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CORPORATE STRATEGY: A WRITTEN REPORT

Submitted by: GASCON, Marc Racelis

04.29.2011

Submitted to: Dr. Mabel Liza Cagadoc

BSBA022

 

Opening Case: SONY INTERNATIONAL

Adapted from: Guth (2003)

Chairman Idei and SONY’s Quest for Diversification

The development of technology has continued to revolutionize the media industry, among many other facets of everyday living. However, prior to the recent rise and predominance of interactive programmes headlined by the likes of YouTube and Facebook or even TMZ and Apple, media content producers have sought but struggled to merge their companies with content distribution firms, hoping to maximize returns by controlling outlets for their content. For example, the executives at organizations like Bertelsmann AG, Vivendi Universal, and AOL (which all have multiple but disjointed media and content outlet business units in publishing, movies, cable TV, and Internet sites) have not been as successful as the execs at the abovementioned multimedia giants. But despite the failure of Bertelsmann’s Chairman Middelhoff, Vivendi’s Chairman Messier, and AOL’s Chairman Levin, it was Sony International’s Chairman Nobuyuki Idei who still undauntedly pursued the once-elusive convergence of music, movies, games, and communications in all forms.

 

Mr. Idei argued that Sony’s unique advantage over other media behemoths was that it makes the actual electronic devices (such as televisions, cameras, computers, gaming consoles, mobile phones, and portable gadgets for music plus other personal uses) that deliver the kind of content that Sony monopolizes. Across its personal device divisions, Sony has achieved competitive advantage in its consumer electronics businesses. Now, Sony is seeking competitive advantage across its electronic devices, software, and content divisions. As Sony’s chairman, Idei has made significant strides in building a company where user content meshes with the electronics. Many Sony gadgets have intertwined functions: the Walkman’s are no longer just stand-alone tape players, but can also download music from the Internet; the Clié personal digital assistants come with cameras; the CoCoonHome videorecorders can be programmed from a celfone. Sony has succeeded and exceeded many strategic expectations, to the point that business experts testify that, “in terms of building networked products, no company has come so far as Sony,” according to an analyst at Tokyo’s West LB Securities named Lee Kun Soo. But inside the Sony family, there remains the major challenge: Sony’s acquisition of Columbia Pictures in the late 1980s brought the struggle between hardware and software copyrights, which means that new technological advances are likely to make that struggle even more intense in the coming years. In response, chairman Idei maintains that by 2005, the broadband telecommunications infrastructure meshed with user content products (music, video, and games software) will be in place, allowing the company to reap the benefits of the convergence of media and technology. The number of high-speed Internet and mobile phone connections is exploding. Sony’s Memory Stick is now embedded in most of its new products, making it possible for users to easily swap data between cameras, computers, and PDAs. One-third, or nearly 1,200 of Sony’s movies through Columbia Pictures, have been digitized, allowing these content to be used on many different hardware devices that are compatible with the Sony technology.

In this era of increasingly indistinguishable electronics, preserving Sony’s corporate brand is paramount. “People don’t just buy for economic reasons,” Chairman Idei said. “When you touch a product, you should feel something.” However, to accomplish this diversification strategy, the integration necessary between divisions has led to some changes in the Sony company’s leadership. Mr. Idei added: “The necessity for such bridge-building led to the recent ouster of Sony Music’s longtime leader Tommy Mottola, whose unwillingness to confer with the rest of Sony on a new business model forced the change to an outsider, NBC television executive Andrew Lack.” Thus, implementing the related diversification strategy and vision of Chairman Idei has not been without difficulties. Furthermore, any strategy of any company has to create value over and above the value created by the other companies involved in an industry. To this point in time, although the corporate-level strategy has been fairly successful for Sony, the fast-changing technologies and constant- shifting consumer mindsets continue to test the plans of Chairman Idei and his team.

