CORPORATE ADVANTAGE1
The test of a good corporate diversification strategy is called corporate advantage. It is a multi-dimensional test appropriate for evaluating multi-business strategy
that is analogous to the tests of competitive advantage that are used to evaluate the
strategy of a single line of business. (Within any particular line of business, a successful
competitive strategy strives to attain competitive advantage – which is evaluated relative
to the success of other firms’ business units that are serving the same customers in the
same competitive marketplace.) An effective competitive strategy takes offensive (or
defensive) action against profit-eroding industry forces before competitors can pre-empt
the firm from influencing the balance of competitive forces to its advantage. In brief, the
successful competitor makes superior choices concerning how to serve its customers
that sustains their willingness to pay for the business unit’s unique products over time.
Corporate strategy pertains to the firm’s choices concerning the composition of
its corporate family and how it supports members’ respective efforts to implement their
competitive strategies (or not). Superior corporate strategy yields superior corporate
performance. The firm that has superior corporate performance enjoys a higher market
valuation if it is publicly-traded (which enables the corporation to have better access to
the resources that will be needed for organizational renewal). For the purposes of this
discussion, corporate advantage is treated as a relative rather than absolute condition.
The efficacy of a particular diversified firm’s corporate strategy is judged relative to the
successes enjoyed by other diversified firms (since the firm vies for capital against all
other firms and alternative forms of investment opportunities).
Diversification describes the relatedness of a firm’s corporate family members to
each other. When a firm invests its profits in the same line of business that produced
them – even if it funds expansion in the same line of business in a new geography – the
resulting family members are horizontally-related to each other (because they engage in
the same activities). When a firm invests its profits in lines of business that supply
goods or services to the business unit that produced the profits, the resulting family
members are vertically-related to each other (because they have a supplier-buyer relationship to each other whereby the cash-generating business unit is customer to the upstream, sister business unit that is its supplier). Vertical diversification can also pertain
to investments in a business unit that consumes, distributes or adds value to goods and
services made by its supplying, sister business unit. Corporate family members also
have supplier-buyer relationships to each other in such diversifications (although the respective roles have changed between the cash-generating business, which becomes
the supplier, and its customer which is the downstream, sister business unit).
1
This note by Professor Kathryn Rudie Harrigan is based on lectures from B7708: Corporate Growth & Organizational Development as well as from Collis & Montgomery (2005), Corporate Strategy: A Resource-Based Approach, Irwin/ McGraw-Hill
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Vertical diversifications are analyzed with respect to a particular, core business
unit within the corporate family which is presumed to make especially good use of the
family‘s extant corporate resources in attaining its respective competitive success. Upstream diversifications (investments in supplying activities) build more heavily on commonalities in technologies shared among corporate family members. Downstream diversifications (investments in consuming, distributing or value-adding activities) exploit
commonalities in customer knowledge shared among corporate family members more
heavily.
Even where corporate family-member business units have no supplier-buyer relationships among them, similarities in the success requirements of competing within
their respective marketplaces determine the business units’ relatedness to each other.
Closely-related business units frequently use common resources provided by their corporate family to enhance their respective competitiveness. Although each respective
business unit possesses its own set of unique, competitive resources that create competitive advantage in its respective marketplace, access to the corporate resources that
become available through membership in a superior corporate family may give the
business unit an inimitable corporate advantage that competitors from inferior corporate
families cannot match.
In summary, corporate advantage is the construct that measures the optimality
of the firm’s diversification (its corporate strategy). Evaluation of a firm’s geographic diversification (or diversification into industries of varying relatedness to each other) uses
several tests to determine its overall level of corporate advantage.
STRICT TEST OF CORPORATE ADVANTAGE
The corporate advantage model assumes that corporate value is created by the
choices that headquarters managers make. In the Corporate Growth & Organizational
Development course, the strict test of attaining corporate advantage specifies that this
condition of advantage is attained when (1) a multi-business firm’s headquarters managers create corporate value from the membership of each business unit in the corporation, (2) the benefit such corporate value creates exceeds the cost of corporate overhead incurred in doing so (including the cost of headquarters staff who may coordinate
certain intrafirm activities, or not), (3) the corporate parent under analysis adds more
value to its corporate family members than any other potential corporate parent could
offer (or vice versa), and (4) the corporate value that the family under analysis adds in
its particular enterprise form is greater than any alternative corporate form of enterprise
could add to its family members.
Headquarters decisions concerning diversification are presumed to create value.
