5 SM - Corp - Strategy Tom Tat

Corporate-Level Strategy should allow a company, or its
business units, to perform the value-creation functions at lower cost

or in a way that allows for differentiation and premium price.
Corporate strategy is used to identify:
1. Businesses or industries that the company should
compete in
2. Value creation activities that the company should
perform in those businesses
3. Method to enter or leave businesses or industries
in order to maximize its long-run
profitability
Companies must adopt a long-term perspective
Consider how changes in the industry and its products,
technology, customers, and competitors will affect its
current business model and future strategies.
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Corporate-Level Strategy:
The Multi-Business Model
A company’s corporate-level strategies
should be chosen to promote the success of
a company’s business model – and to allow
it to achieve a sustainable competitive
advantage at the business level.
A multi-business company must construct its
business model at two levels:
1. Business models and strategies
for each business unit or division in every industry in
which it competes
2. Higher-level multi-business model that
justifies its entry into different businesses and industries

Corporate Strategy asks
Two Questions
1.Should we compete in our current

business by engaging in closely-related
businesses?
2.Should we compete in new related or
unrelated businesses ?

Corporate Strategy
Core Challenge of Corporate Strategy:
How do we manage diversity?
How do we manage different

businesses?
(Different businesses may compete in
different environments and require
different resources and capabilities)

Two Questions

businesses?

Core question: Relatedness
Closely-related = directly related to a
firm’s core business
• Suppliers
• Buyers
• Competitors
Related: shares some strategic
characteristic with core business
• Value chain resources, capabilities
Unrelated: no logical or complementary
relationship to core business
Repositioning and Redefining
A Company’s Business Model
Corporate-level strategies are primarily directed
toward improving a company’s competitive advantage
and profitability in its present business or product line:
1. Horizontal Integration
• The process of acquiring or merging with industry
competitors
2. Vertical Integration
• Expanding operations backward into an industry that
produces inputs for the company or forward into an
industry that distributes the company’s products
3. Strategic Outsourcing
• Letting some value creation activities within a business
be performed by an independent entity

Related Business Diversification

Horizontal Integration
Single-Industry Strategy
Horizontal Integration is the process of acquiring or merging
with industry competitors in an effort to achieve the
competitive advantages that come with large scale and scope.
Staying inside a single industry
allows a company to:
 Focus resources
Its total managerial,
technological, financial and functional
resources and capabilities are
devoted to competing
successfully in one area.
 ‘Stick to its knitting’
Company stays focused on what it does best,
rather than entering new industries where its existing
resources
Copyright and capabilities
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Benefits of
Profits and profitability increase when horizontal
integration:
1. Lowers the cost structure
• Creates increasing economies of scale
• Reduces the duplication of resources between two companies
2. Increases product differentiation
• Product bundling – broader range at single combined price
• Total solution – saving customers time and money
• Cross-selling – leveraging established customer relationships
3. Replicates the business model
• In new market segments within same industry
4. Reduces industry rivalry
• Eliminate excess capacity in an industry
• Easier to implement tacit price coordination among rivals
5. Increases bargaining power
• Increased market power over suppliers and buyers
• Gain greater control
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Problems with
A wealth of data suggests that the majority of mergers
and acquisitions DO NOT create value and that many
may actually DESTROY value.
 Implementing a horizontal integration is not an easy
task.
• Problems associated with merging very different company
cultures
• High management turnover in the acquired company when
the acquisition is a hostile one
• Tendency of managers to overestimate the benefits to be had
in the merger
• Tendency of managers to underestimate the problems
involved in merging their operations
 The merger may be blocked if merger is perceived to:
• Create a dominant competitor
• Create too much industry consolidation
• Have the potential for future abuse of market power