 

INTRODUCTION

At present, the environment we exist in is highly dynamic and quick-changing, rendering it very difficult for any contemporary business enterprise to boom let alone operate successfully. Given innumerable uncertainties, threats, and constraints, it is but inevitable for the many members of the corporate world to be under great pressures, trying to find out the ways and means for survival. Under such circumstances, the realistic attack would be to make the best use of strategic management principles that can help the corporate-level management to not just explore the possible opportunities but to also concurrently achieve an optimum level of efficiency by minimizing expected and unexpected threats to the business. Hence, CORPORATE STRATEGY is an imperative for every organization, especially since it offers several benefits to the different stakeholders.

To begin with, it would be auspicious for the purposes of this written report to revisit the meaning of the term strategy. Taking root in the language fueled by histories of warfare, the concept of STRATEGY in business has been borrowed from military tactics. Originating in the Greek terms ‘stratos’ [which roughly translates to “field, spread out like a structure”] and ‘agos’ [which roughly translates to “leader”], the original rough definition of “strategy” was to think ahead in order to counter the movements of the enemy forces (Thompson & Strickland, 2003). Alas, in the modern era, the keyword strategy has become widely used in other domains such as in sports and academics, just to name a few. Generally speaking, a strategy is narrowly defined as a set of key decisions designed to meet a set of targets. Conversely, in the domain of business, a strategy points to the accomplishment of enterprise goals and/or the broad program of action involving the deployment of resources towards attaining comprehensive organizational objective/s (Pettigrew et al., 2002). Still in the business sense, Johnson & Scholes (2006) define strategy as “the basic long-term direction and scope of an organization” (Johnson & Scholes, 2006, 120). In other words, the strategy of a business organization refers to a comprehensive master plan stating how the organization will achieve its duty or long-term goals. Narrowing it down a bit further, it is in the field of Management where STRATEGY involves the appropriate configuration of resources within a challenging environment in order to meet the needs of markets and to fulfill stakeholder expectations (Bennett, 1999). Additionally, this entails the consistent patterns in organizational decision-making in order to deliver a unique mix of value and quality in the global arena. As such, strategies are plans that must change frequently, in light of the plans of competitors as well as in adaptation to the constantly evolving market’s conditions.

In corporations ranging from small-scale to large-scale, there are at least three to four levels of management. Said levels, usually taking the form of a hierarchical pyramid, signify which among the several components of a firm is/are generally responsible for developing the many puzzle-like pieces of a company’s overall strategy. And as depicted in Figure 1 found below, at the very tip of these levels of management is CORPORATE STRATEGY.

To begin with, it would be auspicious for the purposes of this written report to revisit

Figure 1: The Strategy Pyramid [Adapted from: Pettigrew et al. (2002)]

Corporate Strategy is the top-most level mainly in the sense that it is the one with the broadest scope albeit with the longest time horizon (Pettigrew et al., 2002). This means that as the operation of an enterprise becomes larger and more diverse, more points of initiative plus more time is required to develop a Corporate Strategy. Also, more managers and employees with relevant strategy-making role are required to coordinate at all the other levels of management.

Ultimately, the several aspects of Corporate Strategy are challenging, not only for large firms but also for small local enterprises. That is because strategies exist at many differing levels in any organization, from the overall business (or group of businesses) down to the individuals working in it.

WHAT IS CORPORATE STRATEGY?

