Chapter 9
Corporate Strategy
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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.
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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.
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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).
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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.
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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.
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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).
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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.
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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.
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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.
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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.
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Related Diversification
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
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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
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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.
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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.
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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.
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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.
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Competitive Advantage and Corporate Strategy: When does a portfolio of
businesses create value for shareholders?
Resources
Implementation
Arenas
Specialized
General
Organizational
structure
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Systems/
Processes
People/
Rewards
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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.
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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
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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.
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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.
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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.
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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.
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