Corporate Strategy

• What is it?

• What are its main concerns?

• How is it different from business-level

strategy?

History of Corporate Strategy: 1950s & 1960s

• Conglomerates• Undervalued companies & general mgmt skills• The reality of this period• Contributions to C.S.:

– Concept of corporate strategy

– SWOT

– Structure follows strategy

– Strategic fit

Examples of Strategic Fit

• Resource strengths are well matched to the KSFs of industries the firm competes in

• Adequate managerial expertise exists to cope with problems of current businesses

• Ability exists to transfer resources and capabilities from one business to another

• Good financial fit is when a business:– Contributes to achievement of corporate objectives– Enhances shareholder value

History of Corporate Strategy: 1970s

• Unrelated diversification still in vogue

• Search for portfolio planning tools

• Contributions to C.S.:– BCG Matrix & GE Matrix– Rumelt’s diversification typology– Valuable internal capital allocation (Williamson ‘75)

The BCG Growth-Share Business Portfolio Matrix

Circle Size = proportion of total revenue business contributes to corp.

Weaknesses of the BCG Matrix

• No average position

• Oversimplification

• Position in matrix investment success

• Cash cows defending shrinking market share

• 2 dimensions -- inadequate

• Cash flow emphasis

Constructing a GEAttractiveness/Strength Matrix

• Use quantitative measures of industry attractiveness and business strength to plot location of each business in matrix

• Each business unit appears as a circle– Area of circle is proportional to size of

business as a percent of company revenues (Or area of circle can represent relative size of

industry with pie slice showing the company’s market share)

Procedure: Rating the RelativeRelative Attractiveness of Each Industry

Step 1: Select industry attractiveness factors

Step 2: Assign weights to each factor (sum of weights = 1.0)

Step 3: Rate each industry on each factor (use scale of 1 to 10)

Step 4: Calculate weighted ratings; sum to get an overall industry attractiveness rating for each industry

Example: Rating Industry Attractiveness

Attractiveness Rating

5

8

2

6

4

7

4

5

Weighted Industry Rating

0.75

2.40

0.10

0.30

0.20

1.05

0.60

0.50

5.90

Weight

0.15

0.30

0.05

0.05

0.05

0.15

0.15

0.10

1.00

Industry Attractiveness Factor

Market size and projected growth

Intensity of competition

Emerging industry opportunities and threatsSocial, political, regulatory, and environmental factors

Seasonality and cyclical influences

Resource requirements

Industry profitability

Degree of risk and uncertainty

Sum of weights

Industry attractiveness rating

Rating Scale: 1 = Unattractive; 10 = Very attractive

Rating the Competitive Strength of Each Business

Step 1: Select competitive strength factors

Step 2: Assign weights to each factor (sum of weights = 1.0)

Step 3: Rate each business on eachfactor (use scale of 1 to 10)

Step 4: Calculate weighted ratings; sum to get an overall attractiveness rating for each business

Example: Rating a Business Unit’s Competitive Strength

Strength Rating

5

8

2

6

4

7

4

5

Weighted Strength Rating

1.00

2.00

0.10

0.60

0.20

1.05

0.40

0.50

5.85

Weight

0.20

0.25

0.05

0.10

0.05

0.15

0.10

0.10

1.00

Competitive Strength Measure

Relative market share

Ability to compete on cost

Ability to match rivals on quality or service

Technology/innovation capabilities

How well resources match KSFs

Brand name reputation/image

Degree of profit relative to rivals

Sum of weights

Competitive strength rating

Rating Scale: 1 = Weak ; 10 = Strong

Bargaining leverage

General Electric’s Industry Attractiveness-Business Strength Matrix

Low

High

Medium

AverageStrong Weak• Market Size• Growth Rate• Profit Margin• Intensity of Competition• Seasonality• Cyclicality• Resource Requirements• Social Impact• Regulation• Environment• Opportunities & Threats

• Relative Market Share• Reputation/ Image• Bargaining Leverage• Ability to Match Quality/Service

• Relative Costs• Profit Margins• Fit with KSFsIndustry

Attractiveness

Business Strength

Rating Scale: 1 = Weak ; 10 = Strong

6.7

3.3

10.0

1.0

1.03.36.7

Strategy Implications of Attractiveness/Strength Matrix

• Businesses in upper left corner– Accorded top investment priority– Strategic prescription is grow and build

• Businesses in three diagonal cells– Given medium investment priority– Invest to maintain position

• Businesses in lower right corner– Candidates for harvesting or divestiture– May be candidates for an overhaul and reposition

strategy

The Attractiveness/Strength Matrix

• Allows for intermediate rankings between high and low and between strong and weak

• Incorporates a wide variety of strategically relevant variables

• Stresses allocating corporate resources to businesses with greatest potential for

– Competitive advantage and

– Superior performance

Rumelt’s Diversification Typology

Levels of Diversification Source of Revenues Linkages Between Business

Low Level: Single Business > 95% from a single

businessN/A

Low Level: Dominant Business

70% to 95% from a single business

Linkages between two businesses

Moderate-High Level:

Related-Constrained< 70% from dominant

businessAll businesses share linkages

Moderate-High Level:

Related Linked< 70% from dominant

businessOnly some businesses share

linkages

Very High Level:

Unrelated< 70% from dominant

businessNo linkages

History of Corporate Strategy: 1980s• Sticking to the Knitting• Restructuring: Downsizing, Downscoping, &

LBOs• Corporate Raiders

• Contributions to C.S.:– Value-Based Strategy– New Concepts: Market for Control & Free Cash Flows– Porter’s Generic Corporate Strategies– Resource-Based View of the Firm

Value-Based Strategy

• Computed Value:– Discount forecasted cash flows using WACC– Compute share value

• Imputed Value:– Apply industry average P:E ratio to company

earnings to get imputed share value.

• Computed < Imputed … improve or sell

Porter’s Generic Corporate Strategies

• Portfolio Management

• Restructuring

• Transferring Skills

• Sharing Activities

Corporate Strategy in the ‘90s & Beyond

• Restructuring & Refocusing Continues, yet ...• Record Number of Mergers & Acquisitions

• Issues Confronted in this Course:– Are there generic corporate strategies?– What are the key elements of C.S.?– How do you achieve a corporate advantage?– Is any corporate advantage sustainable?– How far should one diversify?