Corporate Advantage & Strategy

Agenda

 Explore the tangents on which an

multibusiness corporation can grow.
1. Scope of the Corporation

 Assess the motives, costs and benefits of

different types of corporate strategy.
2. Vertical Integration
3. Diversification

“Nothing stops an organization faster

 Evaluate the resource continuum that
than people who believe that the way you
drives the implementation of corporate
strategy.
worked yesterday is the best way to work
tomorrow.”
4. Implementation of Corporate Strategy

Jon Madonna, CEO KPMG

 Levels of Strategy

Executive-Level Managers Business

Strategy

Two-Way Influence

Functional Managers Functional Strategies

Two-Way Influence

Operating
Operating Strategies
Managers
 Levels of Strategy

Corporate-Level Managers Corporate

Strategy

Two-Way Influence

Division Managers Business Strategies

Two-Way Influence

Functional Mgrs Functional Strategies

Two-Way Influence

Operating
Operating Strategies
Mgrs
 Levels of Strategy

Level 1 Corporate-wide Corporate Corporate

Vision & Level Level
Corporate- Mission Goals/Objs Strategy
Level
Managers Two-Way Influence Two-Way Influence Two-Way Influence

Level 2 Business Business Business

Business-Level Level Level Level
Mission Goals/Objs Strategies
Managers
Two-Way Influence Two-Way Influence Two-Way Influence
Level 3
Functional Functional Functional Functional
Goals Objectives Strategies
Managers
Two-Way Influence Two-Way Influence Two-Way Influence
Level 4
Plant Managers, Operating Operating Operating
Lower-Level Goals Objectives Strategies
Supervisors
1 – Scope of the corporation
 Corporate Advantage
 An outstanding corporate strategy is not a random collection of
individual building blocks.

 It is a carefully constructed system of interdependent parts.

 Corporate strategy;
 Is guided by a vision of how a firm will create value.
 Is a system of interdependent parts. Its success depends not only on the
quality of individual parts but also on how the parts reinforce each other.
 Must be consistent with and capitalize on opportunities inside and outside the
company.
 Must benefit the members in comparison to the costs incurred by them.
 Scope of Corporation
 Corporate strategy is a set of choices that a corporation makes to create value
through configuration and coordination of its multimarket activities.

 Vertical / Value Chain - What range of vertically linked activities should the firm
encompass?
 Horizontal / Product & Customer - How specialized should the firm be in terms of
the range of products it supplies?
 Geographic - What is the optimal geographical spread of activities for the firm?
Types of Corporate Strategy

Input Domain Out put Domain

Glass Bottles Trucks

Core Domain
Coca Cola

Related Domain Unrelated Domain

Snacks Apparel
2 – Vertical Integration
 Definition
 Vertical integration is a firm’s ownership and control of multiple vertical stages in
the supply of a product.
 Can be measured by the ratio of its value added to sales revenue.
 Dilemma
 Is it better to be vertically integrated or vertically specialized?
 Should we make or to buy?
 Motive
1. Avoiding Transaction Costs
 Transaction costs are costs associated with searching, maintaining and enforcing
relationships with external entities. Cost in making any economic trade when
participating in a market.
 Mutual dependency of the two parties encourages opportunism and strategic
misrepresentation.
 Firms will driven to integrate vertically in order to control transaction costs.
 Motive
2. Technical Economies from the Physical Integration of Processes
 Savings that arise from the physical integration of processes
3. Coordination Benefits
 Greater value added due to coordination of activities and synergy

