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This note by Professor Kathryn Rudie Harrigan is based on lectures from B7708: Corporate Growth &
Organizational Development as well as from Collis & Montgomery (2005), Corporate Strategy: A Resource-Based
Approach, Irwin/ McGraw-Hill
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which becomes the supplier, and its customer which is the downstream, sister business
unit).
The corporate advantage model assumes that corporate value is created by the
choices that headquarters managers make. In the Corporate Growth & Organizational
Development course, the strict test of attaining corporate advantage specifies that this
condition of advantage is attained when (1) a multi-business firm’s headquarters
managers create corporate value from the membership of each business unit in the
corporation, (2) the benefit such corporate value creates exceeds the cost of corporate
overhead incurred in doing so (including the cost of headquarters staff who may
coordinate certain intrafirm activities, or not), (3) the corporate parent under analysis
adds more value to its corporate family members than any other potential corporate
parent could offer (or vice versa), and (4) the corporate value that the family under
analysis adds in its particular enterprise form is greater than any alternative corporate
form of enterprise could add to its family members.
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create value. The organizational infrastructure created -- and headquarters activities
undertaken to implement a firm’s corporate strategy -- are presumed to create value.
These investments are the active drivers of the corporation’s strategy. If they are
effective, the interactions of these drivers create conditions that enhance the realization
of corporate advantage through the astute exploitation of resource renewals and
operating synergies that further strengthen the corporate family’s competitive advantage
in their respective lines of business.
Figure 1
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dimensions [controls, coordination and competitive advantage] to produce the
outcomes that contribute to the family’s corporate advantage [enhanced operating
synergies, robust resource renewal and sustainable competitive advantages].
In order to assess whether a particular firm has attained relatively high corporate
advantage, it is useful to consider how the corporate family fares vis-à-vis certain acid
tests that evaluate the efficacy of each respective corporate strategy dimension.
Remember that driver strategy dimensions interact with each other to affect the
moderating strategy dimensions; some managerial choices affect both driver and
moderating dimensions. It is possible to give each driver strategy dimension a score
between 00 and 100 – with higher scores awarded when the driver strategy dimension
that interacts favorably with moderating dimensions to contribute favorably to the
desirable outcomes of sustainable competitive advantage, enhanced operating synergy
and robust resource renewal.
If the six scores are posted along the respective scaled lines on the shape shown
in Figure 2 and connected by lines between each scale to form the planes of a hexagon,
a visual evaluation of the firm’s corporate strategy is created. Strategies that most
closely approach optimal corporate advantage will be depicted as balanced and large
(since the values of many of their driver and moderating dimensions will approach 99).
Inferior corporate strategies will be depicted as unbalanced and smaller (since the
values of many of their driver and moderating dimensions will be below average). The
corporate strategy shape can function as a diagnostic tool that suggests which
dimensions of a firm’s strategy should be strengthened to improve implementation of
the management’s strategic vision by increasing balance among the dimensions.
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DRIVERS OF CORPORATE STRATEGY
Figure 3
Height
Heightand
andNature
Nature
of
of EntryBarriers
Entry Barriers
Characteristics affecting
Factors Factors
Factors
Factors Creating
Creating
Creating Creating
Suppliers’ Customers
Customers
Suppliers’ Competitive Behavior Bargaining
Bargaining
Bargaining Bargaining
Power Within Industry Power
Power
Power
point for assessing industry attractiveness, analysis of overall demand traits is also
important. Is demand growing (or saturated) in the markets where the firm’s businesses
compete? Which exogenous forces are likely to change customers’ requirements within
them (thereby forcing competitive shifts in the firm’s businesses? Which competitive
dynamics are likely to harm industry attractiveness? Is there growing demand for
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Assessment of industry attractiveness typically relies upon Porter’s 5-Forces paradigm to assess an industry’s
average profitability potential. See Porter, M.E. 1980. Competitive strategy: Techniques for analyzing industries
and competitors. New York: Free Press.
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complementary products that could revitalize demand for the products of the firm’s
business units? Evaluation of this aspect of the businesses dimension is difficult
because attractive industries may be characterized as those with double-digit demand
growth or those with industry structures that foster high average profitability or those
with a favorable regulatory environment or those having other criteria that please the
providers of capital (or some combination of these attractive traits). That is why stock
market prices alone are inadequate measures of a successful corporate strategy. A
dynamic assessment (that considers the future sustainability of favorable industry traits)
is needed to score the businesses dimension effectively.
