Assessment and Implications

●​ Resilience of VI: Despite outsourcing trends, VI remains prevalent, particularly downstream,

due to learning motives.
●​ Challenges: Firms must retain market incentives, flexibility, and manage supplier/customer
relationships in tapered VI.
●​ Academic Gap: Traditional theories (strategic and governance) fail to capture contemporary
motives. A learning-based lens is needed.
●​ Managerial Advice: Firms should consider VI to capture learning benefits, balancing focus
with knowledge creation.
Session 5 - Geographical Scope and International Diversification
READING 1 - Managing Global Expansion: A Conceptual Framework
Reasons for global expansion: From discretionary option to strategic imperative for changing a
medium sized company to a large corporation.

1.​ The growth Imperative:

-​ persist neverending growth if their wish is to ⇒ rewards from capital markets,
attract and retain top talent.
-​ Developed countries = mature ; Emerging markets = fresh opportunities
-​ Eg: Paper
2.​ The efficiency imperative:
-​ a value chain sustains one or more activities in which the minimum efficiency
exceeds the sales volume with global presence will have the potential to create a
cost advantage relative to domestic players within that industry.
-​ Eg: Mercedes Benz - This is particularly important in scale-sensitive industries like
automotive manufacturing, where high production costs require global sales to
remain viable.
3.​ The knowledge Imperative:
-​ Neighbor countries are never completely alike ⇒ so companies must adapt to local
environment
-​ By creating local know-how
-​ P&G Indonesia, GF India
4.​ Globalization of customers:
-​ refers to customers that are worldwide corporations ⇒ when customers of a
domestic company start to globalize company must keep pace
-​ GE plastics ⇒ supplied AT&T ang GTE, as they globalized and set manu. plants
outside US, GE followed abroad
5.​ Globalization of competitors:
-​ If competitor globalized and you do not:
 a)​ develop first mover advantage in capturing market growth, global scale
efficiencies, knowledge arbitrage, supply to global customers
b)​ Use multimarket presence to cross-subsidize and wage a more intense attack
in your own home market
-​ Fuji ⇒ Over Kodak in US

The following framework and set of conceptual ideas can guide firms in approaching the strategic
challenge of casting their business lines overseas and building global presence:
-​ How should a multiproduct firm choose the product line to launch it into the global market?
-​ What factors make some markets more strategic than others?
-​ What should companies consider in determining the right mode of entry?
-​ How should the enterprise transplant the corporate DNA as it enters new markets?
-​ What approaches should the company use to win the local battle?
-​ How rapidly should a company expand globally?

Framework for Managing Global Expansion

1.​ Choice of products
-​ When multiproduct firm chooses to go abroad it must ask itself ⇒ whether to globalize the
entire portfolio or use subset of product lines

-​ The first dimension focuses on the magnitude of globalization's payoffs:

-​ Tend to be higher when the five imperatives (listed at the beginning of the article)
are stronger.
-​ Looking at the case of Marriott, it is clear that such imperatives are much stronger
for full-service lodging than they are for the retirement community business.
-​ The primary customers of full-service lodging are globe-trotting corporate
executives. In such a business, worldwide presence can create significant value by
using a centralized reservation system, developing and diffusing globally consistent
service concepts, and leveraging a well-known brand name that assures customers of
high quality and service.
-​ In contrast, none of these factors is of high salience in the retirement community
business, thereby rendering the in-peratives for globalization much less urgent.
 -​ The second dimension of our framework concerns the extent to which different lines of
business require local adaptation to succeed in foreign markets.
-​ The greater the extent of such adaptation, the greater the degree to which new
product and/or service features would need to be developed locally
-​ Because any new development involves risk, the greater the degree of required local
adaptation, the greater the risks of failure: "liability of foreignness."
-​ Marriott: the retirement community business is a very local business and thus
requires more local adap-tation.
⇒ Any multiproduct firm that is starting to globalize must remember that a logically sequenced
rather than random approach is likely to serve as higher return, lower-risk path toward full-scale
globalization

2.​ Choice of strategic markets:

a)​ Market potential:

-​ Current market size and growth expectations for a particular line of business
-​ AOL ⇒ Japan ⇒ 45% of PCs in Asia sold there
-​ countries economy market potential not always go hand with country’s GDP
b)​ Learning potential:
1)​ presence of sophisticated and demanding customers
2)​ pace at which relevant technology are evolving there

⇒ Ability to exploit a market is function of: height of entry barriers and intensity of competition in
the market

⇒ Conceptual framework that combines two key dimensions ⇒ guideline to engage directed
opportunism in its choice of market
 -​ Markets that have high strategic importance but are also very difficult to exploit, we
recommend an incremental phased approach in which the development of needed
capabilities precedes market entry.
-​ One attractive way for a company to develop such capabilities ⇒ first enter a beachhead
market ⇒ one that closely resembles the targeted strategic market but provides a safer
opportunity to learn how to enter and succeed there.
-​ Switzerland and/or Austria for Germany, Canada for the U.S., and Hong Kong or Taiwan for
China.

3. Mode of entry

-​ after selecting country(ies) to enter and product line(s) ⇒ appropriate mode on entry
-​ Two fundamental questions:
-​ extent to which the firm will export or produce locally
-​ extent of ownership control over activities (0% ownership ⇒ licensing, franchising,
partial ownership => joint ventures, affiliates , 100%==> fully owned greenfield
operations, or acquisitions)
⇒ Alternative modes of entry
 -​ Greater reliance in local production would be appropriate under 4 conditions:
1.​ Size of local market is larger than minimum efficient scale of production
2.​ Shipping and tariff costs associated with exporting to the target market are so high that they
neutralize any cost advantage associated
3.​ need for local customization of product design is high
4.​ Local content requirements are strong

-​ Alliance-based entry modes are often more appropriate under:

1.​ Physical linguistic and cultural distance between the home and host countries is high
2.​ the subsidiary would have low operational integration with the rest of the multinational
operations
3.​ the risk of asymmetric learning by the partener is (or can be kept) low
4.​ the company is short of capital
5.​ government regulations require local equity participation

-​ a company that decides to enter foreign market through local production rather than
through exports faces secondary decision ⇒ greenfield operations or use an existing
production base though cross-border acquisition
-​ Greenfield operations⇒
-​ freedom to impose unique management team
-​ liabilities: lower speed of entry and intense local competition
⇒ Conceptual framework to determine when greenfield operations and/or cross border are
appropriate

4. Transplanting the corporate DNA

-​ obstacles to transplanting corporate DNA can emerge from: local employees, local
customers, local regulations etc.
-​ Steps:
 1.​ Clarifying and defining the core beliefs and practices: core beliefs and practices =
result of learning and experimentation over time
2.​ Transplanting core beliefs and practices to the new subsidiary
3.​ Embedding the core beliefs and practices: successful only when beliefs and practices
have become internalized in the mindsets and routines of employees in the new
subsidiary ⇒ achieved by visibly explicit and credible commitment by parent
company to its core practices, deeping the process of education and reduction within
the new organization right down to middle managers and local workforce, concrete
demonstration that the new beliefs and practices yield individual as well corporate
success
-​ Eg: Ritz Carlton ⇒ Shanghai, Ritz-Carlton demonstrated commitment in Shanghai by
prioritizing employee facilities, embedding its service culture.

