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Corporate Strategy

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... (rents) from multi-market activities that create corporate advantages ... analogous to a competitive advantage in a business unit ... – PowerPoint PPT presentation

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Title: Corporate Strategy


1
Corporate Strategy
Creating Corporate Advantages
2
Defining Corporate Strategy
  • Corporate Strategy is the way a company creates
    value through the configuration and coordination
    of its multi-market activities
  • The definition has three important aspects
  • Value Creation - the generation of superior
    financial performance (rents) from multi-market
    activities that create corporate advantages
  • Configuration - the multi-market scope of the
    corporation (product/market diversification,
    geographic focus, and vertical boundaries)
  • Coordination - the management of activities and
    businesses that lie within the corporate
    hierarchy
  • Source Collis and Montgomery, Corporate
    Strategy, 1997

3
Goal of Corporate Strategy Corporate Advantage
  • The goal of corporate strategy is to build
    corporate advantage so as to earn above normal
    returns
  • analogous to a competitive advantage in a
    business unit
  • Three tests of the existence of corporate
    advantage
  • Does ownership of the business create benefit
    somewhere in the corporation? (Does parentage
    matter?)
  • Are those benefits greater than the cost of
    corporate overhead?
  • Does the corporation create more value with the
    business than any other possible corporate parent
    or alternative governance structure?

Source Collis and MOntgomergy, 1998
4
Three Dimensions of Corporate Strategy
  • Business Diversification - Horizontal expansion
  • Vertical Integration - forward or backward
    expansion
  • Geographic Scope - geographic and/or global
    expansion

5
Corporate Strategy Three Fundamental Issues
  • 1. Can the corporation create economic value by
    changing its scope? (Rent-generating
    opportunities)
  • Diversification
  • Vertical integration
  • Geographic expansion
  • 2. Should activities be undertaken inside the
    corporation, or accessed through contracts, joint
    ventures, alliances, or other institutional
    arrangements? How should the corporation grow?
  • 3. How should the corporation be structured and
    managed to enhance the combined value of its
    individual business units?

6
Levels of Strategy
  • Business Strategy (competitive strategy) is
    concerned with how a firm competes within a
    particular market
  • Corporate strategy is concerned with where a firm
    competes

7
Levels of Strategy (contd)
  • Business-Level Strategy (competitve strategy)
  • How to create competitive advantage in each
    busness in which the company competes
  • low cost leadership
  • differentiation
  • focus low cost/ focus differentiation
  • Business (or Competitive) Strategy is concerned
    with the use of resources and capabilities to
    create competitive advantages in each of
    businesses or industries in which a company
    competes
  • Corporate-Level Strategy (companywide strategy)
  • Corporate (or Company-wide) Strategy is the
    overall plan for a multi-business unit company.
  • Corporate strategy is what makes the corporate
    whole add up to more than the sum of its business
    unit parts

8
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

9
Implications from these Premises
  • Corporate Strategy cannot succeed unless it truly
    adds value to business units
  • by providing tangible benefits that offset costs
    of lost independence
  • economies of scope in operations
  • economies of scale in administration and internal
    financing
  • add value to shareholders in a way that
    shareholders could not replicate by themselves
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