Vertical Integration
Entering New Industries
A company may expands its operations backward into
industries that produces inputs to its products or forward
into industries that utilize, distribute or sell it products.
 Backward Vertical Integration
• Company expands its operations into an industry
that produces inputs to the company’s products.
 Forward Vertical Integration
• Company expands into an industry that uses,
distributes, or sells the company’s products.
 Full Integration
• Company produces all of a particular input
from its own operations.
• Disposes of all of its completed products through its own outlets.
 Taper Integration
• In addition to company-owned suppliers, the company will also use
other suppliers for inputs or independent outlets in addition to
company-owned outlets.
Increasing Profitability Through
A company pursues vertical integration to strengthen
the business model of its original or core business
or to improve its competitive position:
1. Facilitates investments in efficiency-enhancing
specialized assets
• Allows company to lower the cost structure or
• Better differentiate its products
2. Enhances or protects product quality
• To strengthen its differentiation advantage through either
forward or backward integration
3. Results in improved scheduling
• Makes it easier and more cost-effective to plan, coordinate,
and schedule the transfer of product within the value-added
chain
• Enables a company to respond better to changes in demand
Problems with
Companies may disintegrate or exit industries adjacent
to the industry value chain when encountering
disadvantages from the vertical integration:
 Cost structure is increasing.
• Company-owned suppliers develop a higher cost structure
than those of the independent suppliers
• Bureaucratic costs of solving transaction difficulties
 The technology is changing fast.
• Vertical integration may lock into old or inefficient technology
• Prevent company from changing to a new technology that
could strengthen the business model
 Demand is unpredictable.
 Creates risk in vertical integration investments.
Vertical integration can weaken business model when:
• Company-owned suppliers lack incentive to reduce costs
• Changing demand or technology reduces ability to be competitive
Alternatives to Vertical Integration:
Cooperative Relationships
Strategic Alliances are long-term agreement between two or
more companies to jointly develop new products or processes
that benefit all companies concerned.
 Short-term contracts and competitive bidding

• May signal a company’s lack of commitment to its supplier
 Strategic alliances and long-term contracting
• Enables creation of a stable long-term relationship
• Becomes a substitute for vertical integration
• Avoids the problems of having to manage a company located in an
adjacent industry


Strategic Outsourcing
Strategic Outsourcing allows one or more of a company’s
value-chain activities or functions to be performed by
independent specialized companies that focus all their
skills and knowledge on just one kind of activity.
 Company is choosing to focus on a fewer
number of value-creation activities
 In order to strengthen its business model
 Companies typically focus on noncore or
nonstrategic activities
 In order to determine if they can be performed more
effectively and efficiently by independent specialized
companies
 Virtual Corporation
 Describes companies that have pursued extensive
strategic outsourcing
Strategic Outsourcing of Primary
Value Creation Functions
Figure 9.4

Benefits of Outsourcing
1. Reducing the cost structure
• The specialist company cost is less than what it would cost
to perform the activity internally.
2. Enhanced differentiation
• The quality of the activity performed by the specialist is
greater than if the activity were performed by the company.
3. Focus on the core business
• Distractions are removed.
• The company can focus attention and resources on
activities important for value creation and competitive
advantage.
Strategic outsourcing may be detrimental when:
• Holdup – company becomes too dependent on specialist provider
• Loss of information – company loses important customer contact or
competitive information

Two Questions

businesses?

Expanding
Beyond a Single Industry
Staying inside a single industry allows a company to:
• Focus its resources  ‘Stick to its knitting’
BUT a company’s fortunes are tied closely to
the profitability of its original industry:
 Can be dangerous if the industry matures and goes into
decline
 May be missing the opportunity to leverage their
distinctive competencies in new industries
 Tendency to rest on their laurels and not engage in
constant learning
To stay agile, companies must leverage –
find new ways to take advantage of their distinctive
competencies and core business model in new
markets and industries.
Corporate-Level Strategy
of Diversification
Diversification Strategy is the company’s decision to
enter one or more new industries (that are distinct from
its established operations) to take advantage of its
existing distinctive competencies and business model.
Types of diversification:
 Related diversification
 Unrelated diversification
Methods to implement a
diversification
strategy:
 Internal new ventures
 Acquisitions
 Joint ventures
A Company as a Portfolio of
Distinctive Competencies
Reconceptualize the company as a
portfolio of distinctive
competencies . . . rather than a portfolio
of products:
 Consider how those competencies
might be leveraged to create
opportunities in new industries
 Existing competencies versus new
competencies that would need to be
developed
 Existing industries in which a
company competes versus new
industries
Establishing a
Competency Agenda
Figure 10.1
Source: Reprinted by permission of Harvard Business School Press. From Competing for the Future: Breakthrough Strategies for
Seizing Control of Your Industry and Creating the Markets of Tomorrow by Gary Hamel and C. K. Prahalad, Boston, MA. Copyright ©
1994 by Gary Hamel and C. K. Prahalad. All rights reserved.