Acid test of valuable resources: The corporate parent possesses resources that
it makes available to appropriate business units to enhance their respective competitive
advantage. Corporate resources are likely to be intangibles – patents, brand names,
corporate logos and trademarks, distribution systems that can be used by several lines
of business, databases and information system infrastructures, or other valuable
resources that are meaningfully unique from those controlled by other corporate
parents.
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The lines of business within a corporate family will each have their own
resources that are idiosyncratic to their respective industry success requirements and
not used by other members of their corporate family. (If two or more lines of business
rely on the same valuable resources for success in their respective marketplaces, those
resources either were provided by their corporate parent or have been elevated by their
parent for use by sister businesses -- in addition to the specific line of business that first
developed the valuable resource and contributed its use to the corporate family. Some
valuable resources are corporate; most resources belong to the lines of business.) It is
important to distinguish between these two levels of resources; if the resources that are
most important to competitive success are owned by the respective lines of business
and the use of the parent’s corporate resources adds little incremental advantage to a
business unit’s strategic posture, then that parent’s corporate resources are not
particularly important and the corporate parent adds little of value to the members of its
family.
.
Corporate resources can be evaluated using the same tests that are used to
evaluate the resources of a particular line of business: 3 uniqueness, durability and value
that will increase customers’ willingness to pay premiums for the firm’s products and
services, among others. Good corporate resources accrue valuable rents that the
corporate family appropriates (instead of its individual employees). Corporate resources
also create high desirability and are competitively superior to those of other corporate
parents.
Acid test of optimal management systems: The firm implements its corporate
strategy through the managerial systems and organizational processes that it
establishes -- its organizational structure and lines of communication, size and role of
corporate staff, nature of performance measures and feedback, use of performance
incentives, opportunities for managerial training or promotion or rotation among lines of
business, uses of symbolism in developing corporate culture, and other dimensions of
organizational design. Organizational structure, management systems and decision-
making processes should be appropriate for the type of corporate strategy that the firm
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See Wernerfeldt, B. 1984. A resource-based view of the firm. Strategic Management Journal. 5: 171-180 and
Peteraf, M.A. 1993. The cornerstones of competitive advantage: A resource-based view. Strategic Management
Journal. 179-191.
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is pursuing (e.g., synergistic conglomerate, passive holding company, organic growth
via innovation, collecting rents via franchising, joint venture, corporate venture capital to
enhance internal entrepreneurship, or other some other type of relatedness and
coordination among the firm’s lines of business). To evaluate the efficacy of the firm’s
choices of structures, systems and processes, it is necessary to analyze the role of the
corporate office in creating value to corporation. Intervention by headquarters in the
autonomy of its businesses could enhance synergies within/ across the firm’s industry
and geographic groups (or destroy it).
Typically the corporate office encourages coordination among business units (to
exploit potential synergies and create future corporate resources). Even in the absence
of opportunities to exploit operating synergies and build new corporate resources,
headquarters typically acts as central provider of scarce resources (e.g., advantageous
access to capital or talent or other necessary items that the parent can acquire more
cheaply than each of its business units can do individually) to avoid wasteful
redundancies. Oversight is exercised when headquarters uses its control mechanisms
to intervene in a particular business unit’s decisions (e.g., refusing a capital request,
asking for inventory reduction, proposing new strategic moves, or other centrally-
directed change in operations).
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affected by the interaction of the corporation’s choices of lines of businesses and the
firm’s choices of organizational structure, managerial systems and decision-making
process for implementing corporate strategy. Although the realization of operating
synergies is one highly-desirable outcome of their interactions, effective corporate
controls can influence how well the firm’s lines of business perform. For example, if its
business units are horizontally-related (as is often found in forms of global strategy),
corporate interventions often improve coordination among geographically-diverse sites
while playing off the differing levels of country risk that particular business units face. If
the firm’s lines of business are vertically-related to each other, corporate interventions
sometimes enhance the effectiveness of value chain strategies by improving
intelligence and coordinating throughput volumes. If the firm’s business units are related
to each other with respect to any coherent trait, corporate interventions to transfer
knowledge, enhance asset-sharing arrangements or incubate new business initiatives
can create greater corporate advantage than would be possible if each line of business
competed only on the potential of their respective industries (as would be the case in
unrelated diversification strategies).
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Corporate controls endow headquarters with substantial power over corporate
resources because the corporate office acts as guardian of the firm’s “crown jewels” and
determines which businesses use the corporate-level resources. In its capacity as
guardian, the corporate office controls their use to prevent value destruction due to
over-exposure, denigration of image, or other damaging activities. Depending on the
firm’s type of diversification, its organizational structure, managerial systems and
decision-making processes should be designed to reinforce appropriate strategic control
processes.
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SUMMARY
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