Corporate Strategy

Where to compete / How to manage portfolios – answering questions from the corporate level Single business firm

= business strategy and not corporate strategy

Competitive Advantage to Corporate Strategy

1. Corporate Strategy is for multi-business firms

2. Premises of corporate strategy

o Competition occurs at the business unit level (Need to belong to same industry)
o Multi-business inevitably adds costs and constraints to business units
 Process to get into a new sector by a corporate like Tata, Birla, Mahindra, they can acquire an organization
in the desired sector or start from scratch. If they want to come out of this sector, they can sell off the
assets, if they want to expand their business, they will need money, who will give that money?
Shareholders

 If a company wants to restructure its portfolio, it’ll be a very expensive affair

• If you’re an informed individual investor, will you invest in a company which is diversified, or will you invest
in your own diversified portfolio? – Since a company cannot restructure its diversification easily whereas
an individual can, having my own diversified portfolio will be preferred.

o Shareholders can readily diversify themselves

• A diversified company can create more value, which two individual companies may not be able to

do- As they can use the same synergy to manage business.

• A diversified company can make 2 + 2 = 5 or even more

• A diversified company can create value for each other

• Divestment = coming out of a sector business

Function of Corporate Management

1. Managing the corporate portfolio

a. Restructuring decision like diversification, acquisition, divestment
b. Resource allocation between business – for e.g., giving money from one business to another business

2. Managing Linkages for sharing activities and transferring skills –

TAS – Tata Administrative Service. What is the role of TAS? – TAS is a company, preparing managers for the entire group, and
placing managers across Tata Group of Companies.

3. Managing the individual business

a. Business strategy Formulation
b. Monitoring and controlling business performance

Parenting Advantage

1. Multi-business companies create value by influencing or parenting - the business they own!

2. Best parent companies create more value than any of their rivals
• Example 1: I have an idea and go to the market to raise money as an individual, Vishal has an idea and also goes to the
market, however, as a representative of Tata. Who will be able to raise money and why? – Vishal will be able to raise
money easily since he has the backing of Tata brand and due to which the perception of the lender will be that the risk is
low – this is Parenting Advantage.

• Example 2: Brand recognition in the market when you go to purchase a product is also Parenting Advantage – for e.g.,
you go to purchase a pressure cooker, one is of Bajaj and the other is of a local player, which one will you go for – Bajaj,
since you know the brand
 3. Parent organization is an intermediaries between investors and business

4. Essence is Assessing Fit:

• Critical success factors: understanding the business
• Parenting Opportunities: Gauging the upside

Reality of life in business – either you can make it, or you can buy it. One is market mechanism (buying), the other is a firm
mechanism (make)

Why do some companies make, and other companies buy? – Evaluation of the market, which ever is more efficient for them, the
company will go for that.

Why did some of the friends buy an electric kettle to make tea in the hostel? – customized product, not delivering the product on
time, unreliability of the market, transaction frequency, know-how, knowledge, capability, cost coming down due to collaboration

If you need the material / product on a regular basis, you may go for vertical integration, however, if you use the material / product
once or twice in a year, you may not go for vertical integration.

What is transaction cost? – How do you identify which tea shop you want to buy tea from on a regular basis, you will try the tea
from all the available shops and then decide which one you want to buy tea from regularly, you may also get an option to pay the
tea vendor later, – this is known as transaction cost.

Transaction cost is the cost of coordinating an activity.

Transaction costs are expenses incurred when buying or selling a good or service. Transaction costs represent the labor required to
bring a good or service to market,
When the cost of coordination is high in the market (buy), the company will prefer to go with the internal option, and if the cost of
going with the internal option is high (make), the company will go with the market
In Economics we assume that humans are rational and take rational decisions. To take a rational decision one has to spend time in
collecting and processing the data

TCE (Transaction Cost of Economies) & Scope of the Firm

1. Costs of coordinating a transaction
• External costs: Searching for contractors, negotiating, monitoring, and enforcing contracts

• Internal costs: Recruiting and retaining employees, Setting up a shop floor

2. Make or Buy?
• Make [Costs in-house < Costs market ]: the firm should vertically integrate, own production of the inputs, own output
distribution channels
o Transaction cost in the market is high, Make is good option

• Buy [Costs market < Costs in-house]: the firm should consider purchasing from the market
o Transaction cost in the market is low, Buy is good option