5. Winning the local battle

1.​ Winning host country customers: if a firm wants to expand the customer base it serves in
foreign market, adapting the business model to the unique demands of locals is mandatory .
Eg: Fedex in China does not adapt because they choose multinational corp. while Domino’s
in India did dropping pepperoni and adding chicken lamb etc
2.​ Winning against host country competitors: four possible options are available to the new
invader:
-​ Enter by acquiring a dominant local competitor.
-​ Enter by acquiring a weak local competitor who can be quickly transformed and
scaled up
-​ Enter a poorly defended niche.
-​ Engage in a frontal attack on the dominant and entrenched incumbents.
3.​ Managing relationships with the Host country government: governments key external
stakeholders particularly in emerging markets. Two key points:
-​ The global firm can ill afford to ignore non-market stakeholders such as the local
government.
-​ Managing the non-market stakeholders should be seen as a dynamic process. eg:
Enron’s entry into india ⇒ active approach

6. Speed of global expansion

-​ accelerated speed of global expansion is more appropriate under:
a)​ it is easy for competitors to replicate you recipe for success
b)​ scale economies are extremely important: first mover advantage
c)​ management capacity to manage global operations is high
-​ Microsoft’s Success: Rapid expansion worked because it met the three
conditions—replicability, scale benefits, and strong management. The global launch of
Windows 95 leveraged a first-mover advantage, locking in customers and deterring
competitors, while Microsoft’s resources supported the effort.
-​ PepsiCo’s Struggle: Rapid expansion failed because PepsiCo didn’t fully meet these
conditions. The lack of a replicable model, incomplete scale benefits, and overstretched
capacity led to a costly overreach. The reading contrasts this with firms like KFC or Goodyear,
where rapid moves paid off due to simpler replication or scale-driven industries.
Conclusion
The framework emphasizes “directed opportunism,” a balance of systematic planning and flexibility
to maximize returns and minimize risks in global expansion. By addressing these six questions, firms
can navigate the complexities of going global, leveraging the opportunities presented by the five
drivers

READING 2 - Distance Still Matters: The Hard Reality of Global Expansion Pankaj
Ghemawat's

Key Points

●​ Research suggests global expansion success depends on understanding distance, including

cultural, administrative, geographic, and economic factors.
●​ It seems likely companies often overestimate foreign market potential, as seen in Star TV's
significant losses.
●​ The evidence leans toward the CAGE Distance Framework being useful, with case studies like
Tricon Restaurants showing its value.
●​ There is some debate on technology reducing distance barriers, but the article argues
distance remains critical.

Comprehensive Analysis of Global Expansion and Distance

This note provides an in-depth exploration of Pankaj Ghemawat's article "Distance Still Matters: The
Hard Reality of Global Expansion," published in the Harvard Business Review in September 2001. It
addresses the complexities companies face when expanding globally, emphasizing the critical role of
distance in various dimensions. The analysis is grounded in the document provided, ensuring
accuracy and relevance as of 08:58 PM CEST on Tuesday, April 29, 2025.

Introduction and Case Study: Star TV's Struggles

The article begins with Star TV, launched in 1991 to deliver English-language programming to Asia's
elite via satellite, aiming to bypass geographic constraints. News Corporation acquired it for $825
million between 1993 and 1995, leveraging its Twentieth Century Fox film library. However, Star TV
incurred significant losses, reporting a $141 million pretax loss in 1999 on $111 million revenue, with
cumulative losses of about $500 million over 1996-1999. This example underscores a common pitfall:
companies overestimate foreign market attractiveness, focusing on size while ignoring operational
challenges.

Critique of Traditional Tools: Country Portfolio Analysis (CPA)

Ghemawat critiques Country Portfolio Analysis (CPA), which focuses on potential sales based on
national wealth, consumer income, and consumption propensity. CPA emphasizes market size
metrics like GDP but neglects costs and risks associated with distance, leading to strategic errors, as
seen with Star TV.

The Role of Distance: Beyond Geography

The core argument is that distance encompasses cultural, administrative/political, and economic
dimensions, creating barriers to international trade and investment. A study by Jeffrey Frankel and
Andrew Rose quantifies this: a 1% increase in GDP boosts trade by 0.7% to 0.8%, but distance has a
stronger effect. Trade between countries 5,000 miles apart is only 20% of what it would be at 1,000
miles, highlighting distance's significant impact.

Measuring Distance’s Impact: The Gravity Theory of Trade

The article introduces the "gravity theory of trade," showing a positive correlation between
economic size and trade volume, and a negative correlation with distance. Specific distance
attributes include:

●​ A common language increases trade by 200%.

●​ Colony-colonizer ties boost trade by 900%.
●​ A common currency enhances trade by 340%.

These metrics, detailed in the "Measuring the Impact of Distance" exhibit, provide a quantitative
basis for understanding global expansion challenges.

Debunking the "Death of Distance" Myth

Despite technological advances suggesting a shrinking world, Ghemawat argues distance remains
critical, challenging the notion that globalization eliminates barriers.

The Four Dimensions of Distance: The CAGE Framework

The CAGE Distance Framework categorizes distance into four dimensions:

●​ Cultural Distance: Includes differences in language, religion, social norms, and consumer
preferences. For example, Hindus avoiding beef or Japanese preferring small appliances
illustrate cultural impacts. Star TV's failure to localize content, focusing on English
programming, exemplifies this.
●​ Administrative/Political Distance: Encompasses historical ties (e.g., colony-colonizer
relationships increase trade by 900%), government policies like tariffs, and institutional
factors such as corruption. Hostile relations or weak legal systems deter investment.
●​ Geographic Distance: Involves physical remoteness, lack of borders or sea access, and poor
infrastructure, increasing transportation and communication costs, especially for bulky or
perishable goods. Landlocked countries face higher logistics costs compared to coastal
nations.
●​ Economic Distance: Refers to disparities in consumer wealth, resource costs, and
infrastructure, influencing trade patterns. Rich countries trade more with each other, while
industries like garments exploit cost differences by targeting poorer markets for arbitrage.
The framework, detailed in an exhibit, helps assess industry-specific impacts, such as television being
highly sensitive to cultural distance or electricity to administrative and geographic factors.

Industry Sensitivity to Distance: A Sectoral Analysis

Different industries experience varying sensitivity to distance dimensions:

●​ Electricity is primarily affected by administrative and geographic distance, requiring

infrastructure and regulatory alignment, with cultural differences less relevant.
●​ Consumer goods, like food or media, are highly sensitive to cultural distance due to varying
consumer preferences.
●​ Garments leverage economic distance for arbitrage, targeting markets with lower labor costs.

This analysis is crucial for tailoring global strategies to specific industry needs.

Case Study: China’s Market Challenges

China is highlighted as challenging due to high cultural and administrative distances. Language
barriers, a guanxi-based business culture, government restrictions, and corruption create hurdles.
Many multinationals, attracted by China's large market, underestimated these distances, leading to
poor performance.