Increasing Profitability
Through Diversification
A diversified company can create value by:
 Transferring competencies among
existing businesses
 Leveraging competencies
to create new businesses
 Sharing resources
to realize economies of scope
 Using product bundling
 Managing rivalry by
using diversification as a means in one or more industries
 Exploiting general organizational competencies that
enhance performance within all business units
Managers often consider diversification when their
company is generating free cash flow – with resources in
excess of those needed to maintain competitive advantage.
2 Types of Diversification
Entry into a new business activity in a different industry that:
• Is related to a company’s existing business activity or
activities and
• Has commonalities between one or more components of
each activity’s value chain
Based on transferring and leveraging competencies, sharing
resources, and bundling products
Entry into industries that have no obvious connection to any
of a company’s value-chain activities in its present industry or
industries
Based on using only general organizational competencies to
increase profitability of each business unit

“Fit between a parent and its
businesses is a two-edged sword:
a good fit can create value,
a bad one can destroy it.”
- Andrew Campbell,
Michael Gould &
Marcus Alexander

Commonalities Between Value
Chains of Three Business Units
Figure 10.4

Disadvantages and
Limits of Diversification
Conditions that can make diversification
disadvantageous:
1. Changing Industry and Firm-Specific Conditions
• Future success of this strategy is hard to predict.
• Over time, changing situations may require businesses
to be divested.
2. Diversification for the Wrong Reasons
• Must have clear vision as to how value will be created.
• Extensive diversification tends to reduce rather than improve
profitability.
3. Bureaucratic Costs of Diversification
• Costs are a function of the number of business units in a
company’s portfolio, and the
• Extent to which coordination is required to gain the benefits.
Coordination Among
Related Business Units
Figure 10.5

Choosing a Strategy
The choice of strategy depends on a comparison of the
benefits of each strategy versus the cost of pursuing it:
• When company’s competencies can be applied across a
greater number of industries and
• Company has superior capabilities to keep bureaucratic
costs under control
• When functional competencies have few useful applications
across industries and
• Company has good organizational design skills to build
distinctive competencies
 Web of corporate level strategy
• May pursue both related and unrelated diversification
• As well as other strategies that improve long-term profitability
Sony’s Web of
Corporate-Level Strategy
Figure 10.6

Diversification That
Dissipates Value
 Diversifying to pool risks
• Stockholders can diversify their own portfolios at lower costs
than the company can.
• This represents an unproductive use of resources as profits
can be returned to shareholders as dividends.
• Research suggests that corporate diversification is not an
effective way to pool risks.
 Diversifying to achieve greater growth
• Growth on its own does not create value.
• Business cycles of different industries are inherently difficult
to predict.
Based on a large number of academic studies:
Extensive diversification tends to reduce,
rather than improve, company profitability.
Entry Strategies to
Implement Multibusiness Model
Various entry strategies may be employed based on
the company’s competencies and capabilities:
 Internal New Ventures
• Company has a set of valuable competencies in its existing
businesses.
• Competences leveraged or recombined to enter new business
areas.
 Acquisitions
• Company lacks important competencies to compete in an area.
• Company can purchase an incumbent company that has those
competencies at a reasonable price.
 Joint Ventures
• Company can increase the probability of success by teaming
up with another company with complementary skills.
• Joint ventures are preferred when risks and costs of setting up
a new business unit are more than company can assume.
 Pitfalls of New Ventures
 Scale of entry
• Large-scale entry is initially
more expensive than small-
scale entry, but it brings
higher returns in the long run.
 Commercialization
• Technological possibilities
should not overshadow
market needs and opportunities.
 Poor implementation
• Demands on cash flow
• Need clear strategic objectives
• Anticipate time and costs
Scale of Entry and Profitability
Figure 10.7

