Class 6 & 7 Flashcards
Definition Corporate Strategy
Corporate strategy: decisions and actions taken by senior management in the quest for growth in several industries and markets simultaneously (Rothaermal, 2012)
“Where do we want to compete?” vs. “How do we want to compete”
Corporate strategy concerns two different questions: what businesses the corporation should be in and how the corporate office should manage the array of business units.
Corporate strategy is what makes the corporate whole add up to more than the sum of its business unit parts.
Refocusing vs. Expansion
Refocusing strategies involve narrowing a company’s scope by divesting non-core activities to strengthen its main business. Expansion strategies, on the other hand, aim to grow the company by entering new markets, developing new products, or acquiring businesses.
An example of Refocusing is Philip Morris Companies, Inc. (now Altria Group) sold off 7-Up, Miller Brewing and Kraft Foods
▪ Examples of Expansion are:
▪ Microsoft: extended the business from operating systems to applications and networking software, entertainment
services, etc..
▪ Google: no longer a search engine, but operating system for mobile phones (Android), internet browser (Chrome), etc
Trends in Diversification
There are 3 main factors generated such trend of
SPECIALIZATION:
1. Emphasis on Shareholder values:
* From Growth to Profitability
* Entire value of conglomerates less than the sum of individual business
2. Turbulence and Transaction Costs:
* Uncertain market conditions → burden on decision making (spin-offs given efficiency in external markets for resources)
* Private capital
3. Trend in Management Thinking:
* Linkages between businesses are not enough: economies of scope, transferability of resources and capabilities
Motives of Diversification
Portfolio perspective on cash flows…but more to shareholders than managers!
Investors vs Companies in diversification (transaction costs of investments are less than those associated to acquisitions)
Lack of empirical support on shareholder benefit
Resources – What are the desired qualities?
- Core resources should be VRIN Valuable
Rare
Inimitable
Non-substitutable
Developing them requires investments and effort over time
* Time
* Money and equipment
* Human resources
* Knowledge and expertise
It is useful to think of resources accumulation in terms of stocks and flows
Examples of core competences
Consumer products: * Brandmanagement * Distribution
Computing: * Productdevelopment
Automotive: * Sourcing * Manufacturing
Pharmaceutical: * R&D * Marketing and Distribution
The bathtub metaphor
The bathtub metaphor in the image illustrates how resources within an organization accumulate, flow, and erode over time, much like water in a bathtub.
Flow (Inflow): This represents the acquisition or development of resources. The concept of “Time compression diseconomies” suggests that trying to speed up resource development too much can lead to inefficiencies or diminishing returns.
Stock (Inside the Bathtub): These are the resources the organization holds, including asset interconnectedness (how resources are linked) and asset mass efficiency (the effective use of resources). Causal ambiguity (marked with question marks) implies that it’s often unclear how these resources work together to create value, making replication difficult.
Outflow: This represents resource erosion or loss, where assets degrade over time, referred to as “asset erosion.” If outflow isn’t managed, the stock of resources diminishes, threatening the organization’s capacity to maintain its competitive advantage.
In essence, the metaphor highlights the importance of managing both the inflow and outflow of resources to maintain an effective stock of assets.
Resources - Summary
- Resource accumulation works in stocks and flows:
- Stocks represent the state of your resources today
- Flows represent the investments made to increase the stock
- If we don’t add flows, resources will eventually fade (asset erosion)
- Resources can produce competitive advantage if the process of their accumulation is:
- Pathdependent
- Ambiguous
- Complex
- And with strong time compression diseconomies
Porters 3 Test to create shareholder value
Michael Porter’s influential view: “Corporate strategy cannot succeed unless it truly adds value – to business units by providing tangible benefits that offset the inherent costs of lost independence and to shareholders by diversifying in a way they could not replicate.”
Porter suggests 3 “tests”:
* Attractiveness test: the industries chosen for diversification should be structurally
attractive
* Cost of entry: Does the cost of entry capitalize all future profits?
* Better-off: Does the target gain competitive advantage from being part of the group or vice versa? Is it one-time or continuous gain?
* P&G acquisition of Gillette (2005): global marketing and distribution along with new product development capabilities
Corporate Strategy Goal and Issue
- Corporate strategy consists of devising a strategy for the portfolio of businesses as a whole
- The basic issue around corporate strategy is how does the corporate entity adds value to all its businesses
- Sharing resources and capabilities between businesses
- Key goal in corporate strategy is to maximize shareholder value by adding value over and above what the businesses could earn separately by themselves
Corporate Strategy - Take aways
- We must analyze how is the industry that each business unit competes in and how it will likely evolve
- We must consider how to develop resources and capabilities that will sustain that portfolio today and in the future
- We must determine where the most profitable sources of synergy lie
Operational Relatedness
Similarities between industries, markets, and technologies
Manufacturing, marketing, and distribution
Strategic Relatedness Table
The table explains the factors that determine strategic relatedness between businesses based on three key corporate management tasks:
-
Resource Allocation: Strategic similarity is based on:
- Businesses requiring similar sizes and time spans for capital investments
- Facing similar sources of risk
- Needing similar general management skills for business unit managers. -
Strategy Formulation: Businesses are considered strategically similar if they share:
- Key success factors
- Operate in similar stages of the industry life cycle
- Hold comparable competitive positions within their respective industries. -
Performance Management and Control Variables:
- use similar performance indicators
- have comparable time horizons for achieving performance targets.
Questions to ask Before diversification (1-3)
- What can our company do better than any of its competitors in its current market(s)?
* Knowing what you can do better than existing competitors will increase your chance of succeeding in new markets - What strategy assets (strength in core capabilities and competencies) do we need in order to succeed in the new market?
* Consider whether the company has every strategic asset necessary to establish a competitive advantage and how it can leverage its current business to build this advantage - How can we obtain the missing but necessary resources and capabilities?
* If missing a critical strategic asset, managers can buy what is missing, develop it in-house or make it unnecessary by changing the competitive rules of the game
Questions to ask before diversification (4-6)
- Will diversification break up strategic assets that need to be kept together?
* Do not separate strategic assets that rely on one another for effectiveness - Will we be simply a player in the new market, or will we emerge a winner?
* Consider whether strategic assets can be easily imitated, purchased or replaced to avoid being outmaneuvered by new competitors - What can our company learn by diversifying, and are we sufficiently organized to learn it?
* Use diversification as a learning experience. Find how new businesses can help improve existing ones, act as a stepping-stone to industries or markets previously out of reach, or improve organizational efficiency