Investments in corporate resources used by corporate family members are presumed to
create value. The organizational infrastructure created -- and headquarters activities
undertaken to implement a firm’s corporate strategy -- are presumed to create value.
These investments are the active drivers of the corporation’s strategy. If they are effec-
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tive, the interactions of these drivers create conditions that enhance the realization of
corporate advantage through the astute exploitation of resource renewals and operating
synergies that further strengthen the corporate family’s competitive advantage in their
respective lines of business.
DIMENSIONS OF CORPORATE STRATEGY
As Figure 1 illustrates, the corporate advantage paradigm is driven by three corporate strategy choices – (1) industries, (2) resources and (3) organizational structure,
systems and policies [OSSP] -- that affect three moderating corporate choices regarding how to use, control and coordinate the family’s corporate resources to enhance corporate performance. Effective choices among these six dimensions will produce three
desirable outcomes [enhanced operating synergies, robust resource renewal and sustainable competitive advantages] that create corporate advantage in a particular firm’s
diversification. Analysis of the dimensions of a firm’s corporate strategy considers the
efficacy of each respective driver dimension in its own right [resources, industries and
organizational structure, systems and processes] as well as in light of how that particular driver dimension interacts with the adjacent moderating dimensions [controls, coordination and competitive advantage] to produce the outcomes that contribute to the
family’s corporate advantage [enhanced operating synergies, robust resource renewal
and sustainable competitive advantages].
3
In order to assess whether a particular firm has attained relatively high corporate
advantage, it is useful to consider how the corporate family fares vis-à-vis certain acid
tests that evaluate the efficacy of each respective corporate strategy dimension. Remember that driver strategy dimensions interact with each other to affect the moderating
strategy dimensions; some managerial choices affect both driver and moderating dimensions. It is possible to give each driver strategy dimension a score between 00 and
100 – with higher scores awarded when the driver strategy dimension that interacts favorably with moderating dimensions to contribute favorably to the desirable outcomes of
sustainable competitive advantage, enhanced operating synergy and robust resource
renewal.
Figure 2
Corporate advantage dimensions
If the six scores are posted along the respective scaled lines on the shape shown
in Figure 2 and connected by lines between each scale to form the planes of a hexagon,
a visual evaluation of the firm’s corporate strategy is created. Strategies that most
closely approach optimal corporate advantage will be depicted as balanced and large
(since the values of many of their driver and moderating dimensions will approach 99).
Inferior corporate strategies will be depicted as unbalanced and smaller (since the values of many of their driver and moderating dimensions will be below average). The corporate strategy shape can function as a diagnostic tool that suggests which dimensions
of a firm’s strategy should be strengthened to improve implementation of the management’s strategic vision by increasing balance among the dimensions.
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DRIVERS OF CORPORATE STRATEGY
Acid test of valuable business scope – choice of industries to compete in and nature of linkages between its lines of business: This dimension considers the relatedness
pattern of a corporate family’s members and the attractiveness of the family of businesses that the firm has invested in. Is each line of business competing in an attractive
industry?2 If the industry is deemed attractive, is the business unit enjoying market
leadership or is it merely being buoyed up by the high average returns of an inherently
attractive industry? (Even if an industry is deemed relatively “unattractive” by the Porter
5-Forces analysis, the firm’s particular business unit could be enjoying above normal
profits if it pursues an effective competitive strategy.) Although Figure 3 is a good starting
Figure 3
Porter’s Five-Forces Diagram
Height
Heightand
andNature
Nature
of
Entry
of EntryBarriers
Barriers
Characteristics affecting
Factors
Factors
Creating
Creating
Suppliers’
Suppliers’
Bargaining
Bargaining
Power
Power
Perform analyses on
an industry-byindustry basis
Competitive Behavior
Within Industry
Availability
Availabilityof
of
Perfect
PerfectSubstitute
Substitute
Products
Products
Factors
Factors
Creating
Creating
Customers
Customers
Bargaining
Bargaining
Power
Power
Analysis yields
expectations of average
industry-wide profitability
point for assessing industry attractiveness, analysis of overall demand traits is also important. Is demand growing (or saturated) in the markets where the firm’s businesses
compete? Which exogenous forces are likely to change customers’ requirements within
them (thereby forcing competitive shifts in the firm’s businesses? Which competitive dynamics are likely to harm industry attractiveness? Is there growing demand for compleAssessment of industry attractiveness typically relies upon Porter’s 5-Forces paradigm to assess an industry’s
average profitability potential. See Porter, M.E. 1980. Competitive strategy: Techniques for analyzing industries
and competitors. New York: Free Press.
