Competitive Advantage to Corporate Strategy

7/28/2019 Competitive Advantage to Corporate Strategy

1/18

Competitive Advantage toCorporate Strategy


2/18

Corporate Strategy

2 levels of strategies for any company

Business Strategy

Corporate Strategy

2 Questions answered by Corporate Strategy

What business the corporation should be in

How the corporate office should manage the array of business units

2


3/18

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 thecorporate level

Successful corporate strategy must grow out of and reinforce competitivestrategy

Corporate Strategy inevitably adds costs andconstraints 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 largeacquisition premiums


4/18

Corporate Strategy

Essential Tests

The Attractiveness Test

The Cost of Entry test

The Better-off test

4


5/18

How attractive is an Industry

Industry with high return

Diversification cannot create value for shareholders, unless the industry has a

favorable structure

If not, should consider restructuring of the firm

Poor industry structure can lead to unhappy diversificationExample: Dutch Shells unsuccessful acquisitions like Billiton (Mining) ,

Bechtel (Power generation)

Dont rush into fast-growing industries

Mistook early growth for long term potential

Example: Video Games, Personal Computers, Robotics

5
http://www.bhpbilliton.com/http://www.bechtel.com/home.htmlhttp://www.shell.com/


6/18

Attractiveness Test

Evaluation based on relative attractiveness

6

Measures Weighting Ind. Rating Ind. Attract.

Co. A Co. B Co. C Co. A Co. B Co. C

Mkt size 0.10 6.0 2.0 5 0.6 0.2 0.5

Growth Rate 0.15 1.0 8.0 5 0.15 1.2 0.75

Intensity (comp) 0.30 2.0 9.0 5 0.6 2.7 1.5

Resource reqs 0.10 3.0 5.0 5 0.3 0.5 0.5

Strategic fit 0.15 6.0 8.0 5 0.9 1.2 0.75

Opps / threats 0.05 1.0 6.0 5 0.05 0.3 0.25

Social, political 0.05 1.0 4.0 5 0.05 0.2 0.25

Degree of risk 0.05 1.0 4.0 5 0.05 0.2 0.25

Industry profitability 0.05 7.0 5.0 5 0.35 0.25 0.25

1.0 3.05 6.75 5.00


7/18

Cost of Entry Test

If cost of entry > expected returns . No shareholder value

Overpayment?

Example: Philip Morris acquires 7-up (4 times the book value)

More attractive an industry, more the cost of entry

7
http://en.wikipedia.org/wiki/File:Philip_Morris_International_Logo_svg.png


8/18

Better-Off Test

Corporation should bring in competitive advantage to the new unit or vice

versa. Why?

If the benefit is one-time, it is best to sell the unit after extracting benefits

does not add value to shareholders

Example: Baxter Travenol and American Hospitality Supply

8
http://www.baxter.com/


9/18

Concepts of Corporate Strategy

Major reasons for diversification failures

Failure to address the 3 tests

Lack of clarity in the concept of corporate strategy

Poor Implementation of the strategies

4 Major concepts of corporate strategy are

Portfolio Management

Restructuring

Transferring Skills

Sharing Activities

9

Requires No Connection among Business Units

Depends on connection among Business Units

To create value through companys each autonomous unit

Exploits the relationship between businesses.


10/18

Managing Linkages between Businesses

KEY ISSUEHow does the corporate center add value to the business?

BASIS OF BUSINESS LINKAGESSharing of resources and capabilities.

SHARING OCCURS AT TWO LEVELS:

Corporate levelcommon corporate services Business levelsharing resources, transferring capabilities

PORTERS ANALYSIS OF BUSINESS LINKAGES AND CORPORATE

STRATEGY TYPES

Portfolio management Parent creates value by operating an internal

capital market

RestructuringParent create value by acquiring and restructuring

inefficiently-managed businesses

Transferring skillsParent creates value by transferring capabilities

between businesses

Sharing activitiesParent creates value by sharing resources between

businesses


11/18

What Corporate Management Activities are Implied by

Porters Concepts of Corporate Strategy

(1) Portfolio Management

Using superior information and analysis to acquire attractive companies at

favorable prices (e.g. Berkshire Hathaway).

Minimizing cost of capital (e.g. GE)

Create efficient internal system for capital allocation (e.g. Exxon-Mobil) Efficient monitoring of business unit performance (e.g. BP-Amoco).

(2) Restructuring: Intervening to cut costs and divest under performing assets (e.g.

Hanson during 1980s & early 1990s)

(3) Transferring skills:

Transferring best practices (e.g. Hewlett-Packard)

Transferring innovations (e.g. Sharp)

Transferring key personnel between businesses (e.g. Sony)

(4) Sharing activities:

Common corporate services (e.g. 3M)

Sharing operational resources and functions (e.g. sales and distribution,

manufacturing facilities).