Corporate Strategy is defined by Thompson & Strickland (2003) as the overarching program of actions that apply to all parts of the diversified firm, giving an overall direction to the organization through visions, missions, systems, and culture, under which are the business-level strategies, functional-level strategies, and operating-level strategies. It is embodied by a collection of strategic initiatives devised by managers and key employees up and down the whole organizational hierarchy, and is concerned with the overall purpose and scope of the business to meet stakeholder expectations. It answers questions such as “which line of businesses should we be in?” and “how does being in these businesses create synergy and/or add to the competitive advantage of the corporation as a whole?” As visualized in Figure 2 below, the 10-Planets Model of Johnson & Scholes (2006) said that corporate-level strategy specifies the coordinated actions conceptualized and taken by a business firm in order to gain a competitive advantage in a society and environment that vary from time to time. By configuring or redirecting the resources of the company towards a group of different business units where the company can create values and successfully attain goals related to profitability and trust, effective Corporate Strategy helps the firm in competing in several industries and product markets. A corporate- level strategy’s value is ultimately determined by the degree to which the businesses in the company’s portfolio are worth more under the management of the company when they would be under any other ownership. Thus, a well-executed Corporate Strategy creates, across all business units, aggregate returns that exceed what those returns would be without the strategy, and contributes to the firm’s competitiveness plus its ability to earn above-average returns.

WHAT IS CORPORATE STRATEGY? Corporate Strategy is defined by Thompson & Strickland (2003) as the overarching

Figure 2: The 10-Planets Model of Corporate-level Strategy [Adapted from: Johnson & Scholes (2006)]

In the current global environment, top executives should view their firm’s business units as a portfolio of core capabilities when they and their management teams select new business ventures and decide how to manage these investments. As shared in this written report’s sample Opening Case, the international firm headed by Nobuyuki Idei is best known for its consumer electronics market where it seeks to create interrelatedness between many business units. Sony, under the management of Mr. Idei, seeks to have integration across its media businesses through the kind of corporate-level strategy known as DIVERSIFICATION [to be discussed in further detail in the later parts of this written report]. This Corporate Strategy allows the company to use its core competencies to pursue opportunities in the external environment, that is, the user information sharing-driven world. But as the Sony case illustrates, corporate-level strategies also have an effect on the behavior of organizations, revealing for example that strategic choices regarding any part of the company are loaded with uncertainty and no real guarantee of exact success.

Figure 3: The Corporate Strategy Cycle [Adapted from: Bennett (1999)] Heavily influenced by investors as well

Figure 3: The Corporate Strategy Cycle [Adapted from: Bennett (1999)]

Heavily influenced by investors as well as other stakeholders, Bennett (1999) stated that CORPORATE STRATEGY is an ongoing cycle undertaken to guide decision-making all throughout the business. It is the kind of plan that is usually explicitly conveyed in an organization’s ‘Vision-Mission Statement’.

Figure 3: The Corporate Strategy Cycle [Adapted from: Bennett (1999)] Heavily influenced by investors as well

Figure 4: The Corporate Strategy Cycle [Taken from: The Philippine Women’s University website (2011)]

Across time, studying the Corporate Strategy of different organizations would reveal common patterns of overall directions. For example, there was a time when soft-drink giant Coca Cola expanded its reach by buying into wine-producing business units. Such is an example of a direction towards DIVERSIFICATION, which is defined as a primary corporate- level strategy that concerns “how managers buy, create, and sell different businesses to match skills and strengths with opportunities presented to the firm” (Pettigrew et al., 2002, 240). Successful diversification should reduce variability in the firm’s profitability, meaning that earnings are generated from majority if not all the purchased business units. But in the case of Coca Cola, the diversification strategy was not entirely successful that the company had to refocus on a single operation:

sticking to what it knows AND does best, which is making sodas in can and in bottles.

There are other types of corporate-level strategies, and they are presented in the next page of this written report as a three- column chart. In this way, the pros and the cons of each Corporate Strategy type can be seen at one glance. In addition to that, the definition of terms related to each corporate-level strategy can also be noted.