 Test: Vertical Integration vs. Market Contract

Example
 Costs
 Differences in Optimal Scale between Different Stages of Production
 UPS’s delivery vans are manufactured to its own specifications by Morgan Olson, but it
should not certainly manufacture them. Transaction costs avoided will be trivial
compared with the inefficiencies incurred in manufacturing.
 The Need to Develop Distinctive Capabilities
 UPS not making its own vans is that it is likely to be a poor vehicle manufacturer.
 Problems of Managing Strategically Different Businesses
 Management systems and organizational capabilities required for truck manufacturing
are very different from those required for express delivery.
 Incentive Problems
 Integration changes the incentives between vertically related businesses.
 High Powered Incentive. Where a market interface exists between a buyer and a seller,
profit incentives ensure the best possible deal, efficiency is service is ensured. —
 Low Powered Incentive - In vertical integration customer relationships are subject to
transfer pricing and coordinated production.
 Costs
 Investing in an Unattractive Business
 it may involve investing in an inherently unattractive industry.
 Flexibility
 If responsiveness to uncertain demand is required, there may be advantages in market
transactions.
 Competitive Effects
 Vertical integration risks damaging its competitive position in its core business. If it
forward integrates, it becomes a competitor of its customers.
 Compounding Risk
 Problems at any one stage of production threaten production and profitability at all other
stages.
Make or Buy?
Types of Vertical Relationships
 Types of Vertical Relationships
 Criteria / Conditions for Choice of Vertical Relationship
1. Resources, capabilities, and strategy: Within the same industry, different
companies will choose different vertical arrangements according to their relative
resource and capability.
2. Allocation of risk: Contract must cope with uncertainties over the course of the
contract. How risk is shared is dependent partly on bargaining power and partly on
efficiency considerations.
3. Incentive structures: Market contracts provide powerful motivations to the parties
involved, but may also induce opportunistic behavior. Weak performance incentives
can make the relationship skewed.
3 – Diversification
 Definition
 The tangent of company growth by
adding new products and services to
the company's offerings. With these
new offerings, the company can
pursue business opportunities outside
of its regular practices and markets.

 Concentric or Related Diversification

 Leveraging Core Competencies
 Sharing Activities
 Pooled Negotiating Power

 Unrelated Diversification
 Corporate Restructuring & Parenting
 Portfolio Management
Evolution
 Motive
1. Growth
 Diversification is successful in generating revenue growth. In the absence of
diversification, firms are prisoners of their industry. It is a way to leverage strong
core or escape a weak core.

2. Risk Reduction
 Shareholders can diversify risk by holding diversified portfolios.

3. Value Creation
 The attractiveness test: The industries chosen for diversification must be
structurally attractive or capable of being made attractive.
 The cost-of-entry test: The cost of entry must not capitalize all the future profits.
 The better-off test: Either the new unit must gain competitive advantage from its
link with the corporation or vice versa.
 Benefits
 Economies of Scope - presence of economies of scope in common resources
 Tangible resources such as distribution networks, information technology systems,
sales forces, and research laboratories confer economies of scope by eliminating
duplication.
 Intangible resources such as brands, corporate reputation, and technology offer
economies of scope from the ability to extend them to additional businesses at a low
marginal cost.
 Organizational capabilities can also be transferred within a diversified company.
 Internal Market
 Internal Capital Markets - Firm possesses an internal capital market in which the
different businesses compete for investment funds.
 Internal Labor Markets - Efficiencies arise from the ability to transfer managers and
technical specialists between businesses, thus relying less on external.
 Parenting Advantage
 If a parent company is to own a particular business, not only must it be able to add value
to that business but also it should be capable of adding more value than any other
potential parent.
Example
Degree of Diversification
4 – Implementing Corporate
Strategy
 Resource Continuum
 Relatedness is about resources not products
 Companies with specialized resources will compete in a narrower range of
businesses than companies with more general resources.

 Coordination is dependent on how the resources are disseminated

across the subsidiaries
 Public goods – brand names, patents etc
 Private goods, MIS system, sales force, procurement

 Performance evaluation of subsidiaries is dependent on control

mechanism
 Financial control – stable, mature industries, output orientation
 Strategic / Operational control – fast moving industry, input orientation
 Resource Continuum

General Nature of Resources Specialized

Wide Scope of Businesses Narrow

Transferring Coordination of Mechanisms Sharing

Financial Control Systems Operating

Small Corporate Office Size Large

Resource Continuum
Implementation
Implementation
Example
Example
Example
Q&A