Competitive Advantage to Corporate Strategy

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 How to measure diversification?

Market values after mergers.short term!!! Main Objective --- to create shareholders value

Corporate Strategy
Premises Competition occurs at the business unit level Diversification inevitably adds to costs & constraints Shareholders can diversify themselves Essential Tests The Attractiveness Test The Cost of Entry test The Better-off test
Out of 33 major companies, >60% divested

How attractive is an Industry

Industry with high return 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 Example: 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
4

Attractiveness Test
Evaluation based on relative attractiveness
Measures Weighting Co. A Mkt size Growth Rate Intensity (comp) Resource reqs Strategic fit Opps / threats Social, political Degree of risk Industry profitability 0.10 0.15 0.30 0.10 0.15 0.05 0.05 0.05 0.05 1.0 6.0 1.0 2.0 3.0 6.0 1.0 1.0 1.0 7.0 Ind. Rating Co. B 2.0 8.0 9.0 5.0 8.0 6.0 4.0 4.0 5.0 Co. C 5 5 5 5 5 5 5 5 5 Ind. Attract. Co. A 0.6 0.15 0.6 0.3 0.9 0.05 0.05 0.05 0.35 3.05 Co. B 0.2 1.2 2.7 0.5 1.2 0.3 0.2 0.2 0.25 6.75 Co. C 0.5 0.75 1.5 0.5 0.75 0.25 0.25 0.25 0.25 5.00

Cost of Entry Test

If cost of entry > expected returns . No shareholder value If the acquirer beats market prices, not reflecting the prospectspressure Example: Philip Morris acquires 7-up (4 times the book value)

More attractive an industry, more the cost of entry

Better-Off Test
Corporation should bring in competitive advantage to the new unit or vice versa If the benefit is one-time, it is best to sell the unit once got the benefitsas does not add value to shareholders Example: Baxter Travenol and American Hospitality Supply

Concepts of Corporate Strategy

Major reasons for diversification failures Failure to address the 3 tests Lack of clearness in the concept of corporate strategy Poor Implementation of the strategies 4 Major concepts of corporate strategy are Portfolio Management Requires No Connection among Business Units Restructuring To create value through companys each autonomous unit Transferring Skills Depends on connection among Business Units Sharing Activities
Exploits the relationship between businesses.

Portfolio Management
Acquire sound, attractive companies with competent mangers who stay Companies acquired needs to be autonomous and should be compensated based on its results Requires good but undervalued companies
But, the success of this is a Past Thing. More complex nature of portfolio, difficult to manage Gulf & Western Sara Lee

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 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

10

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, positioning concepts, promotion techniques to a cough syrup business unit

Expertise must be a meaningful source of competitive advantage

Companies which diversified using this concept

11

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
Uses common physical distribution system and sales force in both paper towels and disposable diapers

Shared Procurement and distribution system for food serves in all Marriott units Fully Integrated Real Estate unit

12

Action Program
Identify Interrelationships Among Units Select Core Business Facilitate Interrelationships Diversify Via Shared Activities Diversify Via Transfer of Skills Diversify Via Restructuring Pay Dividends Instead

Create a Corporate theme A way to ensure that corporation will create shareholder value

13

Corporate Theme - Examples

NEC Corporation Corporate Theme --- C&C in 1978 Started to integrate Computers and Communications

Columbia Broadcasting System Corporate Theme --- Entertaining Company

Started to diversify in toys, crafts, musical instruments, sport teams But, failed miserably None has any significant opportunity for sharing activity or transferring skills
14

Thank you