1. Horizontal Integration: combining with competitors operating in the same industry & doing the same things,

2. Related Diversification: a substantial portion of the total revenues accrue from businesses which are related to each other,
and which use closely related technical or marketing competence,

3. Unrelated Diversification: where various businesses of the enterprise do not depend on any common technological or
marketing skills

4. Vertical Integration: a series of businesses which are related to each other in a vertically integrated sequence of activities.
Forward (Backward) Integration à gaining control of distributors (suppliers)

5. Global Strategy: Strategy that recognizes and exploits linkages between countries (e.g. exploits global scale, national resource
differences, strategic competition)
For e.g., Steel and Semi-conductor industries. The cost of transportation is high for Steel and low for Semi- conductor, in this scenario
where all would you have your factories? For the Steel industry the factories would be in every country where the Steel is required and
for Semi-Conductor, the factory can be in one country and supply can be done to various other countries.
Efficient Boundary

Can the Efficient Boundary be the same for 2 companies in the same industry? – Depends on resource & capability, on technical
know-how.

When will the market power of the adjacent industry chain be high, when will the retailer have more power in the bakery example?
– When there are less retailers and multiple agriculture / bakery suppliers.

Reasons to vertically integrate

• The market is too risky and unreliable – it fails
• Companies in the adjacent stages of the industry chain have more market power than companies in your stage
• Vertical Integration would create or exploit market power by raising barriers to entry or allowing price discrimination across
customer segments
• The market is young and company must forward integrate to develop a market, or the market is declining and independents are
pulling out of adjacent stages

Benefits of Vertical Integration

• Superior coordination à can potentially enhance efficiency
• Avoids transactions costs of market contracts in situations where there are:
 small numbers of firms
 transaction-specific investments/hold-up problem
 opportunism
 regulations on market transactions
• Vertical integration can give me market power

Costs of Vertical Integration

• Differences in optimal scale of operation between different stages prevents balanced integration
• Strategic differences between different vertical stages creates management difficulties
• Incentive problem
• It limits flexibility
 in responding to demand cycles
 in responding to changes in technology, customer preferences, etc.
• Compounding risk – Financial, supply delay risk

Diversification, Acquisition & Alliance

Diversification of corporate strategy is about how to pursue growth.

Ansoff’s Growth Matrix:

-
a) Exiting Product & Existing Market = Trying to grow, lowering price to grab more market share, enhancing market activities
to get more customers – this is known as Market Penetration Strategy

b) Existing Market & New Product = Case of product development, so you’re improving your products, adding more
items to your portfolio.

c) Existing Product & New Market = This is known as Market Development, with the same products, trying to acquire new
customers, entering new domestic or international market (globalization), expanding geographic footprint

d) New Products & New Markets = Diversification.

Related Diversification: I’m getting into a related business. Either you should have technical synergy, or marketing synergy or both.

Unrelated Diversification: I’m getting into an unrelated business. In this you neither have technical nor marketing synergies.

why, does would a company go for unrelated diversification? The cash flows are not related to each other, gives a financial
synergy, for e.g., if you have IT business and Steel business, at times IT may be doing good and at another time, Steel may be doing
good.

Mutual Funds have a huge financial synergy since the funds are diversified in various industries.
 Types of Diversification

 Product Diversification
o Increase in variety of products / services
 Active in several product markets
 Geographic Diversification
o Increase in variety of markets / geographic regions
 Regional, national, or international markets
 Product-Market Diversification
o Product and geographic diversification

Diversification Strategies
 Single business: Low level of diversification

 Dominant business: Additional business activity pursued

o Dominant business: Means my primary business is say for example producing cake, but I also package it, however,
packaging cake is not my primary business.

 Related diversification: a substantial portion of the total revenues accrue from businesses which are related to each other,
and which use closely related technical or marketing competence

 Vertical Integration: a series of businesses which are related to each other in a vertically integrated sequence of activities

 Unrelated diversification /Conglomerate: Various businesses of the enterprise do not depend on any common technological
or marketing skills

Diversification: Why?
 Provides economies of scale reduces cost

 Creates economies of scope  increases value by sharing resources across multiple businesses
o Tangible resources (capital, R&D, distribution channels)
o Intangible resources (brands, technology)
o Difficult to realize using the market mechanism because of transaction difficulties

 Hence, diversified organization can avoid the transaction cost of external market by operating in
o Internal Capital Market A way to allocate capital at a lower cost
o Internal Labor Market transferring functional capabilities (marketing, accounting) across businesses; Applying
general management capabilities to multiple businesses
o Superior access to information Can be more efficient than external market

Economies of scope can be done inside the organization and not in the market.