2
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mentary products that could revitalize demand for the products of the firm’s business
units? Evaluation of this aspect of the businesses dimension is difficult because attractive industries may be characterized as those with double-digit demand growth or those
with industry structures that foster high average profitability or those with a favorable
regulatory environment or those having other criteria that please the providers of capital
(or some combination of these attractive traits). That is why stock market prices alone
are inadequate measures of a successful corporate strategy. A dynamic assessment
(that considers the future sustainability of favorable industry traits) is needed to score
the businesses dimension effectively.
Evaluation of the businesses dimension of the corporate strategy paradigm can
be weighted by the proportion of total investment that each line of business represents
(measured by revenues generated, profits generated, capital deployed, or any salient
metric that accurately represents the firm’s mix of businesses). Closely-related lines of
business may be weighted more heavily in scoring this dimension if their respective
success requirements are similar enough to warrant sharing corporate resources
among them (or transferring salient knowledge among a cluster of related business
units). It may not be necessary to analyze the smaller lines of business if they share no
corporate resources with sister business units and contribute only proportionate revenues and profits. The moderating dimension of competitive advantage (for salient business units) draws upon the strength of their inherently-attractive industries as well as
the extra competitive boost that business units gain by using their family’s corporate resources (discussed below).
Evaluation of the businesses dimension of the corporate strategy paradigm considers linkages among the firm’s family of businesses (or lack thereof). When evaluating
acquisitions with respect to the businesses dimension, each industry’s success requirements should be matched with the corporate resources that headquarters controls
to assess valuable parenting potential. What value can this firm bring to a particular
business unit that is a member of (or is joining) its corporate family (and how should
headquarters intervene in the autonomy of each business unit to create such corporate
value)? Greater interactions among related business units can be encouraged by the
firm’s corporate system of controls (discussed below) and should be enhanced where
positive synergies result. Unfortunately, many firms impose heavy-handed corporate
controls in situations where greater competitive autonomy is warranted.
Acid test of valuable resources: The corporate parent possesses resources that
it makes available to appropriate business units to enhance their respective competitive
advantage. Corporate resources are likely to be intangibles – patents, brand names,
corporate logos and trademarks, distribution systems that can be used by several lines
of business, databases and information system infrastructures, or other valuable resources that are meaningfully unique from those controlled by other corporate parents.
The lines of business within a corporate family will each have their own resources that are idiosyncratic to their respective industry success requirements and not
used by other members of their corporate family. (If two or more lines of business rely
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on the same valuable resources for success in their respective marketplaces, those resources either were provided by their corporate parent or have been elevated by their
parent for use by sister businesses -- in addition to the specific line of business that first
developed the valuable resource and contributed its use to the corporate family. Some
valuable resources are corporate; most resources belong to the lines of business.) It is
important to distinguish between these two levels of resources; if the resources that are
most important to competitive success are owned by the respective lines of business
and the use of the parent’s corporate resources adds little incremental advantage to a
business unit’s strategic posture, then that parent’s corporate resources are not particularly important and the corporate parent adds little of value to the members of its family.
.
Corporate resources can be evaluated using the same tests that are used to
evaluate the resources of a particular line of business:3 uniqueness, durability and value
that will increase customers’ willingness to pay premiums for the firm’s products and
services, among others. Good corporate resources accrue valuable rents that the corporate family appropriates (instead of its individual employees). Corporate resources
also create high desirability and are competitively superior to those of other corporate
parents.
The resources dimension of the corporate advantage model is enhanced when
the firm exploits corporate resources that could be shared with business units. Headquarters identifies and nurtures the critical resources that the corporate parent manages
(which may be corporate-level competencies, capabilities, knowledge workers or other
resources that are distinctive in ways that contribute positively to the competitive advantages of the firm’s lines of business). As long as the value of the firm’s corporate
resources are enhanced -- not destroyed -- by the way in which lines of business use
them, corporate advantage is enhanced. (If interactions among the firm’s lines of business generate positive spillovers in the benefits of using corporate resources, the firm
possesses the potential to enhance operating synergies -- assuming that the right controls are applied to guide business units to work together.)
