Chapter 9 Corporate Strategy

1. Chapter 9Corporate Strategy 0

2. LEARNING OBJECTIVES • 1. Define corporate strategy. • 2. Understand the special challenge of corporate strategy. • 3. Identify the different types of diversification. • 4. Explain how companies can successfully enter attractive industries when • those industries have the greatest barriers to entry. • 5. Describe the relationship between corporate strategy and competitive • advantage. • 6. Explain the differences between corporate strategy in stable and dynamic • contexts.

3. Competitive Advantage of a Corporation • The justification for a business to grow is that it has further opportunities to invest in that generate a higher expected return than money invested elsewhere, holding risk constant. • In other words, the corporation (hopefully) has a competitive advantage that allows it to provide an above-normal return on money invested in it. If not, what should they do? • The competitive advantage is the outcome of a combination of revenues, costs, and investment. • Revenues can be enhanced through differentiation, costs can be lowered through superior capabilities and spreading fixed costs, while investment can be lowered using low-cost resources. • KEY: Can the corporation, via SBUs, add value that the investor can’t? Companies in StratSim must also ask this question (but answers will differ).

4. Related Diversification • HORIZONTAL INTEGRATION • When businesses sharing similar activities are brought together, three • relationships among business are important to creating competitive • advantage: tangible interrelationships, intangible relationships, and • competitor relationships. • Tangible relationships arise from the ability to share activities in the • value chain because of common customers, channels, technology, • and other factors. • Intangible relationships arise from the ability to transfer know-how among • separate value chains. • Competitive relationships arise from the actual or potential competition • with competitors that spill over into others of the corporation’s businesses.

5. Related Diversification • Tangible Relationships • Tangible relationships provide competitive advantage if sharing activities • lowers costs or enhances differentiation enough to exceed the cost • of sharing. • This can be achieved when jointly performing one activity, such as • sharing a sales force. • This can also be achieved by having multiple activities, such as when • each business has its own sales force that engages in cross-selling— • selling both its own products as well as those of the related business.

6. Related Diversification • Intangible Relationships • Intangible relationships provide competitive advantage if sharing • know-how lowers the cost of an activity or enhances differentiation • enough to exceed the cost of sharing. • Businesses can benefit from one another even though they cannot • share activities. • They can share the skills and know-how generated from their • commonalities, such as the type of customer, the type of purchase, • and the type of manufacturing process each deals with, following • a common strategy and a similar configuration of the value chain • (such as many dispersed sites where activities are performed).

7. Related Diversification • Competitive Relationships • Competitive relationships are present when a company actually or • potentially competes with diversified rivals in more than one • business unit. • The competitive actions affecting one business unit can have an • impact on other businesses in the corporation. • For example, corporations tend to be in similar sets of businesses • and compete with one another in each of these businesses.

8. Related Diversification • VERTICAL INTEGRATION • Vertical integration is the term applied when a corporation diversifies • by extending the activities included in its value chain. • Shermag Inc., headquartered in Sherbrooke, Quebec, designs, • produces, markets, and distributes high-quality residential furniture. • The company is a vertically integrated manufacturer and importer with • its own cutting rights, sawmill, veneer facility, manufacturing operations, • and global sourcing division.

9. Related Diversification • There are two directions when management decides to • integrate vertically. • Integrating upstream or backward integration involves • moving toward the sources of supply. • Integrating downstream or forward integration involves • moving toward end-users.

10. Related Diversification • UNRELATED DIVERSIFICATION • A corporation with two or more businesses engaged in • entirely unrelated industries is called a conglomerate. • Capturing benefits when holding such businesses in the • corporate portfolio is very difficult. • Building competitive advantage rests on the capabilities • and skills of corporate managers.

11. Related Diversification • These skills include the abilities: • to identify new businesses that will provide good and consistent • returns on investment • 2. to enter a new industry at low cost, either through an efficient • start-up or buying a business at low cost • 3. to leave an industry at high value through negotiating or attracting a high price for the business being sold • 4 . to provide management for the businesses acquired that is superior to businesses run separately

12. Related Diversification • 5. to encourage managers of businesses in the portfolio to perform better • than businesses run separately • 6 . to shift resources within the portfolio more effectively than others in • pursuit of superior performance • 7 . to recognize the need to dispose of businesses before they have a • detrimental impact on corporate performance

13. Strategies for Entering Attractive New Businesses • We want to enter an attractive business but…highly profitable businesses usually have high entry barriers. Options to overcome these barriers include a) alliances, b) acquisitions/mergers, or internal development into i) a niche, or ii) revolutionizes the industry iii) leverage resources (corporate venture). • FOCUS ON A NICHE • The generic positions for strategy in Chapter 5 were low-cost leadership, • differentiation, focus cost leadership, and focus differentiation. • An entry that is focused involves pursuing a niche in the market and • appears less threatening to the incumbents because it seems to have • modest goals. • Consequently, it attracts little attention and is not likely to provoke • retaliatory behaviour.