Diversification – Performance Linkage?

 Linear Model: market power theory and internal market efficiency arguments

 Costs of diversification: Internal coordination costs of managing a diversified portfolio

o If you keep on diversifying, beyond an optimal point, the benefits of diversification will be less than the cost of
diversification, that’s why the curve will be an inverted U. Company will start making losses.

 Curvilinear model: the benefits of increasing diversification with costs of diversification

Basics of Mergers & Acquisitions

 Merger
o Two firms agree to integrate their operations on a relatively co-equal basis

 Acquisition
o One firm buys a controlling stake in Target
o Target becomes subsidiary
o Hostile Takeover: Special type of acquisition strategy wherein the target firm did not solicit the acquiring firm's bid
o Takeover defenses
 Takeover defenses in the following ways: Golden Parachute / White Knight

 What is golden parachute? – you are the target company and could get acquired, so the CEO changes the
policy and says that if I get fired, I’ll get a huge sum of money (compensation). So now if this company gets
acquired and the CEO needs to be fired, she/he needs to be paid this compensation, this makes the
acquiring company rethink their position of acquiring the target company.

 What is while knight? – Target company asks a friendly firm to acquire

 Destroying the value of the company: Overnight divest the iron ore or the product you have and the value
for the acquiring firm will go down. The company is being acquired only because it has a good asset,
however, if that asset doesn’t exist anymore, no acquiring company will want to acquire.

 Type of M&A
o Horizontal, Vertical, Related and Conglomerate

To acquire a company the acquiring organization must have at least a 50% stake in the target company.

Types of Mergers & Acquisitions:

a) Horizontal: A merger between Coca-Cola and the Pepsi beverage division, for example, would be horizontal in nature. The
goal of a horizontal merger is to create a new, larger organization with more market share.

b) Vertical: A vertical merger joins two companies that may not compete with each other but exist in the same supply chain.
An automobile company joining with a parts supplier would be an example of a vertical merger

c) Related: A product extension merger takes place between two business organizations that deal in products that are related
to each other and operate in the same market. The product extension merger allows the merging companies to group
together their products and get access to a bigger set of consumers. For e.g., Google & Android, Disney and Pixar/Marvel.

d) Conglomerate: A conglomerate merger is a merger between firms that are involved in totally unrelated business activities.
These mergers typically occur between firms within different industries or firms located in different geographical locations.
There are two types of conglomerate mergers: pure and mixed. For example, if a computer company decides to produce
notebooks, the company is pursuing a conglomerate diversification strategy.

Mergers & Acquisitions: Why?

• Acquiring strategically important resources and capabilities
• Seeking cost economies and market power
• Overcoming entry barriers - In a M&A when the entry barrier is high, I can take the acquisition route to enter the market
• Increased speed to market
• Expanding into new geographical markets
• Diversification into new industries  Learning and developing new capabilities. Moreover, lower risk compared to developing new
products

Problems in Achieving Success

• Integration difficulties - inability to achieve synergy
• Inadequate evaluation of target
• Large or extraordinary debt
• Too much diversification - Managers overly focused on acquisitions

Was the Indian Airlines & Air India merger a successful merger? – No, it wasn’t, because one of them was using Airbus aircrafts and
the other Boeing aircrafts due to which they required 2 completely different sets of engineers to maintain the aircrafts. Failure in
terms of technical synergy.
 A (Acquiring Firm) + B (Target Firm) = AB (Combined Firm)

Basics of Merger is individual valuation of A + individual valuation of B should be less than the combined entity AB. = V(A) + V(B) <
V(AB)

What happens if the merger fails to create value? – The acquiring firm will have to pay the price.

Whenever there is a merger announcement, most of the time, the share price of the target firm will be positive.
In case of the acquiring firm, if the market thinks you’re paying a good price, the share price will rise, however, if the market things
you’re paying too much, the share price will dip.

What is the cost of acquiring a firm B? – Say there are 100 shareholders of company B and company A wants to acquire company B,
company A approaches the shareholders and proposes to buy their shares. Say each of them holds 1 share of value Rs 10, so the
total cost of acquiring will be 100 x 10 = 1000. Now to get 100% hold of company B, company A offer Rs 12 per share to everyone,
they will have to pay 100 x 12 = 1200. Total cost of acquiring was 1000, company A is willing to pay 1200, so COST OF ACQUIRING A
FIRM B = 1200 – 1000 = 200. This is the premium being paid to acquire the company.