Case Study: Tricon Restaurants International (TRI)

Tricon Restaurants International, managing Pizza Hut, Taco Bell, and KFC, faced profitability issues
across 27 countries. Initially, CPA ranked Mexico low due to market size. Adjusting for
distance—geographic proximity to Dallas, common border, and NAFTA—significantly increased its
ranking, making Mexico a top priority. This case demonstrates the CAGE framework's practical utility.

Adjusted Country Portfolio Analysis: A Comparative Approach

The article contrasts CPA with a distance-adjusted approach, showing how incorporating distance
factors transforms market assessments. For TRI, Mexico's potential increased substantially,
illustrating the framework's value in refining global strategies.

Company-Specific Factors: Mitigating Distance Effects

While the CAGE framework is broadly applicable, company-specific factors can mitigate distance
effects. Firms with cosmopolitan managers or existing market presence (e.g., TRI in Mexico) may
navigate distance better. However, managers must always consider all distance dimensions to make
informed decisions.

Conclusion: The Enduring Relevance of Distance

Ghemawat concludes that distance remains high and must be explicitly addressed in global strategy.
The CAGE framework complements traditional tools, providing a nuanced understanding of global
markets. Supported by examples like Star TV and TRI, the article underscores that ignoring distance
can lead to costly mistakes, emphasizing a distance-aware approach to international expansion.

PART III - CORPORATE DEVELOPMENT MODES: ORGANIC GROWTH, M&A,

ALLIANCES AND CVC

Session 6 - Corporate Development through Organic Growth

READING 1 - Finding the Right Path
Main Idea – many companies default to a single approach when acquiring resources (Internal
Development, Alliances or M&A)
-​ acquiring resources in multiple ways is much more effective than realizing solely in one

> By blaming implementation rather tan looking for corporate development strategy companies leave
value on the table
•​ acquiring resources in multiple ways = outperform narrow approach

3 basic questions to select the right mode for the situation:

Q1: Do you already have relevant resources?
If YES → Develop internally → faster, cost-efficient, avoids integration issues.
Internal Development -> developing new resources internally is faster + effective than acquiring
from external parties when existing resources are similar to existing ones needed to outshine
competitors
If NO → Consider external sourcing (contract, alliance, acquisition).
External Development -> if require different organizational models, better to import new systems
rather than adapt existing ones

Strategic Flexibility -> continuous reassessment; choice between internal or external development
needs to be revisited regularly
-​ market conditions and internal capabilities evolve
-​ Flexibility allows companies to; response to new opportunities, overcome challenges,
maintain competitiveness

Q2: Do you and your provider have a shared understanding of value?

If YES → Purchase contract
- Shared understanding in contract
●​ both parties have a good understanding of the resources values
○​ mismatch in value perception => potential failure in the agreement
●​ difficult to measure value of resources due to unquantifiable effects
 ○​ PV or FV is elusive -> struggle to agree on terms
○​ coordination is costly + time consuming
Benefits:
-​ clear pricing = easy to negotiate
-​ less complexity = buy what needed
-​ less commitment = no need to ge too involved
When to use purchase contract?
-​ Resource is standardized or easily measurable.
-​ Both parties have similar knowledge about what is being exchanged.

> To correctly acquire technology -> COMPETENCIES are required

●​ lack them = increase risk of not commanding intangible aspects of tech -> engage in alliance

If NO → do alliance
Alliance
- GOAL: mitigate risk where direct purchase contracts might fail
Joint Venture = want to have a more structured agreement
●​ Establish governance mechanism to:
○​ protect against opportunistic behavior
○​ facilitate coordination
Use when:
-​ When resource value is uncertain or evolving over time.
-​ If complex coordination is needed → need ongoing relationship.
> Alliance most successful when few people and organizational units from each part need to work
together to coordinate joint activities

Q3: How deeply involved do you have to be with your partner?

If LOW → Alliance is enough
-​ Limited scope → both parties work independently.
-​ Flexibility → each keeps autonomy.
-​ Good when only a few people/units are involved.

If HIGH → Acquisition (M&A) is best:

Corporate Acquisition
-​ relationship between firm and resource provider involves highly strategic assets
-​ When a relationship needs to be exclusive or very close.
-​ High involvement or many people and organizational units
-​ Control coordination for current and targeted resources
-​ When strategic resources need to be fully integrated
CONS: costly, disruptive for merging firms

M&A -> Acquisition is the last resort → high cost, high risk → only justified when deep integration
+ control are necessary.
•​ if not correctly managed = weigh on a company’s resources
Partnerships
●​ A partnership is a legal agreement between two or more companies, to commit resources to
achieve a set of common goals.
○​ These goals are typically access to new markets, shared intellectual property,
infrastructure, technology or people, or simply combining complementary products
or service lines.
○​ A partnership should be mutually beneficial: generate value for all sides.
●​ Central tool for corporate strategy and competitive advantage across industries and
geographies
●​ Partnerships normally succeed due to having a clear value creation for all parties and a clear
strategy and objectives. They normally fail due to poor cultural fit / lack of trust or lack of
strong senior management commitment.

Session 7 - Corporate Development through Inorganic Growth: M&A

READING 1 - The New M&A Playbook

There are two reasons to acquire a company, which executives often confuse:
1.​ To boost your company’s current performance (most common reason).
-​ Help you hold on to a premium position
-​ Cut costs
2.​ To reinvent your business model and thereby fundamentally redirect your company
-​ Almost nobody understands how to identify the best targets to achieve that goal,
how much to pay for them and how or whether to integrate them.

WHAT ARE WE ACQUIRING?

●​ Think of the target in terms of its business model:
○​ A business model consists of four interdependent elements that create and deliver
value:
■​ Customer value proposition: an offering that helps customers do an
important job more effectively, conveniently or affordably that the
alternatives
■​ The profit formula: made up of a revenue model and a cost structure
■​ Resources: employees, customers, technology, products, facilities and cash
 ■​ Processes: manufacturing, R&D, budgeting, sales.
●​ Under the right circumstances, the resources can be extracted from an acquired company
and plugged into the parent¡s business model → LEVERAGE BUSINESS MODEL Acquisition
(LBM). The other elements of a business model cannot be routinely plugged in.
●​ A company can buy another firm’s business model, operate it separately and use it as a
platform for transformative growth → REINVENT BUSINESS MODEL (RBM) Acquisition
●​ There is far more growth potential in purchasing another company’s business models than in
purchasing their resources.
●​ Executives often believe they can obtain extraordinary returns by acquiring another firm’s
resources and so pay far too much, walking away from potentially transformative deals due
to believing that the acquisition is overpriced or that they would destroy the value of a
high-growth business model by trying to integrate it into their own.

