Lesson 5

From competitive advantage to Corporate strategy

Group 1

Two Basic of Strategies level• Business Strategy• Corporate Strategy

Corporate Strategy Concerns 2 Questions◦ What Business the corporation should be in?◦ How Corporate should manage business unit?

Competitive Advantage to Corporate Strategy

From competitive advantage to Corporate strategy

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How to measure diversification? Market Value after mergers Main Objective of company.

Competitive Advantage to Corporate Strategy

From competitive advantage to Corporate strategy

Group 1

Premises of corporate strategy

From competitive advantage to Corporate strategy

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Competition occurs at the business unit level

Diversification inevitably adds to costs & constraints

Shareholders can diversify themselves

I) The Attractive Test

II) The Cost-to-entry Test

III) The better-off Test

• Attractive Industry• Unattractive

Industry

Passing the Essential Test

From competitive advantage to Corporate strategy

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Diversification cannot create value for shareholders, unless have favourable structure

If not, should consider restructuring of the firm Poor Industry structure can lead to unhappy

diversification Ex: Royal Dutch Shell and other leading oil companies have

had this unhappy experience in a number of chemicals businesses.

Don’t‘ rush into Fast-Growing◦ Mistake early growth for long term.◦ Personal Computer, Video Game, Robotics

I) The Attractive Test is the industry

Attractive Industry

• High Average return • Difficult to enter

• High entry barriers• Bargaining power

(supplier-buyer)• Substitute products or

service are few• The rivalry among

competitors is stable

From competitive advantage to Corporate strategy

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Cost of entry into new business > expected returns : can’t build shareholder value

Enter new industries 1. Acquisition

2. Start-Up- Entry Barriers

II) What is the cost of entry

From competitive advantage to Corporate strategy

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Corporation must bring some significant competitive advantage to the new unit.

If the benefit is one-time, it is best to sell the unit once got the benefits◦ Ex: the merger of Baxter Travenol and American

Hospital Supply

III) Will The Business be Better Off?

Concept of Corporate Strategy

Portfolio Management Restructuring Transferring Skill Sharing Activity

From competitive advantage to Corporate strategy

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The Corporation acquires sound attractive companies with competent managers who agree to stay on.

Autonomous business unit Categorize units by potential Common Pitfalls: Ignoring the fact that

industry structure is not attractive

1. Portfolio Management

From competitive advantage to Corporate strategy

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Undeveloped, sick, or threatened organization or industries on the threshold of significant change

Parent intervenes, Frequently changing the management team, shifting strategy, infusing the company with new technology.

Common Pitfalls: Mistake rapid growth, Ignoring the fact that industry structure is not attractive.

2. Restructuring

From competitive advantage to Corporate strategy

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An Uncanny British Restructurer

Hanson Trust, one of several skillful followers of restructuring concept.

Becoming Britain’s largest company. Hanson target: An attractive structure,

customer and supplier power is low, and rivalry with competitors moderate.

Hanson target: A market leader, rich in assets but formerly poor in management.

Hanson strategy: emphasizes low costs and tight financial controls.

3. Transferring Skill

From competitive advantage to Corporate strategy

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Company’s ability to transfer skills or expertise among similar value chain.(transfer “How to”).

Newly enter industries can benefit from expertise of existing units.

Companies which diversified using this concept: 3M and Pepsico.

3. Transferring Skills

From competitive advantage to Corporate strategy

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Transferring skills will lead to competitive advantage when:

1. Activities are similar enough that sharing expertise is meaningful.

2. Activities are important to competitive advantage.

3. The expertise or skills to be transferred are both advance enough to be beyond the capabilities of competitors.

4. Sharing Activities Company’s ability to share activity between

each business unit Ex. Sales force or logistics network. (share “Activities”).

Sharing must involve activities that are significant to competitive advantage, not just any activity.

Companies which diversified using this concept: P&G, Dupont, IBM, Marriott.

4. Sharing Activities Benefit Can lower costs if it achieves economy of scale. Can enhance the potential for differentiation

Ex. A shared order-processing system, may allow new features and services that a buyer will value.

Can reduce the cost of differentiationEx. A shared services network.

Costs (that benefit must cover) Greater coordination to manage a shared activity. Compromise (greatly erodes the unit effectiveness)

Ex. Shared salesperson to handling the products of two business units

• Each concept of corporate strategy allows the diversified company to create shareholder value.

• Companies can succeed with any concepts :• Clearly define the corporation’s role and objective.• Have the skills necessary. • Manage diversify in a way that fits the strategy.• Find an appropriate capital market environment.• Portfolio management. • Sharing activities.

Choosing a Corporate Strategy

From competitive advantage to Corporate strategy

Group 1

• None of the concepts of corporate strategy works when industry structure is poor or implementation is bad, no matter how related the industries are.

Ex. XEROX

Choosing a Corporate Strategy

From competitive advantage to Corporate strategy

Group 1

AN ACTION PLAN

From competitive advantage to Corporate strategy

Group 1

Identify the interrelationships among units. Select core business Facilitate interrelationships Diversify via shared activities Diversify via transfer of skills Diversify via restructuring Pay dividend instead

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From competitive advantage to Corporate strategy

Group 1