Example:
Present Value of A = USD 100,000 (Acquiring Firm) Present
Value of B = USD 50,000 (Target Firm)
Present Value of AB =175,000 (Combined Entity)
What is the Value Creation? = 175000 – (100000 + 50000) = 25000

If B is bought for USD 65000, then what is the cost of acquiring? = 65000 – 50000 = 15000 What is the gain for

Shareholders? –
a) Shareholders of the acquiring firm: 10000 (Value Creation – Cost of Acquiring / 25000 - 15000)
b) Shareholders of the target firm: 15000 (excess paid to the shareholders of the target firm, cost of acquiring)

Alliances: Make or Buy Continuum

Meaning of Alliances – Neither make nor Buy, somewhere in between.

• Quasi-integration strategies – these are intermediate between spot transactions and vertical integration: long-term contract, joint
ventures, strategic alliances, technology licenses, asset ownership, franchising
• Such relationships may combine benefits of both market transactions and internalization

Strategic Alliances: Why?

 A voluntary arrangement between firms
o Involves the sharing of: Knowledge, resources, capabilities
o To develop: Processes, products, services

 Firm goals can be achieved faster and at lower costs

 Strengthen competitive position
 Enter new markets
 Hedge against uncertainty
 Access critical complementary assets
 Learn new capabilities

Globalization Strategy

In International Trade, the country with efficiency will Export & the country with inefficiency will Import.

What is National Competitiveness?

• No nation can be competitive in everything
• It is important to deploy the nation’s limited pool of human and other resources into the most productive uses
• Analysis should focus on specific industries and industry segments
• Why a nation provides a favorable home base for companies that compete internationally
Theory of National Competitive Advantage

 Attempts to analyze the reasons for a nation’s success in a particular industry

 Porter studied 100 industries in 10 nations

o Denmark, Germany, Italy, Japan, Korea, Singapore, Sweden, Switzerland, UK and USA
o Together, the ten nations accounted for fully 50% of total world exports in 1985
o Industries in which the nation’s companies were internationally successful (presence of substantial and sustained
exports)
o German autos and chemicals, Japanese semiconductors and VCRs, Swiss banking and pharmaceuticals, Italian
footwear and
o textiles, US commercial aircraft as well as South Korean Piano, Italian ski boots, and British biscuits.

 History of competition in particular industries

o How and why the industry began? How it grew? When and why companies from the nation developed international
competitive advantage, and the process by which advantage had been either sustained or lost
o Postulated determinants of competitive advantage of a nation were based on four major attributes
 Factor endowments (inputs)
 Demand conditions
 Related and supporting industries
 Firm strategy, structure, and rivalry

 However, competition is dynamic and evolving!

Porter’s Diamond Framework (refer class PPT)

In Porters Diamond Framework regarding Demand Conditions, it is the QUALITY of the demand and NOT THE QUANTITY. If you can
satisfy the expectations of the domestic customers, then it will be easy to satisfy the global customers.

In the context of Firm Strategy & Rivalry, if you face strong rivalry in the domestic market, you will be more efficient, and this will lead
to surviving in the international market when you face more rivalry.

Porter’s Theory-Predictions
• Porter’s theory says that Success occurs when these attributes (the diamond framework) exists’.
• The diamond is mutually reinforcing – meaning one attribute will lead to another attribute and so on.
• Success occurs where these attributes exist
• More/greater the attribute, the higher chance of success
• The diamond is mutually reinforcing
• Can help us in predicting the pattern of international trade that we observe in the real world
o Why some companies are globally more successful?