BOOSTING CURRENT PERFORMANCE - LBM

●​ Companies turn to LBM acquisitions to improve the output of their profit formulas.
●​ A successful LBM acquisition enables the parent to either command higher prices or reduce
costs.
○​ Acquiring resources to command premium prices:
■​ The surest way to command a price premium is to improve a product or service that's still
developing-in other words, one whose customers are willing to pay for better functionality.
Companies routinely do this by purchasing improved components that are compatible with
their own products.
■​ If such components are not available, then acquiring the needed technology and
talent-usually in the form of intellectual property and the scientists and engineers who are
creating it- can be a faster route to product improvement than internal development.
○​ Acquiring resources to lower costs:
■​ When announcing an acquisition, executives nearly always promise that it will lower costs. In
reality, a resource acquisition accomplishes that in only a few scenar-ios-generally, when the
acquiring company has high fixed costs, which allow it to scale up profitably.
●​ To work out whether a potential resource acquisition will help lower your costs, you must
determine whether the acquisition's resources are compatible with your own and with your
processes and then determine whether scale increases will actually have the desired effect.
○​ For companies in industries where fixed costs represent a large percentage of total costs, increasing
scale through acquisitions results in substantial cost savings
○​ But in industries where cost-competitiveness can be reached at relatively low levels of market share, a
company growing beyond that does not reduce its cost position but replicates it.
○​ For companies whose cost structures are dominated by variable costs, resource acquisitions typically
yield only minimal improvements to the profit formula.
○​ Similarly, the benefits of scale are most substantial in operating categories that have a high percentage
of fixed costs.
 ●​ As a general rule, the impact of an LBM acquisition on the acquirer’s share price will be
apparent within one year, because the market understands the full potential of both
businesses before the acquisition has had enough time to assess the outcome of the
integration and any synergies that may arise.

REINVENTING YOUR BUSINESS MODEL

●​ The general manager must lay the groundwork for long term growth by creating new ways of
doing business, since the value of existing business models fades as competition and
technological progress erode their profit potential.
●​ Acquiring a disruptive business model:
○​ Disruptive companies are those whose initial products are simpler and more
affordable than the established players’ offerings.
○​ A company that acquires a disruptive business model can achieve spectacular results
■​ Example: information giant EMC acquired VMware, whose software enabled
IT departments to run multiple “virtual servers” on a single machine,
replacing server vendors’ pricey hardware solution with a lower cost
software one.
●​ One of the most effective ways to use RBM acquisitions is as a defence against
commoditization.
●​ Paying the right price: it is ironic that acquirers typically underpay for RBM acquisitions and
overpay for LBM ones, given that RBM acquisitions most effectively raise the rate of value
creation for shareholders. To determine the right price to pay for RBM acquisitions, the right
comparables for disruptive companies are other disruptors, regardless of the industry.
 ●​ Avoiding integration mistakes: if you buy a company for its business model, it's important to
keep the model intact, most commonly by operating it separately.

Most M&As fail. That's because most acquirers don't know how to think systematically about what they're buying and
what it might do for them. There is a better way.

If you want to extend your business but not fundamentally change how you compete, you should buy a company with
resources that will strengthen your firm. Fold those resources into your existing business and eventually let the acquired
business die. But be careful! Acquirers in this situation usually overpay.

To reinvent your business, you'll need a new business model to complement, extend, or replace your own.
Plug your best resources into the new company, including the technology and capital it needs to grow. Pay liberally:
Successful new business models make a lot of money.

Session 8 - Corporate Development through Inorganic Growth: Alliances

Astrazeneca talk

READING 1 - How to Manage Alliances Strategically

Why do so many strategic alliances underperform?

> Tesla example through collaboration with Toyota, Daimler, and Panasonic, highlights -> individual
companies do not need to own all resources, knowledge or skills to undertake key strategic growth
initiatives
-​ uncertain conditions = partnerships can be an alternative instead of going alone or to M&A

Taking a Strategic Approach

-> strategic alliances => viewed as critical for pursuing growth opportunities
●​ alliances benefits do no core automatically but depend on the extent to which the
organization can actively capture and leverage its experience
●​ Alliances are critical for accessing new capabilities and markets without the need to own
everything.
●​ Alliance portfolio = combination of all alliances
​ ​ - requires holistic and strategic approach
Why do alliances underperform so frequently?
●​ treat alliances tactically, not strategically.
●​ ill prepared of managers

3 misguided assumption of the process:

1) company will find good partners
 ●​ alliance market is crowded and competitive
●​ No complete information to find good matches
2) company will be able to capture an adequate amount of economic value from partnership
●​ there is no guarantee of amount of value you will capture
●​ Competitive pressures makes the deal to rush -> not enough time assessing key factors
●​ If alliance with big partner, then you give too much value in fear that they will walk away
from deal

3) that the alliances will continue to serve the company’s needs over time
●​ coordination and monitoring costs difficult to measure -> work with unrealistic estimates of
value
●​ Failure to anticipate problems before they escalate
●​ Strategic environments change

Improving Alliance Management

> Factors such as globalization, tech, innovation… makes managers needing to deal with various
alliances at once in different geographies and at different stages of the alliance life cycle
-​ many interrelated activities -> leading to missteps

Framework -> acknowledge complexity of generating benefits from alliances

●​ Alliances are dynamic, living strategic relationships — not static deals
●​ Value is not only created at the moment of signing → but across the entire alliance lifecycle.

1) Step Selection
●​ Two types of alliances:
○​ Aim to access existing knowledge, resources and capabilities
○​ Aim to create or develop new knowledge, resources and capabilities
●​ Criteria for selection:
○​ Past experience in alliances: indicator of potential success
○​ Contribution of internal competencies: essential for value addition
●​ Strategic alliances foster corporate advantage by combining complementary competencies
and strategic fits, creating value beyond what individual entities can achieve alone.
●​ strategic alliances are voluntary arrangements between organizations to develop new
processes, products or services
●​ partners should be asses on relevant experiences that can bring to alliance
●​ Examine in terms of value-creation potential and strategic fit to overall alliance portfolio
2) Deal Negotiation
●​ define terms of partnership and mutual responsibilities and reward
○​ importance of balanced negotiation: focusing solely on both parties’ gains
●​ Negotiations between small and large companies are particularly susceptible to poor
outcomes due to differences in the partners’ negotiating power
●​ success deal = set the stage for the execution stage and support knowledge sharing
●​ steering committee -> facilitate communication and coordination
3) Execution
●​ collaboration from people in different organization is important
 ○​ geographic, industry and sector boundaries
●​ Unsuccessful executioners means working through the inevitable frictions
●​ Small companies limited alliance experiences to few employees
●​ Big companies can store alliance experiences for future use
^^allows to have roles who specialize in the know-how of alliances to succeed
4) Exit
●​ dissolving alliance not always means failure
●​ Advanced determine when dissolution process begins
●​ Agreed upfront how gains and losses will be shared
5) Portfolio Management
●​ multiple partners -> reduce reliance on a single one
​ ​ - low risk alliance = leverage existing capabilities
​ ​ - high risk alliances = build new capabilities
●​ new partners should add complementary strengths and increase company’s strategic
flexibility not reduce it
○​ Synergistic partnerships: strategically select alliances for optimal fit and mutual value
enhancement.
●​ alliance should complement internal development choices
●​ Conduct regular assessments to fill important gaps of the alliances
○​ Dynamic portfolio management: continually assess and adjust alliance portfolio,
ensuring alignment with strategic goals and market dynamics for sustained
competitive edge.
READING 2 - When to Ally and When to Acquire

The Harvard Business Review article "When to Ally and When to Acquire" by Jeffrey H. Dyer, Prashant
Kale, and Harbir Singh provides a strategic framework for companies deciding between acquisitions
and alliances to achieve growth. The authors argue that treating these strategies as interchangeable
leads to poor decisions, as each has distinct advantages and risks. They propose a systematic
approach based on three key factors: the types of synergies desired, the nature of resources
involved, and market conditions.