THREE-COLUMN CHART FEATURING DIFFERENT CORPORATE-LEVEL STRATEGIES

[adapted from all the References, as synthesized by Gascon (2011)]

 

CORPORATE STRATEGY

   

ADVANTAGES

   

DISADVANTAGES

 

DIVERSIFICATION

 

CREATES VALUE through…

 

INVOLVES

BUREAUCRATIC

COSTS

-multibusiness

strategy

 

of

 

through…

 

simultaneously

competing

with

1.Acquiring and Restructuring

 
  • 1. number of businesses

 

many

diff.

product

markets

&

2.

transferring skills

 
  • 2. coordination among businesses

 

industry environments

 

3.

economies of scope (a.k.a. the lowering the

 

Kinds:

average costs for a firm associated with

  • (a) related diversif.

 

producing two or more product/service types)

-venturing into a new business

activity/ies linked to company’s existing activity with one or more commonality in the value chain

 
  • (b) unrelated diversif.

 

-the new business activity/ies linked to the company has very little to zero commonality in the company’s original value-creation process

VERTICAL INTEGRATION

 

PROFITABILITY

through

increased

INEFFICIENCIES

through

increased

-a strategy whereby the company

EFFICIENCY

 

BUREAUCRATIC COSTS

 

either

moves

UP or DOWN

the

1.

Limits the entry of new competition into a

Facilitates

investments in

  • 1. Can raise rates related to production and

typical raw-material-to-consumer production chain

2.

particular industry

operating expenses

Kinds:

specialized assets (a.k.a. exclusive

Protects product quality so the

  • 2. Can inhibit strategic flexibility (a.k.a. the ability to match requirements of fast-changing

  • 3. Can raise the risks when supply-demand

  • (a) backward integ. / upstream

-company produces its own inputs

  • (b) forward integ. / downstream

3.

equipment and/or unduplicated technical expertise) that enhance efficiency

technologies by making changes such as in the suppliers or the distribution system

conditions are unpredictable/unstable

-company

disposes

of

its

own

 

outputs

4.

firm becomes a differentiated player in its core business

Allows improved scheduling and tighter coordination of business processes, enabling faster response to sudden changes in supply-demand conditions

 

COOPERATIVE RELATIONS

 

1. Helps foster credibility, a believable

  • 1. Can

lead

company

to

become

heavily

-a.k.a. long-term contracting or

commitment to support the development

 

dependent on an inefficient partner organization

strategic alliances -an arrangement in which one

of a long-term relationship between companies

  • 2. Can discourage company from competing with other organizations in the marketplace

company agrees to supply another, as the other company agrees to continue purchasing from that supplier in a commitment to seek jointly ways of lowering the costs or raising the quality of inputs into both companies’ value-creation process

2.

Helps maintain market discipline, able to apply negotiation skills

  • 3. Can lead company to lack the incentive to be cost-efficient

STRATEGIC OUTSOURCING

 

1.

Enables company to reduce its own costs

  • 1. Can lead company to loses ability to

-a strategy that

is

the

opposite of

2.

Enables

company

to

better

 

learn from the outsourced activity AND the

Vertical Integration

   

differentiate its final product

 

opportunity to transform that activity into a

-a process whereby the company

3.

Enables company to focus limited

distinctive competence of the company

 

hands

over

its

certain

  • 2. Can make company too dependent upon

activities/responsibilities

to

an

independent organization outside the

human/financial/physical resources on further strengthening its core competencies

a particular supplier/distributor

company

4.

Enables company to be more flexible by being responsive to changing market conditions

  • 3. Can make company go too far in outsourcing value-creation activities that are central to the maintenance of competitive advantage

 
  • 4. Can lead company to lose control over the future development of a competency to the

   

point

that

its

performance

might

ultimately

decline

 

Closing Case: ECHOSTAR and SBC

 

Adapted from: Guth (2003)

 

Telecommunication versus Cable Firms: Alliances in response to Rivalry

 

Demand for broadband Internet connections has surged in the United States, and telephone companies have scrambled to maintain pace with the cable companies as they respond to the demand. In our Internet-driven age, phone companies and satellite TV providers have started formed corporate-level alliances, allowing them to respond effectively to cable company offerings in communications. The alliance between satellite television corporation EchoStar Communications and leading homephone organization SBC, for example, will allow customers to sign up for as many as five services: local, long distance, and cellular phone services plus satellite TV and broadband services. Their newly formed SBC DISH Network should please customers, who will receive a singular billing statement for several diverse services rolled into one.