Ghemawat’s CAGE Framework

Due to the following CAGE framework, it could be difficult to enter a market
a) Cultural Distance: As explained with the Mattel (Barbie) market share in USA & Japan
b) Administrative Distance: Sanctions, Higher taxes for the international players, Trade treaties between countries
c) Geographic Distance: If you’re into heavy industry like steel, transportation cost will be huge, however, for a semi-
conductor industry the transport cost would not matter
d) Economic Distance: I-Phone market in Europe is much more vibrant than an I-phone market in Africa

Going Global?
• Liability of Foreignness: The inherent disadvantage foreign firms experience in host countries because of their non-native
status Foreign firms are often discriminated against, sometimes formally and other times informally. Thus,
internationalization is difficult, mistakes are costly! So, what would be the scale of commitment (or entry strategy)?
• Hence, any firm contemplating foreign expansion must struggle with the following decisions
o Why to enter?
o Which foreign market(s) to enter?
o When to enter?
o What scale?
o Which mode of entry??
Liability of Foreignness: Boycott good from the foreign market and use only locally made goods
 Why Foreign Markets?
• Organizational factors
o Firm-specific factors
 Firm size, international appeal
o Decision-maker characteristics: Upper Echelons Theory
 Foreign travel and experience abroad, foreign language proficiency, The decision-maker background,
Personal characteristics
• External Factors
o The “bandwagon” effect, Attractiveness of the host country
 Bandwagon Effect: When all my competitors are moving to the global market, I’m compelled to move too.
Which Foreign Market(
• The choice must be based on an assessment of a nation’s long run profit potential
• The attractiveness of a country depends upon balancing the benefits, costs, and risks associated with doing business in that
country
• Factors include
o Size of market
o Present wealth of the consumers in the market
o Likely future wealth of consumers
o Economic growth rates?

Timing of the Entry: When?

• How to define early entry?
• Advantages frequently associated with entering a market early are commonly known as first-mover advantages
o The ability to preempt rivals and capture demand by establishing a strong brand name
o Ability to build sales volume – learning curve effects on others
o Ability of early entrants to create switching costs

• Disadvantages associated with entering a foreign market before other international businesses are referred to as first-mover
disadvantages
o Liability of being foreigner
o Pioneering costs are costs that an early entrant has to bear
o Possibility that regulations may change

Scale of Entry: Large or Small?

• Large scale involves the strategic commitment of significant resources

• Large scale entry

o A decision that has a long-term impact and is difficult to reverse
o May cause rivals to rethink market entry
o May lead to indigenous competitive response

• Small scale entry

o Reduces exposure risk
o Time to learn about market
o It is a step towards the gather information about a foreign market before deciding whether to enter on a significant
scale and how to enter

Upper Echelon Theory:

Top management in an organization was to invest in a foreign market, maybe it’s a dream of one of the top management personnel,
personal ambition, etc.

• Stage 1: no regular export activities

• Stage 2: export activities via independent representatives or agents
• Stage 3: the establishment of an overseas subsidiary
• Stage 4: overseas production and manufacturing units

If the liability of being a foreigner is high, it is better to follow while entering a new market, rather than lead (be the 1 st one to enter)

If the liability of being a foreigner is high, you can make a small-scale entry today and a large-scale entry later. You may start with
 exports, once you’re comfortable with the market, you may start acquisitions.

The Uppsala model also speaks about making a small-scale entry and then moving to the next level, and then the next and so on.

Mode of Entry: Trade or FDI?

• Firms can use multiple modes to enter a market
o Exporting – Trade?
o Contract? For Turnkey Projects
o Non-equity collaborations or Equity collaboration with partners?
 Licensing
 Franchising
 Joint Ventures
o Wholly Owned Subsidiaries – FDI? Fully owned or partially owned FDI?
 Build a new operation - The Greenfield Strategy?
 Or take over an existing one - M&As?

• Greenfield Strategy: Building a business from scratch and then taking it ahead
• Brownfield Strategy: Acquiring an existing firm in a foreign country

Entry Modes: Merits & Demerits (Refer class PPT

Role of Corporate Parent

• Mostly strategies are initiated at the Corporate HQ level
o To determine the overall strategic direction and structure of the multinational firm as a whole
o To determine the scope of operations by defining the extent of the firm’s involvement across different operations
and countries
• However, implementation of the strategy are typically done at the subsidiary-level
• The management team at the corporate level needs to develop a basis for maintaining an overview of performance across all
subsidiaries

Role of Subsidiary
• Significance of the subsidiary’s contribution to the overall global success of the multinational firm

• Over time, the role varies from simply meeting the challenges of implementing the global headquarter-level strategy to taking
lead responsibility in developing a specific strategy for the subsidiary

• When should subsidiary have a strategic role?

o Environment uncertainty
o The need to adapt to local conditions

• If the market is uncertain in the local market, then the decision-making power needs to be given to the subsidiary in that
local market and the parent company would not be able to take a decision for the local market.