Corporate Strategy

Two Strategy Levels

Business-level Strategy (Competitive)
Each business unit in a diversified firm chooses a business-level
strategy as its means of competing in individual product markets.
Corporate-level Strategy (Companywide)
Specifies actions taken by the firm to gain a competitive
advantage by selecting and managing a group of different
businesses competing in several industries and product markets.

The dimensions of scope are
geographical scope
vertical scope
product scope

Corporate-Level Strategy: Key Questions
Corporate-level Strategys Value
The degree to which the businesses in the portfolio are
worth more under the management of the company than
they would be under other ownership.
What businesses should
the firm be in?
How should the corporate
office manage the
group of businesses?
Business Units
Premises of Corporate Strategy
Competition occurs at the business unit level

Diversification inevitably adds costs and constraints to
business units

Shareholders can readily diversify their portfolio

Corporate strategy can succeed if it truly adds value to
the different business units
Competitive advantage of a business is short-lived

Todays competitive advantage is tomorrows
competitive requirement

Corporate strategy involves
developing a vision for the whole organisation,
making decisions about the scope of the organisation,
allocating resources among business units,
developing objectives and performance measures for
each business unit,
managing the synergies among different business
unit.

Corporate strategy
is guided by a vision of how the firm , as a
whole will create value

is a system of interdependent parts

must be consistent with, and capitalise on,
opportunities outisde the company.

The benefits of corporate memberships must
be greater than the costs.
Essential tests for diversifications

The Attractiveness Test
Industry selected for diversifying into must be structurally
attractive or capable of being made attractive

The Cost-of-entry Test
Cost of entry must not capitalize all future profits.

The Better-off Test
Either the new unit must gain competitive advantage from its link
with the corporation or vice-versa
Three Concepts of Corporate Strategy
1. Portfolio Management
Diversification through acquisition

Logic of portfolio management rest on a number of assumptions
To meet the attractiveness and cost of entry test must find good but
undervalued companies
For better-off test, benefits provided by corporation should yield a
competitive advantage to the acquired units

Benefits of giving business units complete autonomy is questionable

2. Restructuring

New businesses are not necessarily related to existing units.

Unrealized potential is the driving force

Looks for undeveloped, sick or threatened organisations on the
threshold of significant change.
3. Sharing activities and transferring skills

Value is created from economies of scope through:
Operational relatedness in sharing activities
Corporate relatedness in transferring skills or core competencies
among units.

The difference between sharing activities and transferring competencies
is based on how the resources are jointly used to create economies of
scope.
Sharing Activities
Operational Relatedness
Created by sharing either a primary activity such as inventory
delivery systems, or a support activity such as purchasing.

Activity sharing requires sharing strategic control over business
units.

Activity sharing may create risk because business-unit ties create
links between outcomes.
Resource Continuum
General Nature of Resources Specialised
Wide Scope of Businesses Narrow
Companies with specialised
resources will compete in
narrow range of businesses

Transferring Coordination mechanisms Sharing
General resources more
likely to be transferred

Financial Control Systems Operational
With specialized resources
need to move to operational
control increases

Small Corporate office size Large
Transferring Skills
Corporate Relatedness
Using complex sets of resources and capabilities to link different
businesses through managerial and technological knowledge,
experience, and expertise.

Creates value in two ways:

Eliminates resource duplication

Provides intangible resources (resource intangibility) that are
difficult for competitors to understand and imitate.

Evaluating the benefits of diversification
Reducing
Risk
Maintaining
growth
Balancing
cash flows
Sharing
Infrastructure
Increasing
market
power
Capitalizing
on core
competencies
Least power to create value
Most power to create value
Recommended as a reason
to diversify
Means of diversification
Acquisitions
CISCO Systems, GE, Dr. Reddys Lab, TATA, etc

Strategic Alliances
Eli Lily Ranbaxy, Hero Honda, Japanese firms- Asahi glass, etc

Internal Development
P&G, Dow Chem., Wipro, 3M

Divestments
Jack Welch's GE