Key Insights

1.​ Synergies and Strategy Choice:

○​ Modular Synergies: When companies work independently and pool results (e.g., an
airline and hotel chain collaboration), nonequity alliances are ideal.
○​ Sequential Synergies: When one company hands off tasks to another (e.g.,
Bristol-Myers Squibb’s equity stake in ImClone for drug marketing), equity alliances
are preferred.
○​ Reciprocal Synergies: When firms integrate operations tightly (e.g., Exxon and
Mobil’s merger), acquisitions are best to maximize efficiency.
2.​ Nature of Resources:
○​ Hard Resources (e.g., manufacturing plants): Acquisitions are suitable as they allow
quick scaling and control, as seen in Masco’s strategy of expanding manufacturing
capacity post-acquisition.
○​ Soft Resources (e.g., human talent): Equity alliances are better to avoid employee
turnover, as acquisitions often lead to cultural clashes and talent loss (e.g.,
NationsBank’s failed acquisition of Montgomery Securities).
○​ Redundant Resources: High redundancy (e.g., Hewlett-Packard and Compaq’s
merger) favors acquisitions to eliminate inefficiencies and achieve cost savings.
3.​ Market Conditions:
○​ High Uncertainty: In uncertain markets (e.g., unproven technologies like ImClone’s
Erbitux), alliances limit risk exposure. Bristol-Myers Squibb’s equity alliance with
ImClone saved billions compared to a potential acquisition.
○​ Competitive Pressure: When rivals vie for a partner (e.g., Pfizer’s acquisition of
Warner-Lambert after an alliance), acquisitions may be necessary to secure strategic
assets.
4.​ Collaboration Capabilities:
○​ Companies often favor the strategy they’re experienced in, but this can lead to
suboptimal choices. Cisco’s success stems from its ability to execute both strategies,
with a unified corporate development team evaluating internal development,
alliances, or acquisitions. Cisco’s dual approach led to 36 acquisitions and over 100
alliances, driving 44% annual market capitalization growth from 1993 to 2003.
​
Practical Framework

The article provides a decision-making matrix:

●​ Modular synergies, low soft resources, low redundancy, low uncertainty, low competition:
Non Equity alliances.
●​ Sequential synergies, high soft resources, medium redundancy, high uncertainty, medium
competition: Equity alliances.
●​ Reciprocal synergies, low soft resources, high redundancy, low/medium uncertainty, high
competition: Acquisitions.

Case Studies

●​ Coca-Cola and P&G: Their failed joint venture aimed for reciprocal synergies with hard
resources and faced high competition but low uncertainty. An acquisition would have been
more effective.
●​ Intel and DSP Communications: Intel’s acquisition of DSP for modular synergies involving
soft resources (people) and high uncertainty led to a $600 million write-off. An equity
alliance would have been wiser.

Conclusion

The authors emphasize that knowing when to ally or acquire is a greater competitive advantage than
mastering execution. Companies must analyze synergies, resources, and market conditions
systematically and develop capabilities in both strategies to avoid costly mistakes. Cisco’s balanced
approach exemplifies how strategic flexibility drives sustained growth.
PART IV - MANAGING THE MULTIBUSINESS FIRM

Session 9 - Organizing the Multi-Business Corporation. The role of the

Corporate Center in Creating Group Advantage
Reading: Tata Case

The parent company was unlisted, but the subsidiaries were listed, completely opposite than
western corporations. This provides a vast degree of freedom to the listed subsidiary.

Tata-ness was the critical glue that bound the diverse businesses of the Tata Group together and
created a common identity despite them running separately.

Project Prune was meant to try and look for ways to achieve economies of scale among the
different business units, but each BU was free to choose whether to participate or not →
Independence, each company has its own leadership.

Tata Sons was the majoritary holder in all the major Tata Companies → ⅔ of it is held by
philanthropic trusts. Tata Sons owns the Tata name and Trademark. Tata Sons, Tata Industries,
and Tata Services operated several fully owned divisions that provided a set of centralized
services to group companies to facilitate business activities and derive some synergies

Group Services

In the 90s, Tata Sons began a series of initiatives at the corporate level to develop a more cohesive
group to help them define a collective vision and develop synergies. They worked a lot on developing
a group identity → The Tata Brand.

Tata Business Excellence Model (TBEM)

The TBEM was a critical part of the group. Companies were required to show scalable
improvement according to standards within 3 years and held them accountable to other
standards of quality, operations, logistics, etc.

Group Strategic Sourcing

It was felt that substantial savings could be realized by extending the concept to the procurement of
certain materials which were common across Tata Companies and get better prices for the whole
group rather than attempt to access these resources individually.
Tata Services Limited

Tata Services was incorporated to provide all the Tata Group Companies with access to a set of
centralied services, operated on a no-profit-no-loss basis. Tata Services had different departments
such as HR, Economics and Statistics, Corporate Affairs, Public Affairs, Training, Legal, IT… They
helped create synergies across the group, but no Tata companies were forced to use these services,
it was entirely up to them to decide between Tata Services or a 3rd party provider. This was done to
keep everybody in Tata Services on their toes and working to provide the best possible service to the
subsidiary companies, since they could opt for another provider if Tata Services fell off in terms of
quality.

Tata-ness Culture
The group’s structure revolved around the belief that too much control hindered the creativity of the
people in the organization. It attempted to strike a balance between the need for control and the
need to be creative, innovative and free-flowing

READING 1 - Corporate Strategy: The Quest for Parenting Advantage

The Harvard Business Review article "Corporate Strategy: The Quest for Parenting Advantage" by
Andrew Campbell, Michael Goold, and Marcus Alexander introduces the parenting framework as a
robust tool for crafting corporate-level strategy in multibusiness companies. Unlike traditional
approaches like the growth/share matrix or core competence model, which often fail to guide
portfolio decisions effectively, the parenting framework focuses on the value created by the parent
organization’s influence over its businesses. The authors argue that a parent must create more value
than rival parents or other intermediaries (e.g., investment trusts) to justify its existence,
emphasizing the concept of "parenting advantage."

