chapter 9 corporate strategy

Copyright © 2012 Pearson Canada Inc. 11

Chapter 9 Corporate Strategy


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.


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).


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.



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.



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).



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.



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.



• 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.



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.



These skills include the abilities:

1. 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



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


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.



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.



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.



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.


Competitive Advantage and Corporate Strategy: When does a portfolio of businesses create value for shareholders?

Arenas

Specialized GeneralOrgani-zationalstructure

Systems/Processes

People/Rewards

Resources Implementation


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.



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



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.



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.


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.


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.

chapter 9 corporate strategy

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