 Guidelines for Successful
Internal New Venturing
Structured approach to managing internal
new venturing:
 Research aimed at advancing basic science
and technology
 Development research aimed at finding and
refining commercial applications for the
technology
 Foster close links between R&D and
marketing; between R&D and manufacturing
 Selection process for choosing ventures
 Monitor progress

 The Attractions of Acquisition
Acquisitions are the principal strategy
used to implement horizontal integration:
 Used to achieve diversification when the
company lacks important competencies
 Enable a company to move quickly
 Perceived as less risky than internal new
ventures
 An attractive way to enter a new industry
that is protected by high barriers to entry

 Acquisition Pitfalls
There is ample evidence that many acquisitions fail to
create value or to realize their anticipated benefits:
 Integrating the acquired company
• Difficulty in integrating value-chain and management activities
• High management and employee turnover in acquired
company
 Overestimating the economic benefits
• Overestimate the competitive advantages and value-added that
can be derived from the acquisition
• Pay too much for the target company
 The expense of acquisitions
• Premium paid for publicly traded companies
• Premium cancels out the prospective value-creating gains
 Inadequate preacquisition screening
• Weaknesses of acquisitions’ business model are not clear
 Guidelines for
Successful Acquisition
 Target identification and preacquisition
screening for:
1. Financial position
2. Distinctive competencies and competitive advantage
3. Changing industry boundaries
4. Management capabilities
5. Corporate culture
 Bidding strategy
• Avoid hostile takeovers and speculative bidding.
• Encourage friendly takeover with amicable merger.
 Integration
• Eliminate duplication of facilities and functions.
• Divest unwanted business units included in acquisition.
 Learning from experience
• Conduct post-acquisition audits.
 Joint Ventures
Attractions:
 Helps avoid the risks and costs of building a new
operation from the ground floor
 Teaming with another company that has
complementary skills and assets may increase the
probability of success
Pitfalls:
 Requires the sharing of profits if the new business
succeeds
 Venture partners must share control – conflicts on
how to run the joint venture can cause failure
 Run the risk of giving critical know-how away to
joint venture partner
“Growth does not always lead a
business to build on success.
All too often it converts a highly
successful business into a
mediocre large business.”
- Richard Branson
“The corporate strategies of

most companies have
dissipated instead of created
shareholder value.” - Michael Porter
What if diversification doesn’t work?
Restructuring: alter portfolio by
1. Divesting businesses
2. Exiting industries
Restructuring is the process of divesting businesses and

exiting industries to focus on core distinctive competencies
in order to increase company profitability.

Restructuring
Why restructure?
• Diversification discount: investors see highly
diversified companies as less attractive
» Complexity and lack of transparency in financial
statements
» Too much diversification
» Diversification for the wrong reasons
• Response to failed acquisitions
• Innovations in strategic management have
diminished the advantages of vertical integration
or diversification

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Corporate-Level Strategy should allow a company, or its

business units, to perform the value-creation functions at lower cost

Copyright © Houghton Mifflin Company. All rights reserved. 9|3

1.Should we compete in our current

Copyright © Houghton Mifflin Company. All rights reserved. 9|4

How do we manage diversity?

How do we manage different

Copyright © Houghton Mifflin Company. All rights reserved. 9|5

1.Should we compete in our current

Copyright © Houghton Mifflin Company. All rights reserved. 9|6

Copyright © Houghton Mifflin Company. All rights reserved. 9|8

Copyright © Houghton Mifflin Company. All rights reserved. 9|9

Copyright © Houghton Mifflin Company. All rights reserved. 9 | 13

 Short-term contracts and competitive bidding

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Copyright © Houghton Mifflin Company. All rights reserved. 9 | 22

1.Should we compete in our current

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Copyright © Houghton Mifflin Company. All rights reserved. 10 | 27

Copyright © Houghton Mifflin Company. All rights reserved. 10 | 29

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“The corporate strategies of

Restructuring is the process of divesting businesses and

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