Key Insights
1.​ The Parenting Framework:
○​ Multibusiness companies must justify their existence by creating value through their
influence on owned businesses. This involves improving plans, fostering linkages,
providing competent central functions, or making strategic acquisition/divestment
decisions.
○​ The framework assesses the fit between the parent’s characteristics and the
businesses’ needs, ensuring the parent enhances performance rather than
destroying value. A poor fit, as seen in oil companies’ failed minerals ventures (e.g.,
BP’s sale to RTZ in 1989), can lead to underperformance due to misaligned
management decisions.
2.​ Assessing Fit:
○​ Critical Success Factors (CSFs): Understanding each business’s CSFs (e.g., low-cost
deposits in minerals vs. exploration in oil) is crucial to evaluate whether the parent’s
influence aligns with business needs. Misalignment, like oil companies prioritizing
exploration in minerals, destroys value.
○​ Parenting Opportunities: These are areas where the parent can improve business
performance (e.g., reducing overheads, combining sales forces, or leveraging
expertise). For example, Cooper Industries’ acquisition of Champion International
exploited manufacturing improvement opportunities, though ceramic manufacturing
posed challenges.
○​ Parent Characteristics: These include mental maps (values and biases),
structures/systems, central resources, key personnel skills, and decentralization
contracts. Cooper’s hands-on “Cooperization” process, with centralized systems,
suited certain manufacturing businesses but risked misfit with Champion’s
high-volume processes.
 ○​ Validation: Success and failure analysis (e.g., BTR’s high margins in manufacturing vs.
average performance in distribution) and performance comparisons (e.g., PIMS par
returns) validate fit judgments.
3.​ Parenting-Fit Matrix:
○​ The matrix categorizes businesses based on fit with parenting opportunities
(horizontal axis) and misfit with CSFs (vertical axis):
■​ Heartland Businesses: High fit, low misfit (e.g., food company’s restaurants),
prioritized for investment.
■​ Edge-of-Heartland Businesses: Mixed fit (e.g., retail), requiring parental
learning or selective intervention (e.g., Unilever’s tailored approach to Calvin
Klein).
■​ Ballast Businesses: Low upside but low misfit (e.g., property), often retained
for stability but at risk of becoming drags.
■​ Alien-Territory Businesses: Low fit, high misfit (e.g., food products),
candidates for divestment.
■​ Value-Trap Businesses: High upside but high misfit (e.g., hotels), where
potential blinds managers to risks, as seen in utilities’ failed engineering
ventures.
4.​ Strategic Implications:
○​ Companies should focus on heartland businesses, divest alien-territory and
value-trap businesses, and cautiously manage ballast and edge-of-heartland
businesses. BTR divested distribution businesses (e.g., National Tyre Service) due to
poor fit with its manufacturing-focused parenting.
○​ Changing parenting characteristics is difficult due to entrenched values. Divesting
misfitting businesses or demerging (e.g., ICI’s split) is often easier than altering the
parent’s approach.
5.​ Case Study: BTR:
○​ BTR’s parenting, led by Sir Owen Green, excelled in industrial manufacturing by
improving financial controls, pricing, and focus, achieving 15%-20% margins vs.
competitors’ 5%-10%. Its profit-planning process and decentralized structure suited
these businesses but clashed with distribution businesses’ fixed-cost structures,
leading to divestitures.

Conclusion

The parenting framework offers a disciplined approach to corporate strategy by prioritizing value
creation through fit between the parent and its businesses. It avoids the pitfalls of growth/share or
core competence models by focusing on the parent’s unique ability to enhance business
performance. Companies like BTR succeed by aligning their portfolio with their parenting strengths,
divesting misfits, and striving for parenting advantage—creating more value than rivals. This dynamic
process requires ongoing assessment to adapt to changing business needs and maintain a
competitive edge.

READING 2 - Four Logics of Corporate Strategy

The MIT Sloan Management Review article "Four Logics of Corporate Strategy" by Donald Sull,
Stefano Turconi, Charles Sull, and James Yoder presents a framework to clarify how diversified
corporations create and capture economic value across their business units. The authors address the
common struggle executives face in aligning corporate and business unit strategies, noting that only
one in five executives report an effective corporate strategy process. Their two-by-two matrix, based
on Corporate-Business Unit Linkage and Business Unit-Business Unit Linkage, defines four distinct
strategic logics to guide corporate strategy formulation and execution.

Key Insights
1.​ The Four Logics Framework:
○​ Corporate-Business Unit Linkage (Vertical Axis): Measures how reliant business units
are on corporate resources (e.g., brand, technology) to generate value. High linkage
exists in companies like Trader Joe’s, where stores depend on corporate assets
(brand, private-label products), while private equity portfolio companies operate
independently.
○​ Business Unit-Business Unit Linkage (Horizontal Axis): Assesses how dependent
business units are on each other to create value. Conglomerates like General Electric
(GE) have low linkage, with independent units, while IBM’s units (consulting,
software, hardware) collaborate for integrated solutions.
○​ The matrix yields four logics:
■​ Portfolio: Low corporate and inter-unit linkage (e.g., GE, Tata Group, KKR).
Corporate strategy focuses on portfolio management (entry, funding, exit),
with business units having standalone strategies.
■​ Leverage: High corporate linkage, low inter-unit linkage (e.g., Trader Joe’s,
Burberry). Corporate strategy emphasizes leveraging shared resources
(brand, economies of scale), with business units aligning to corporate assets.
■​ Federal: Low corporate linkage, high inter-unit linkage (e.g., Star Alliance,
The Leading Hotels of the World). Strategy involves loose collaboration
among units for referrals, lobbying, or best practices, with minimal corporate
oversight.
■​ Integrative: High corporate and inter-unit linkage (e.g., Walt Disney).
Corporate strategy manages portfolio, corporate resources, and inter-unit
dependencies, while business units balance standalone and collaborative
strategies.
2.​ Assessing the Logic:
○​ A diagnostic tool (“Assessing the Logic of Your Corporate Strategy”) uses questions to
score linkage levels. For Corporate-Business Unit Linkage, questions evaluate reliance
on corporate brands, economies of scale, or inimitable resources. For Business
Unit-Business Unit Linkage, questions assess complementary offerings, integrated
solutions, unified customer experience, or shared knowledge.
○​ Plotting average scores on the matrix identifies the applicable logic, guiding strategy
formulation. For example, Danaher’s clusters (e.g., dental, life sciences) show high
inter-unit linkage within clusters but low across them.
3.​ Strategic Implications:
○​ Portfolio Logic: Corporate strategy sets guidelines for portfolio decisions, while
business units operate autonomously (e.g., GE’s diverse businesses).
○​ Leverage Logic: Corporate strategy maximizes shared resources, as Burberry
integrates online and physical stores for a seamless customer experience.
○​ Federal Logic: Strategy fosters voluntary collaboration, as in Star Alliance’s shared
ticketing or lobbying efforts.
○​ Integrative Logic: Disney’s units (theme parks, studios, consumer products) leverage
corporate brands and cross-promote, requiring tight coordination.
○​ Strategy must evolve with business needs. For example, shifting from portfolio to
leverage logic requires reorienting shared services to support corporate goals.
 4.​ Implementation:
○​ Once the logic is identified, executives should articulate strategic priorities to align
activities, investments, and business unit objectives. The authors reference their
article “How to Develop Strategy for Execution” for translating strategy into
actionable objectives.
○​ External partners or platform strategies (e.g., involving stakeholders) should be
considered in Business Unit-Business Unit Linkage assessments.