14. Strategies for Entering Attractive New Businesses • USING A REVOLUTIONARY STRATEGY • This affords some protection from competition because such a strategy • breaks with the convention of the way business is done by the • incumbents. • When it is very different, incumbents are predisposed to think such a • strategy is inferior, unwise, or risky. • Only after such a strategy proves successful will incumbents rally • to try to protect their ground, but by then they are often too late.

15. Strategies for Entering Attractive New Businesses • LEVERAGING EXISTING RESOURCES • The business can take its existing capabilities and pursue businesses • that build on these capabilities. • This can be encouraged by a corporate venture unit, a distinct • organization unit controlled by the parent company that is responsible • for investing in business opportunities that are new to the corporation. • Such units may engage in a variety of forms of investment, from • making small investments in independent start-ups, to incubating • internal business ideas, to spinning out businesses.

16. Strategies for Entering Attractive New Businesses • COMBINATION STRATEGIES • Several entry strategies have elements of two or more of the strategies. • For instance, Skype combined its reconfigured value chain strategy with • a niche strategy; it specifically targeted price-sensitive customers • who would tolerate inferior quality.

17. Competitive Advantage and Corporate Strategy: When does a portfolio of businesses create value for shareholders? Resources Implementation Arenas Organi-zationalstructure Systems/ Processes People/ Rewards Specialized General

18. Competitive Advantage and Corporate Strategy • ARENAS • Theoretically, a company can compete in any combination of discrete • business arenas. • In practice, companies rarely enter arenas randomly but rather • select those that are logically connected to the arenas in which • they already participate.

19. Competitive Advantage and Corporate Strategy • RESOURCES • We saw in Chapter 3 that resources and capabilities are tangible or • intangible, and their usefulness in creating a competitive advantage • depends on five factors: • 1. how valuable they are • 2. whether they’re rare in the industry • 3. whether they’re costly to imitate • 4. the availability of substitutes • 5. whether the company has complementary capabilities to exploit them

20. Competitive Advantage and Corporate Strategy • Specialized Resources • Specialized resources have a narrow range of applicability. • Knowledge about fibre optics, for example, is fairly specialized, whereas • managerial know-how and skill are more general in nature. • General Resources • General resources can be exploited across a wide range of activities. • Many companies have created significant shareholder value by • leveraging expertise in efficient manufacturing and mass-marketing • techniques across different businesses engaged in a variety of industries.

21. Competitive Advantage and Corporate Strategy • IMPLEMENTATION • As explained in Chapters 1 and 2 and reaffirmed in Chapter 8, • implementation levers include organizational structure, systems and • processes, and people and rewards. • Strategic leaders use these levers to implement strategies. • The success with which diversified companies are managed • in accord with key organizational features has a significant effect • on the level of value that can be created through their portfolios.

22. Corporate Strategy in Stable and Dynamic Contexts • CORPORATE STRATEGY IN STABLE CONTEXTS • Many ideas of the relationship between diversification and corporate • strategy are based on analyses of companies operating in relatively stable • contexts. • Historically, a company may have diversified into a high-growth industry • because growth prospects in its current industry were unattractive. • CORPORATE STRATEGY IN DYNAMIC CONTEXTS • The same factors described in Chapter 6 that create the need for a • dynamic strategy also apply to corporate strategy: competitive interaction, • industry evolution, and technological change. • The evolution of the Corel Corporation shows how the corporation needs • to be flexible when dealing in a dynamic context.

23. Corporate Strategy in Stable and Dynamic Contexts • Diversification in Dynamic Contexts • Coevolution • The ebbs and flows of companies’ corporate strategies in dynamic • contexts are best described as a web of shifting linkages among • evolving businesses—a process called coevolution. • Borrowed from biology, the term coevolution describes successive • changes among two or more ecologically interdependent species • that adapt not only to their environment but also to each other.