12/18

Portfolio Management

Acquire sound, attractive companies with competent managers who stay

Companies acquired need to be autonomous and should be compensated

based on results

Requires good but undervalued companies

But, the success of this approach is pass. More complex nature of portfolio, difficult to manage

Gulf & Western

Sara Lee

Virgin

12


13/18

Restructuring

Underdeveloped, sick, or threatened organizations or industries on the

threshold of significant change

Parent intervenes frequently changing the management team, shifting

strategy, or infusing the company with new technology

LBOs Business is sold when parent is no longer adding value

Some Restructuring companies

Hanson Trust

KKR

When well implemented, it passes all 3 tests

Major Pitfall Companies find it difficult to divest once restructured

13


14/18

Transferring Skills

Knowledge about how to perform activities is transferred among the units

Characterized by units with similar buyers, channels, value activities

and/or the same strategic concept

Example

A toiletries business unit, can give the marketing skills, positioningconcepts, promotion techniques to a cough syrup business unit

Expertise must be a meaningful source of competitive advantage

Companies which diversified using this concept

14
http://images.google.co.in/imgres?imgurl=http://i227.photobucket.com/albums/dd39/TINS24651/Hughes/Hughes_hac.jpg&imgrefurl=http://us.profile.myspace.cn/index.cfm?fuseaction=user.viewprofile&friendid=353209435&usg=__mqt5itLo6CbkM7bBIbTrWnHlcxw=&h=136&w=300&sz=72&hl=en&start=4&um=1&tbnid=ASOPcxhV8ntlfM:&tbnh=53&tbnw=116&prev=/images?q=GM+purchsing+hughes+aircraft&hl=en&sa=N&um=1http://images.google.co.in/imgres?imgurl=http://blogs.edmunds.com/strategies/GM_logo.jpg&imgrefurl=http://osi-speaks.blogspot.com/2009_02_01_archive.html&usg=__dhwJ_06-fy3REiSleZpwBM2gXus=&h=530&w=530&sz=33&hl=en&start=12&um=1&tbnid=ByRC8FGaceZkqM:&tbnh=132&tbnw=132&prev=/images?q=GM+purchsing+hughes+aircraft&hl=en&sa=N&um=1http://en.wikipedia.org/wiki/File:3M_wordmark.svghttp://en.wikipedia.org/wiki/File:Pepsico_logo.svg


15/18

Sharing Activities

Leads to lowering costs or raising differentiation

Must involve activities that are significant to competitive advantage and costs

outweighed by benefits

Business unit collaboration is encouraged and reinforced

Example

15

Uses common physical distribution system and sales

force in both paper towels and disposable diapers

Shared Procurement and distribution system for food

services in all Marriott units Fully Integrated Real Estate unit
http://images.google.co.in/imgres?imgurl=http://www.bconnex.net/~mscanada/744px-Marriott_Logo_svg.png&imgrefurl=http://www.bconnex.net/~mscanada/sponsors.htm&usg=__2yql8dWVNsiSEFWSlEGDzpjfOjY=&h=384&w=744&sz=36&hl=en&start=2&um=1&tbnid=RcieeWRYIKyeRM:&tbnh=73&tbnw=141&prev=/images?q=marriott+logo&hl=en&sa=X&um=1http://images.google.co.in/imgres?imgurl=http://www.trendco-vick.com/images/customers/p&g.jpg&imgrefurl=http://brilliont.com/blogs/id/tag/google/&usg=__I8AKKwKYvM50lDwcRFE_hyiud_A=&h=150&w=298&sz=36&hl=en&start=3&um=1&tbnid=ezGFvtlD8VnXlM:&tbnh=58&tbnw=116&prev=/images?q=P&G&hl=en&um=1


16/18

Action Program

1. Identify Interrelationships Among Units

2. Select Core Business

3. Facilitate Interrelationships

4. Diversify Via Shared Activities

5. Diversify Via Transfer of Skills6. Diversify Via Restructuring

7. Pay Dividends Instead

Create a Corporate theme

A way to ensure that corporation will create shareholder value

16


17/18

Corporate Theme - Examples

NEC Corporation

Corporate Theme --- C&C in 1978

Started to integrate Computers and Communications

17

Columbia Broadcasting System

Corporate Theme --- EntertainingCompany

Started to diversify in toys, crafts, musical instruments, sport teams

But, failed miserably

None has any significant opportunity for sharing activity or transferring skills
http://upload.wikimedia.org/wikipedia/en/1/1b/CBS.svghttp://en.wikipedia.org/wiki/File:NEC_logo.SVG


18/18

Thank you

Competitive Advantage to Corporate Strategy

Documents

Transcript of Competitive Advantage to Corporate Strategy