Conclusion

The four logics framework provides a practical tool for executives to align corporate and business
unit strategies by clarifying value creation dynamics. By mapping their organization’s position on the
matrix, leaders can tailor strategies to their specific logic—whether managing a portfolio, leveraging
corporate assets, fostering federal collaboration, or integrating tightly coupled units. This clarity
enables effective resource allocation and strategic execution, addressing the critical gap in corporate
strategy integration highlighted by McKinsey surveys.

Session 10 - Corporate Entrepreneurship and Corporate Venture Capital

READING 1 - The Four Models of Corporate Entrepreneurship

The MIT Sloan Management Review article "The Four Models of Corporate Entrepreneurship" by
Robert C. Wolcott and Michael J. Lippitz explores how established companies can foster organic
growth through corporate entrepreneurship, defined as the process of creating new businesses
within an organization that leverage its assets but are distinct from its core operations. Based on a
study of nearly 30 global companies, the authors propose a framework of four models—opportunist,
enabler, advocate, and producer—differentiated by two dimensions: organizational ownership
(diffused or focused) and resource authority (ad hoc or dedicated). Each model offers unique
benefits and challenges, guiding companies in selecting the best approach for their growth
objectives.

Key Insights

1.​ Definition and Importance:

○​ Corporate entrepreneurship involves internal teams conceiving, launching, and
managing new businesses that utilize the parent company’s resources (e.g., brand,
capabilities) but operate distinctly. It differs from corporate venture capital (external
investments) and spinouts (standalone entities).
○​ Organic growth is critical as core businesses mature, yet fewer than 5% of companies
achieve sustained growth above GDP. Companies emphasizing new business models
grow margins faster, but failures (e.g., Sony missing the iPod opportunity) highlight
the need for structured approaches.
2.​ The Four Models Framework:

○​ Dimensions:
■​ Organizational Ownership: Who has primary responsibility for new business
creation? Diffused (no designated group, e.g., grassroots efforts) or focused
(specific group or team).
■​ Resource Authority: How are projects funded? Ad hoc (through divisional
budgets or slush funds) or dedicated (allocated corporate funds).
○​ Models:
■​ Opportunist: Diffused ownership, ad hoc funding (e.g., Zimmer Holdings).
Relies on project champions and serendipity in trusting, experimental
cultures. Works for initial ventures (e.g., Zimmer’s minimally invasive surgery
training) but is unreliable without structure.
■​ Enabler: Diffused ownership, dedicated resources (e.g., Google). Provides
funding, clear selection criteria, and executive support (e.g., Google’s 20%
time policy) to empower employees. Risks include senior bandwidth
constraints and potential for unfocused “bowling for dollars.”
■​ Advocate: Focused ownership, ad hoc funding (e.g., DuPont). A small team
evangelizes and facilitates business unit-driven initiatives (e.g., DuPont’s
Market Driven Growth program, generating $500M in new revenues).
Requires veteran facilitators but faces business unit resistance.
 ■​ Producer: Focused ownership, dedicated resources (e.g., Cargill’s Emerging
Business Accelerator). A formal group with significant funding manages
disruptive or cross-unit projects (e.g., Cargill’s de-icing technology). Demands
heavy investment and risks integration challenges.
3.​ Model Characteristics and Applications:
○​ Opportunist: Suits early-stage or culturally open firms but lacks scalability. Zimmer
evolved to formal processes after initial success.
○​ Enabler: Ideal for collaborative, innovative cultures with low-cost experimentation
(e.g., Google’s web prototypes). Supports cultural transformation but needs
disciplined processes.
○​ Advocate: Best for reinvigorating business units (e.g., DuPont’s focus on growth).
Requires coalition-building and veteran leadership to align with business unit
priorities.
○​ Producer: Targets disruptive or complex opportunities (e.g., Cargill’s global idea
clearinghouse). Needs strong leadership and resources to overcome business unit
resistance and integrate projects.
4.​ Implementation Guidance:
○​ Starting Point: Articulate a broad growth vision (e.g., DuPont’s “beyond the
molecule”) and clear objectives (cultural transformation, division renovation, or new
platforms). Build consensus to neutralize opposition.
○​ Model Selection: Enabler suits cultural change or grassroots innovation; advocate
fits business unit growth; producer targets disruptive ventures. Resources
vary—enabler is leaner, while producer is resource-intensive.
○​ Execution: Secure quick wins to build credibility, communicate extensively to align
stakeholders, and adapt models as objectives evolve. IBM’s hybrid approach
(producer-advocate with enabler elements) generated $15B in new revenues by
2005.
○​ Challenges: Scaling new businesses stresses delivery mechanisms (e.g., PepsiCo’s
supply chain). Solutions include holistic business system design, building core
competencies, and recruiting “business builder” managers.
5.​ Strategic Considerations:
○​ Corporate entrepreneurship requires deliberate management, not just serendipity. A
flexible, learning-oriented approach mitigates uncertainty.
○​ Models can coexist (e.g., IBM’s multi-model strategy). Companies evolve from
opportunist to deliberate models as growth needs formalize.
○​ External knowledge integration (open innovation) enhances outcomes, but scaling
and transitioning new businesses remain critical challenges.

Conclusion

The four models framework provides a practical guide for companies to foster corporate
entrepreneurship tailored to their culture, resources, and growth goals. By choosing the appropriate
model—opportunist for ad hoc ventures, enabler for grassroots innovation, advocate for business
unit growth, or producer for disruptive opportunities—leaders can overcome the limitations of
traditional innovation and drive sustainable growth. The framework emphasizes strategic vision,
stakeholder alignment, and adaptability, ensuring corporate entrepreneurship becomes a managed,
repeatable process rather than a reliance on chance.

Session 11 - Corporate Strategy & Sustainability

READING 1 - Resilience in a Hotter World

The Impact of Wild Weather on Global Businesses

Historical Disasters:
●​ 2011 Thailand Floods:
○​ Disrupted supply chains, affecting critical auto parts suppliers.
○​ Resulted in significant production setbacks for Toyota, Honda, and other carmakers,
with Toyota losing $1.5 billion in earnings.
●​ 2012 Hurricane Sandy in New York:
○​ Caused an explosion at a Con Edison electric substation, leading to nearly four days
of darkness in lower Manhattan.
○​ Incurred costs exceeding $500 million for the utility and $6 billion for New York
businesses.
●​ 2013 Typhoon Haiyan in the Philippines:
○​ Caused extensive damage and fatalities, with over 6,000 reported deaths and an
estimated $14 billion in damage.

Climate Change Impact:

●​ While attributing specific events to climate change is complex, there's a scientific consensus
that global warming increases the frequency and severity of destructive weather.
●​ Rising commodity prices, driven by weather-related disruptions, are reversing the trend of
lower prices seen in the past century.

