Competitive Advantage to Corporate Strategy

Corporate Strategy
2 levels of strategies for any company

Business Strategy
Corporate Strategy 2 Questions answered by Corporate Strategy

What business the corporation should be in

How the corporate office should manage the array of business units

Premises of Corporate 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 Strategy
Essential Tests The Attractiveness Test The Cost of Entry test The Better-off test

How attractive is an Industry

Industry with high return Diversification cannot create value for shareholders, unless the industry has a favorable structure If not, should consider restructuring of the firm Poor industry structure can lead to unhappy diversification Example: Dutch Shells unsuccessful acquisitions like Billiton (Mining) , Bechtel (Power generation)

Dont rush into fast-growing industries Mistook early growth for long term potential Example: Video Games, Personal Computers, Robotics
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Attractiveness Test
Evaluation based on relative attractiveness
Measures Weighting Co. A Mkt size Growth Rate Intensity (comp) Resource reqs Strategic fit Opps / threats Social, political Degree of risk Industry profitability 0.10 0.15 0.30 0.10 0.15 0.05 0.05 0.05 0.05 1.0 6.0 1.0 2.0 3.0 6.0 1.0 1.0 1.0 7.0 Ind. Rating Co. B 2.0 8.0 9.0 5.0 8.0 6.0 4.0 4.0 5.0 Co. C 5 5 5 5 5 5 5 5 5 Ind. Attract. Co. A 0.6 0.15 0.6 0.3 0.9 0.05 0.05 0.05 0.35 3.05 Co. B 0.2 1.2 2.7 0.5 1.2 0.3 0.2 0.2 0.25 6.75 Co. C 0.5 0.75 1.5 0.5 0.75 0.25 0.25 0.25 0.25 5.00

Cost of Entry Test

If cost of entry > expected returns . No shareholder value Overpayment? Example: Philip Morris acquires 7-up (4 times the book value)

More attractive an industry, more the cost of entry

Better-Off Test
Corporation should bring in competitive advantage to the new unit or vice versa. Why? If the benefit is one-time, it is best to sell the unit after extracting benefits does not add value to shareholders Example: Baxter Travenol and American Hospitality Supply

Concepts of Corporate Strategy

Major reasons for diversification failures Failure to address the 3 tests Lack of clarity in the concept of corporate strategy Poor Implementation of the strategies 4 Major concepts of corporate strategy are Portfolio Management Requires No Connection among Business Units Restructuring To create value through companys each autonomous unit Transferring Skills Depends on connection among Business Units Sharing Activities
Exploits the relationship between businesses.

Managing Linkages between Businesses

KEY ISSUEHow does the corporate center add value to the business? BASIS OF BUSINESS LINKAGESSharing of resources and capabilities.

SHARING OCCURS AT TWO LEVELS: Corporate levelcommon corporate services Business levelsharing resources, transferring capabilities PORTERS ANALYSIS OF BUSINESS LINKAGES AND CORPORATE STRATEGY TYPES Portfolio management Parent creates value by operating an internal capital market RestructuringParent create value by acquiring and restructuring inefficiently-managed businesses Transferring skillsParent creates value by transferring capabilities between businesses Sharing activitiesParent creates value by sharing resources between businesses

What Corporate Management Activities are Implied by Porters Concepts of Corporate Strategy
(1) Portfolio Management Using superior information and analysis to acquire attractive companies at favorable prices (e.g. Berkshire Hathaway). Minimizing cost of capital (e.g. GE) Create efficient internal system for capital allocation (e.g. Exxon-Mobil) Efficient monitoring of business unit performance (e.g. BP-Amoco).

(2) Restructuring: Intervening to cut costs and divest under performing assets (e.g. Hanson during 1980s & early 1990s)
(3) Transferring skills: Transferring best practices (e.g. Hewlett-Packard) Transferring innovations (e.g. Sharp) Transferring key personnel between businesses (e.g. Sony) (4) Sharing activities: Common corporate services (e.g. 3M) Sharing operational resources and functions (e.g. sales and distribution, manufacturing facilities).

Portfolio Management
Acquire sound, attractive companies with competent managers who stay Companies acquired need to be autonomous and should be compensated based on results Requires good but undervalued companies
But, the success of this approach is pass. More complex nature of portfolio, difficult to manage Gulf & Western Sara Lee Virgin

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Restructuring
Underdeveloped, sick, or threatened organizations or industries on the threshold of significant change Parent intervenes frequently changing the management team, shifting strategy, or infusing the company with new technology LBOs Business is sold when parent is no longer adding value
Some Restructuring companies Hanson Trust KKR

When well implemented, it passes all 3 tests Major Pitfall Companies find it difficult to divest once restructured

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Transferring Skills
Knowledge about how to perform activities is transferred among the units Characterized by units with similar buyers, channels, value activities and/or the same strategic concept
Example A toiletries business unit, can give the marketing skills, positioning concepts, promotion techniques to a cough syrup business unit

Expertise must be a meaningful source of competitive advantage

Companies which diversified using this concept

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Sharing Activities
Leads to lowering costs or raising differentiation Must involve activities that are significant to competitive advantage and costs outweighed by benefits Business unit collaboration is encouraged and reinforced Example
Uses common physical distribution system and sales force in both paper towels and disposable diapers

Shared Procurement and distribution system for food services in all Marriott units Fully Integrated Real Estate unit

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Action Program
1. 2. 3. 4. 5. 6. 7. Identify Interrelationships Among Units Select Core Business Facilitate Interrelationships Diversify Via Shared Activities Diversify Via Transfer of Skills Diversify Via Restructuring Pay Dividends Instead

Create a Corporate theme A way to ensure that corporation will create shareholder value

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Corporate Theme - Examples

NEC Corporation Corporate Theme --- C&C in 1978 Started to integrate Computers and Communications

Columbia Broadcasting System Corporate Theme --- Entertaining Company

Started to diversify in toys, crafts, musical instruments, sport teams But, failed miserably None has any significant opportunity for sharing activity or transferring skills
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Thank you