Acid test of optimal management systems: The firm implements its corporate
strategy through the managerial systems and organizational processes that it establishes -- its organizational structure and lines of communication, size and role of corporate
staff, nature of performance measures and feedback, use of performance incentives,
opportunities for managerial training or promotion or rotation among lines of business,
uses of symbolism in developing corporate culture, and other dimensions of organizational design. Organizational structure, management systems and decision-making processes should be appropriate for the type of corporate strategy that the firm is pursuing
(e.g., synergistic conglomerate, passive holding company, organic growth via innovation, collecting rents via franchising, joint venture, corporate venture capital to enhance
internal entrepreneurship, or other some other type of relatedness and coordination
3
See Wernerfeldt, B. 1984. A resource-based view of the firm. Strategic Management Journal. 5: 171-180 and
Peteraf, M.A. 1993. The cornerstones of competitive advantage: A resource-based view. Strategic Management
Journal. 179-191.
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among the firm’s lines of business). To evaluate the efficacy of the firm’s choices of
structures, systems and processes, it is necessary to analyze the role of the corporate
office in creating value to corporation. Intervention by headquarters in the autonomy of
its businesses could enhance synergies within/ across the firm’s industry and geographic groups (or destroy it).
MODERATING DIMENSIONS OF CORPORATE STRATEGY
Acid test of appropriate coordination activities: Corporate-level management designs appropriate systems, evaluation procedures, structures and reporting linkages as
needed to leverage resources across germane products, markets, technologies, geographies to exploit potential relatedness among its lines of business. Every organizational
arrangement, practice, and intervention of the corporate office into activities of business
units should create greater value than if the business units were allowed to operate independently without corporate coordination.
Typically the corporate office encourages coordination among business units (to
exploit potential synergies and create future corporate resources). Even in the absence
of opportunities to exploit operating synergies and build new corporate resources,
headquarters typically acts as central provider of scarce resources (e.g., advantageous
access to capital or talent or other necessary items that the parent can acquire more
cheaply than each of its business units can do individually) to avoid wasteful redundancies. Oversight is exercised when headquarters uses its control mechanisms to intervene in a particular business unit’s decisions (e.g., refusing a capital request, asking for
inventory reduction, proposing new strategic moves, or other centrally-directed change
in operations).
Acid test of competitive advantage: Competitive advantage is a moderating dimension in the evaluation of corporate strategy that can be positively affected by the
interaction of the corporation’s choices of lines of businesses and which corporate resources to develop, nurture and replenish for the benefit of the corporation’s family
members. Multi-business firms contribute positively to the competitive advantage of
their attractive lines of business when they contribute superior corporate resources in
ways that are more effective than any other corporate parent could do. Although their
business units are already configured to perform activities that are unique to create
products and services that constitute high “added value” to their customers, a good corporate strategy enhances their respective competitiveness because the use of the corporation’s resources by its lines of business gives each of their strategic postures a
boost that makes a palpable difference in their perceived distinctiveness in each marketplace where they participate.
Acid test of controls that reinforce desired behaviors: Corporate controls is a
moderating dimension in the evaluation of corporate strategy that can be positively affected by the interaction of the corporation’s choices of lines of businesses and the
firm’s choices of organizational structure, managerial systems and decision-making process for implementing corporate strategy. Although the realization of operating syner-
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gies is one highly-desirable outcome of their interactions, effective corporate controls
can influence how well the firm’s lines of business perform. For example, if its business
units are horizontally-related (as is often found in forms of global strategy), corporate
interventions often improve coordination among geographically-diverse sites while playing off the differing levels of country risk that particular business units face. If the firm’s
lines of business are vertically-related to each other, corporate interventions sometimes
enhance the effectiveness of value chain strategies by improving intelligence and coordinating throughput volumes. If the firm’s business units are related to each other with
respect to any coherent trait, corporate interventions to transfer knowledge, enhance
asset-sharing arrangements or incubate new business initiatives can create greater
corporate advantage than would be possible if each line of business competed only on
the potential of their respective industries (as would be the case in unrelated diversification strategies).
Corporate controls are used in evaluating business unit performance. Controls
can emphasize outcomes (e.g., financial results) that charge the lines of business with
attaining budget targets. Outcome-oriented controls are typically used in passive holding-company strategies that pursue only financial results. Such controls give the firm’s
lines of business the greatest operating autonomy because decision making is typically
decentralized. Because the lines of business are not required to make decisions with
their sister business units in mind, outcome controls often create duplications of facilities
and overlapping turf among lines of business that compete for the same customers. The
major benefit of controls that involve few corporate interventions is easier accountability
for evaluating a business line’s activities. Business unit managers like outcome controls
because they promote an entrepreneurial spirit and reward individual competitive successes.