Challenges Faced by Companies

●​ Resource Constraints:
○​ Major storms, droughts, and floods are affecting both renewable and nonrenewable
resources, leading to supply shortages.
○​ Growing populations and increased wealth, particularly in China, are driving up
demand for commodities.
●​ Impact on Profits:
○​ Rising commodity prices, exemplified by a 300% increase in cotton prices over two
years, are pressuring profit margins for businesses.

Mega Challenges and Responses

●​ Unprecedented Impact:
○​ Climate change and resource limitations pose unprecedented challenges,
threatening corporate profits and global prosperity.
 ●​ Rethinking Strategies:
○​ Companies need to fundamentally rethink their strategies and tactics to address
these mega challenges effectively.

Pivoting Strategies for Resilience

The Big Pivot Framework:

●​ Profound Change:
○​ Companies need to embrace radical changes in strategy, operations, and business
philosophy to thrive in an extreme world.
●​ Embracing Resilience:
○​ Companies must pursue operational efficiency, material and energy use reductions,
and carbon emissions cuts to become more flexible and resilient.
●​ Revenue Resilience:
○​ Adaptation and innovation are crucial for fulfilling evolving customer needs and
ensuring steady or increased sales amidst changing market dynamics.
●​ Market Opportunities:
○​ Transitioning towards a circular economy presents massive market opportunities in
various sectors, including construction, energy, consumer products, and
transportation.

Vision: Anticipating Challenges and Setting Aggressive Goals

Embracing Long-Term Vision:

●​ Companies need to understand the impact of climate change and resource scarcity on their
long-term prospects and goals.
●​ A clear vision should incorporate the best available environmental data, grounding goals in
hard science to foster a longer-term perspective.
Challenging Short-Termism:
●​ Proactive tackling of climate change and resource constraints requires a departure from
short-term thinking prevalent in quarterly cycles.
●​ Leaders should challenge Wall Street norms, resisting pressure for short-term gains to focus
on building lasting value over years.

Heretical Questioning: Driving Innovation and Adaptation

●​ Challenging the Status Quo:
○​ Asking unconventional "heretical questions" can drive innovation across all aspects
of a company's operations.
○​ Example: UPS's inquiry about cutting fuel costs by avoiding left turns led to
significant savings through route optimization.
●​ Innovating Products and Processes:
○​ Companies like Adidas, Nike, and Kimberly-Clark have used heretical questions to
reimagine product design and manufacturing processes, reducing resource
consumption.
 ○​ Examples include waterless dyeing technologies for clothing and tubeless paper
towel and toilet paper rolls.
Reverse Innovation:
●​ Some companies pursue "reverse innovation," creating low-cost products for emerging
markets and then introducing them to developed markets.
●​ Example: GE developed a portable electrocardiograph for emerging markets and later sold it
in the United States at a significantly lower price.
Encouraging Heretical Questions:
●​ Organizations need to foster a culture of questioning assumptions and challenging traditional
business models.
●​ Examples include Patagonia's focus on encouraging customers to buy only what they truly
need.
The Big Pivot Strategies:
●​ Radical Innovation and Long-Term Mindset:
○​ Companies must embrace radical innovation and adopt a long-term perspective to
navigate an uncertain future.
●​ Redefining Valuation Methods:
○​ Valuation methods need to account for unpriced costs and benefits, considering the
broader impacts on society and the environment.
●​ New Forms of Partnerships:
○​ Collaboration with governments, NGOs, competitors, and customers is essential to
achieve goals that transcend individual firms' capabilities

Valuation: Making Better Investment Decisions

Understanding Externalities and Unpriced Value

●​ Externalities:
○​ Includes pollution, damage to natural resources, and societal benefits not accounted
for financially.
○​ Ignoring the value of natural capital leads to underinvestment in protecting
resources.
●​ Unpriced Value:
 ○​ Indirect benefits such as talent attraction, community support, and brand equity
often overlooked.
○​ These intangibles significantly impact market capitalization but are not reflected in
traditional ROI calculations.
Challenges in Traditional Valuation Methods
●​ ROI Limitations:
○​ ROI tools primarily focus on easily quantifiable returns, discouraging investment in
harder-to-measure indirect benefits.
○​ Fail to account for indirect costs and unvalued resources like natural capital, leading
to skewed investment decisions.
Strategies for Better Valuation
●​ Lowering Hurdle Rates:
○​ Companies like 3M, IKEA, and Intel adjust investment hurdle rates for green
initiatives to encourage sustainability projects.
●​ Dedicated Budgets:
○​ Allocating specific budgets for green investments ensures funding for projects with
longer payback periods.
●​ Portfolio Approach:
○​ Creating a portfolio of efficiency projects balances quick wins with longer-term
initiatives, ensuring overall hurdle rate compliance.
●​ Carbon Pricing:
○​ Incorporating carbon prices into financial planning anticipates future regulations and
environmental costs, guiding investment decisions.
●​ Collaborative Efforts:
○​ Companies collaborate with competitors and stakeholders to address common
challenges like reducing greenhouse gas emissions.

Partners: Collaborating in Radical New Ways

Addressing Commons Problems

●​ Need for Large-Scale Solutions:
○​ Challenges like climate change and water shortages require collaborative efforts
beyond individual companies' capacities.
●​ Stakeholders in Partnerships:
○​ Governments, peers, competitors, and customers play crucial roles in addressing
these challenges.
Lobbying for Policy Changes
●​ Engagement with Governments:
○​ Companies lobby for policies like carbon pricing and higher energy-efficiency
standards to promote common good and gain competitive advantage.
○​ Leading change when governments are stagnant is imperative.
Precompetitive Cooperation
●​ Working Together While Competing:
○​ Emphasizes collaborating on shared issues while competing in other areas.
 ○​ Encourages companies to focus on what truly differentiates their products.
Building Markets Together
●​ Mutual Benefit in Market Building:
○​ Companies benefit from jointly building markets for sustainable solutions.
○​ Shared methods and initiatives drive demand and reduce costs for all involved.
Collaborative Partnerships
●​ Addressing Systemic Issues:
○​ Companies collaborate with partners across value chains to reduce environmental
footprints and societal impacts.
○​ Tough conversations with suppliers and consumers inspire behavioral change.

Resilience, Trust, and Prosperity

Principles of Resilient Systems

●​ Diversity and Redundancy:
○​ Contrary to lean philosophies, resilient systems emphasize diversity and redundancy.
●​ Speed and Fast Failure:
○​ Promote fast failure with careful calculation for quick adaptation.
●​ Risk Avoidance Coupled with Risk Taking:
○​ Avoid risk for the majority of the business while engaging in extreme risk-taking with
pilot programs.

Building Brand Resiliency

●​ Cost and Revenue Resiliency:
○​ Strategies lead to brand resiliency, enhancing customer loyalty and trust.
●​ Openness and Transparency:
○​ Openness about operations and commitments builds trust among consumers,
partners, and governments.

Pivoting Strategies for Collective Well-being

●​ Smart Offense and Defense:
○​ Pivot strategies offer both defence and offence, critical for business success and
global well-being.
●​ Essential Investment in the Future:
○​ In a world with tighter resources and volatile climate, a big pivot is crucial for the
future of companies and the global commons.

Session 12 - Guest Speaker