Corporate

Corporate Strategy
Strategy

Creating Corporate Advantages

Defining
Defining Corporate
Corporate Strategy
Strategy
Corporate Strategy is the way a company creates value
through the configuration and coordination of its multimarket activities
The definition has three important aspects:
Value Creation - the generation of superior financial performance
(rents) from multi-market activities that create corporate advantages
Configuration - the multi-market scope of the corporation
(product/market diversification, geographic focus, and vertical
boundaries)
Coordination - the management of activities and businesses that lie
within the corporate hierarchy
Source: Collis and Montgomery, Corporate Strategy, 1997

Corporate

Goal
Goal of
of Corporate
Corporate Strategy:
Strategy:
Corporate
Corporate Advantage
Advantage
The goal of corporate strategy is to build corporate
advantage so as to earn above normal returns
analogous to a competitive advantage in a business unit

Three tests of the existence of corporate advantage:

Does ownership of the business create benefit somewhere in
the corporation? (Does parentage matter?)
Are those benefits greater than the cost of corporate
overhead?
Does the corporation create more value with the business
than any other possible corporate parent or alternative
governance structure?
Source: Collis and MOntgomergy, 1998

Corporate

Three
Three Dimensions
Dimensions of
of Corporate
Corporate Strategy
Strategy

Business Diversification - Horizontal expansion

Vertical Integration - forward or backward expansion
Geographic Scope - geographic and/or global expansion
Corporate

Corporate
Corporate Strategy:
Strategy:
Three
Three Fundamental
Fundamental Issues
Issues
1. Can the corporation create economic value by
changing its scope? (Rent-generating opportunities)
Diversification
Vertical integration
Geographic expansion

2. Should activities be undertaken inside the corporation,

or accessed through contracts, joint ventures,
alliances, or other institutional arrangements? How
should the corporation grow?
3. How should the corporation be structured and
managed to enhance the combined value of its
individual business units?

Corporate

Levels
Levels of
of Strategy
Strategy
Business Strategy (competitive strategy)
is concerned with how a firm competes
within a particular market
Corporate strategy is concerned with
where a firm competes

Corporate

Levels
Levels of
of Strategy
Strategy (contd)
(contd)
Business-Level Strategy (competitve strategy)
How to create competitive advantage in each busness in which
the company competes:
low cost leadership
differentiation
focus low cost/ focus differentiation

Business (or Competitive) Strategy is concerned with the use

of resources and capabilities to create competitive advantages
in each of businesses or industries in which a company
competes

Corporate-Level Strategy (companywide strategy)

Corporate (or Company-wide) Strategy is the overall plan for a
multi-business unit company.
Corporate strategy is what makes the corporate whole add up
to more than the sum of its business unit parts

Corporate

Premises
Premises of
of Corporate
Corporate Strategy
Strategy
Competition occurs at the business unit level
corporations dont compete; only their business units do
value is created at the business unit level, it is only added at the corporate
level
Successful corporate strategy must grow out of and reinforce competitive
strategy

Corporate Strategy inevitably adds costs and constraints

to business units
Corporate overhead and costs of communication between HQ and SBUs
bureaucratic costs, costs of coordination, costs of monitoring

Shareholders can readily diversify themselves

Shareholders can diversify their own portfolios of stocks, and they can often
do it more cheaply with less risk than corporations
Shareholders can buy shares at market prices and avoid paying large
acquisition premiums

Corporate

Implications
Implications from
from these
these Premises
Premises
Corporate Strategy cannot succeed unless it truly
adds value to business units:
by providing tangible benefits that offset costs of lost
independence
economies of scope in operations
economies of scale in administration and internal financing

add value to shareholders in a way that shareholders could

not replicate by themselves

Corporate