The phone companies are relative latecomers to broadband. Cable operators, which in the 1990s invested heavily in expanding and modernizing their networks, dominate the market. Comcast, the biggest provider in the USA, had 4.1 million subscribers at the end of March 2003, far ahead of the leading phone companies—SBC Communications with 2.5 million, Verizon Wireless with 1.8 million, and BellSouth with 1.1 million. Offering broadband also allowed the cable companies to offer phone service (once regulatory agencies allowed it) through cable, something they have aggressively pursued. In 2003, cable operators had registered over three million phone customers, often offering discounts if a customer subscribed to more than one service (cable TV, phone line, broadband Internet). In response to the competition, phone companies all over the world have begun sealing partnerships to better contend with the cable companies’ aggressive moves into phone service. SBC Communications has agreed to partner up with EchoStar Communications Corp., which originally single-handedly offers satellite TV services called the Dish Network. Under the corporate-level plan by SBC, starting early 2004 the phone company’s customers will be able to sign up for EchoStar TV services by calling SBC sales representatives. Interested customers could subscribe to at most five joint SBC-EchoStar services consolidated on one SBC bill. Said partner companies intended to brand their service as SBC DISH Network. In return, SBC will invest $500 million in EchoStar’s convertible debt. Likewise, another phone company Qwest is building a similar alliance with DirecTV, another satellite TV provider.

This EchoStar-SBC alliance builds on the idea of “bundling,” which is the practice of selling diverse kinds of services under a single- package billing, which tech critics declared is the future of telecommunications. As SoundView Technology Group analyst Michael Bowen said, “You’ll see more and more bundled deals as phone companies seek to defend themselves in a fight to stay relevant in a wireless Internet connection world.”Bundling services, like bundled products at the supermarket, is more profitable for the telecoms companies than giving each customer a single service. This is because bundling creates switching expenses for the customer. When customers use multiple services, it becomes increasingly difficult to compare-contrast with other offerings from rival institutions, so customers tend to stay put in one bundle offer. SBC is also announcing deals with other tech companies in attempts to expand its planned broadband package, such as their personalized Yahoo! SBC service subscription. Under the terms of this deal, SBC will pay Yahoo an estimated $5 a month for each subscriber; Yahoo in return will give SBC an undisclosed percentage of any premium services the SBC subscribers purchase beyond the basic bundle service, like expanded email storage or real-time stock quotes.

This kind of competition response alliances between phone companies and TV as well as Internet service providers have not only allowed them to respond to cable companies’ strategic moves into phone services, but have also allowed struggling firms from an endangered industry to diversify the services they offer.

 

REFERENCES

Bennett, R. (1999). Corporate strategy (2nd ed.). New York, USA: McGraw Hill.

Guth, R. (2003). “Sony: The complete entertainer?” The Economist, March 1, 62-64. Retrieved on April 27, 2011, from http://www.theeconomist.com.

Guth, R. (2003). “SBC-EchoStar deal allows satellite TV in your phone bill.” The Wall Street Journal Online, July 22, page B. Retrieved on April 27, 2011, from http://www.wsj.com.

Harrison, (n.d.). Chapter 9: Corporate Strategy—Vertical Integration, Diversification, and Strategic Alliance. pp.278-311.

Johnson, G. & Scholes, K. (2006). Exploring corporate strategy: Text and cases (7th ed.). New Jersey, USA: FT Prentice Hall.

Pettigrew, A., Thomas, H. & Whittington, R. (2002). The handbook of strategy and management. England, UK: SAGE. Thompson, L. & Strickland, R. (2003). Strategic management: concepts and cases. New Delhi, India: McGraw Hill.