Organization & Strategy

Tools & Concepts IV

March 2003
Contents

From Competitive Advantage to Corporate

1
Strategy

2 Matrices of Corporate Strategy

Organization & Strategy 1

Corporate Strategy

Objectives

Corporate Strategy
What businesses the corporate should be in?
How the corporate office should manage the array of business units?

Business Unit A Business Unit B

Competitive Strategy Competitive Strategy
How to create competitive How to create competitive
advantage? advantage?

Corporate Strategy is the overall plan for a diversified company

CEOs have been obsessed with diversification since the early 60s
No consensus exists about corporate strategy
Much less about how a company should formulate it

Organization & Strategy 2

Corporate Strategy

Premises

Any successful corporate strategy builds on a number of premises.

• Competition occurs at the Busines Unit level

• Diversification inevitably adds costs and constraints to business units

• Shareholders can diversify themselves

Organization & Strategy 3

Corporate Strategy

Does diversification create shareholder value?

How attractive is the industry?

The industries chosen for diversification must be structurally attractive or capable of being
made attractive

What is the cost of entry?

The cost of entry must not capitalize all the future profits

Will the business be better off?

Either the new unit must gain competitive advantage from its link with the corporation or
vice versa

Organization & Strategy 4

Corporate Strategy

Portfolio Management

The corporation acquires sound, attractive companies with competent managers

who agree to stay on.

It must find good undervalued companies.

The acquired units are autonomous, and the teams that run them are compensated
according to the unit results
The corporation supplies capital and works with each to infuse it with professional
management techniques
It provides high-quality review and coaching

However, those benefits have been seriously eroded.

• Contributing capital isn’t contributing much
• lack of industry-specific knowledge and experience
• complete autonomy is questionable
• sheer complexity of management task
---> Portfolio management is no way to conduct corporate strategy

Organization & Strategy 5

Corporate Strategy

Restructuring

The restructuring strategy seeks out undeveloped, sick or threatened organizations or

industries on the threshold of significant change.

The parent changes the management team, shifts the strategy or infuses the company with
new technology.
It may make follow-up acquisitions to build a critical mass and sell off unneeded or
unconnected parts and thereby reduce the effective acquisition cost.
The parent sells off the stronger unit once results are clear because the parent is no longer
added value.

The restructurer is exposed to considerable risk:

• insight to spot undervalued companies or positions in industries ripe for transformation
• integrate and turn around the acquisition to create a new strategic position is difficult
• other companies may deplete the pool of suitable candidates
• very hard to dispose of business units once they are restructured and performing well

Organization & Strategy 6

Corporate Strategy

Transferring skills

Knowledge about how to perform activities is transferred among the units.

Transferring skills leads to competitive advantage if the similarities among businesses

meet three conditions:
1. The activities involved in the businesses are similar enough that sharing expertise is
meaningful. Broad similarities are not sufficient basis for diversification.
2. The transfer of skills involves activities important to competitive advantage.
3. The skills transferred represent a significant source of competitive advantage for the
receiving unit. The expertise or skills to be transferred are both advanced and proprietary
enough to be beyond the capabilities of competitors

The transfer of skills is an active process by reassigning critical personnel and by

mobilizing proprietary expertise across units.

By using both acquisitions and internal development, companies can build a transfer-of-
skills strategy: acquisition of a company in the target industry as a beachhead and then
building on it with their internal expertise.

Organization & Strategy 7

Competitive Dynamics

Sharing activities

The ability to share activities is a potent basis for corporate strategy because
sharing often enhances competitive advantage by lowering cost or raising
differentiation. But not all sharing leads to competitive advantage, and companies can
encounter deep organizational resistance to even beneficial sharing possibilities.

Sharing can lower costs if it achieves economies of scale, boosts the efficiency of
utilization, or helps a company move more rapidly down the learning curve.
Sharing can enhance the potential for differentiation and reduce the cost of
differentiation.
Sharing must involve activities that are significant to competitive advantage.

But sharing involves costs such as coordination and compromise of the design of an
activity.

Sharing requires an organizational context in which business unit collaboration is

encouraged and reinforced through a strong sense of corporate identity, a clear corporate
mission, an incentive system.

Organization & Strategy 8

Corporate Strategy

Choosing a corporate strategy

Sharing activities and transferring skills offer the best avenues to value creation.

1. Identify the interrelationships among already existing business units

2. Select the core businesses that will be the foundation of the corporate strategy

3. Create horizontal organizational mechanisms to facilitate interrelationships among the

core businesses and lay the groundwork for future related diversification

4. Pursue diversification opportunities that allow shared activities

5. Pursue diversification through the transfer of skills if opportunities for sharing activities
are limited or exhausted

6. Pursue a strategy of restructuring if it fits the skills of management or no good

opportunities exist for forging corporate interrelationships

7. Pay dividends so that shareholders can be the portfolio managers

Organization & Strategy 9

Contents

From Competitive Advantage to Corporate

1
Strategy

2 Matrices of Corporate Strategy

Organization & Strategy 10

Matrices

Tools for Corporate Strategy

Growth-Share Matrix

Industry attractiveness - business strength Matrix

Life-cycle Matrix

Profitability Matrix

Organization & Strategy 11