Behavioral (or operating) controls consider whether decisions taken by lines of
business contribute to building or nurturing corporate resources. Headquarters interventions are more frequent and pertain more directly to decision-making when behavior
controls are used. Behavioral controls are used where managerial decisions are multidimensional and should contribute to the realization of operating synergies. Depending
on the nature of corporate interventions, behavioral controls give the firm’s lines of business the least operating autonomy because decision making is typically coordinated
with sister business units and many activities are centralized to enjoy economies of
scale (or economies of scope which are attained by sharing common platforms to reach
scale economies). Behavioral controls are typical where lines of business exploit operating synergies through shared facilities, vertical integration transactions, technology
transfers and cross-fertilization of ideas. Accountability is more difficult to assess because individual businesses may be sub-optimizing their respective strategic actions for
the sake of temporarily cross-subsidizing a sister business unit’s launch, start-up costs
or competitive warfare expenses.
Corporate controls endow headquarters with substantial power over corporate
resources because the corporate office acts as guardian of the firm’s “crown jewels” and
determines which businesses use the corporate-level resources. In its capacity as
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guardian, the corporate office controls their use to prevent value destruction due to
over-exposure, denigration of image, or other damaging activities. Depending on the
firm’s type of diversification, its organizational structure, managerial systems and decision-making processes should be designed to reinforce appropriate strategic control
processes.
DESIRABLE OUTCOMES OF CORPORATE STRATEGY
Sustainable competitive advantage is a constantly-moving outcome that can be
eroded by competitive imitation. Competitors typically chip away at reducing the distinctiveness of other firms’ strategies by making investments that erode customer willingness to pay a premium for a particular firm’s products and services. Sustainability of a
particular firm’s competitive advantage indicates the speed with which that business
unit’s advantages can be eroded by competitive imitation. To the extent that a corporate
parent’s resources are particularly inimitable, the duration of competitive advantage that
will be enjoyed before erosion occurs can be extended by using them effectively.
Operating synergies are an evolving outcome that can be eroded by managerial
systems that encourage excessive corporate intervention. The firm’s lines of business
individually pursue market share to enhance volume strategies that will yield scale
economies. Shared volumes from the joint exploitation of core products (to sell germane
end products containing core products within each business unit’s marketplace) can
yield scope economies. Accelerated information flows within the corporate family can
mitigate the speed of creative destruction that prevents lines of business from enjoying
experience curve economies. Communication advantages attained from coordination
and intelligence-sharing up and down the value chain of operations allow cooperating
lines of business to exploit vertical integration economies for the welfare of their corporate family. Managers are responsible for guiding their firm’s growth and realization of
synergies, but operating synergies must be orchestrated to make them multiply over
time. Careful integration of acquired companies can enhance synergies among related
businesses -- but only when circumstances are right and corporate controls are appropriate.
Robust resource renewal is also a diminishing outcome. Because enduring corporate advantage requires robust resource renewal capabilities, management must
support systems for nurturing, augmenting, enriching and replacing corporate resources, as needed. Because the value of corporate resources is constantly being
eroded by competitive activities, the firm must work to renew their value or must develop new ones that are more appropriate for its changing family members. Elements of
the firm’s organizational structure, managerial systems and decision-making processes
should work positively to nurture the corporate family’s current mix of valuable corporate
resources and foster activity paths appropriate for creating new corporate resources.
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SUMMARY
For whichever of the driver dimensions is under analysis -- (a) corporate resources, (b) leadership, strength and relatedness among the corporate family of businesses or (c) organizational structures, managerial systems and decision making processes [OSSP] that implement the firm’s corporate strategy – an assessment of the dimension’s contribution to corporate advantage is needed. When evaluating driver strategy dimensions, it is useful also to consider whether a particular driver dimension interacts favorably with moderating drivers to enhance the desirable outcomes that lead to
corporate advantage. (For example, an OSSP that enhances use of the firm's corporate
resources will enhance resource renewal and the creation of appropriate new ones.
Businesses backed by attractive corporate resources will enjoy stronger competitive
advantages in their respective markets. An OSSP that enhances resource sharing between and rotations of personnel among diverse businesses can foster positive synergies.) The outcomes influenced by driver and moderating dimensions create corporate
advantage over other firms.
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