Corporate Strategy
Fall 2008
Lecture 1
Introduction to Corporate Strategy
with an Historical Perspective
Dr. Olivier Furrer
Office: TvA 1-1-11, Phone: 361 30 79
e-mail: o.furrer@fm.ru.nl
Office Hours: only by appointment
Lecture 1 © Furrer 2002-2008
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Discussion Themes
1. Introduction
(See Collis and Montgomery, 1997, Ch. 1)
– The Need for Corporate Strategy
– What is Corporate Strategy?
– A Framework for Corporate Strategy
3. Corporate Strategy Analytical Tools
(See Collis and Montgomery, 1997, A1)
– Organization Structure and
Diversification
– Portfolio Planning
– Value-Based Strategy
– Generic Corporate Strategies
– Resource-Based View
Lecture 1 © Furrer 2002-2008
2. An Historical Perspective
(See Grant, 2002)
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–
–
–
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Origins of the Modern Corporation
The Multidivisional Corporation
Postwar Patterns of Diversification
The Conglomerates
Downsizing, Outsourcing, and
Restructuring
– Diversification in Emerging-Market
Economies
– Beyond the Trends
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Corporate-Level Strategy
“Corporate strategy is the way a company creates
value through the configuration and coordination
of its multimarket activities”
Collis and Montgomery, 1997, p. 5
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The Need for Corporate Strategy
• Most industrial activity in developed countries is carried out by large
corporations which compete in more than one market.
• In the United States, 60% of assets are controlled by multibusiness
companies (Villalonga, 2003). In Europe, the percentage is about the
same (Pedersen and Thomsen, 1997).
• On average these firms engaged in over 10 different lines of
business.
• Due to the dominant role these firms play in economic activity, it is
likely that most of you, regardless of their chosen career paths, will
at some point either work for, advise, or compete with a
multibusiness corporation.
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The Need for Corporate Strategy
• The nature of these large corporations has undergone enormous
change in the last forty years, affecting both their scope and their
structure.
• The merger and acquisition booms of the sixties and eighties
extended the scope of existing multibusiness corporations.
• More recently, capital market pressures forced every corporation to
reassess its portfolio of businesses, level of overhead, and the way it
coordinates and controls its multibusiness activities.
• New forms of corporate organization, such has the LBO partnerships
of the eighties, provoked a debate about the efficacy of corporate
hierarchies. In addition, new institutional arrangements, such as joint
ventures, alliances and franchising have come to prominence.
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The Need for Corporate Strategy
• In response, normative prescriptions for corporate strategy have been
varied as the challenges multibusiness corporations have faced.
• From an emphasis on financial performances and EPS growth in the
sixties, through managing the corporation as a ‘portfolio’ of SBU’s,
and searching for ‘synergy’ between business units in the seventies;
to the emphasis on ‘free cash flow’ and its corollary ‘shareholder
value analysis’ in the eighties, recommendations, such as the strident
call to break up corporate organizations or ‘stick to the knitting,’
have pulled CEO’s in many conflicting directions.
• Not surprisingly, only a few corporations have made through the last
forty years intact. Of the Fortune 500 in 1950, only 262 firms were
still on the list in 1980.
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Pressure for Shareholder Value
1970s: Little
– Growth at any cost
– Weak rivals
– Fragmented, passive
shareholders
– Ineffective boards
1980s: Increasing
– Restructuring pathological
portfolios
– Takeover premiums increase
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1990s: Intense
–
–
–
–
–
Active shareholders
Active boards
Global product markets
Global capital markets
2000s: Rethinking
– Accounting scandals
– Corporate governance
(Sarbanes-Oxley Act)
– Global markets retreat
Ref.: Collis and Montgomery, 2005
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Corporate-Level Strategy
What is Corporate Strategy?
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A Diversified Company has 2
Levels of Strategy
Business-Level Strategy
(Competitive Strategy)
How to create competitive advantage in each business in which the
company competes
- low cost
- differentiation
- integrated low cost/differentiation
Corporate-Level Strategy
- focused low cost
- focused differentiation
(Company-wide Strategy)
How to create value for the corporation as a whole
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Corporate Strategy Concerns 2
Key Fundamental Questions:
What businesses should the corporation be in?
How should the corporate office manage the array of
business units?
Corporate Strategy is what makes the corporate whole add up
to more than the sum of it business unit parts
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Definition
“Corporate strategy is the way a company creates value
through the configuration and coordination of its multimarket
activities” (Montgomery and Collis, 1997, p. 5)
This definition has 3 important aspects:
• Value Creation as the ultimate purpose of corporate strategy.
• The focus on the multimarket scope of the corporation
(Configuration), including its product, geographic, and vertical
boundaries.
• The emphasis on how the firm manages the activities and
businesses that lie within the corporate hierarchy (Coordination).
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VISION
GOALS & OBJECTIVES
ROLES OF CORPORATE OFFICE
STRUCTURE
SYSTEMS
PROCESSES
Source: Collis and Montgomery (1997, 2005)
A Framework for Corporate Strategy
CORPORATE ADVANTAGE (CA)
CA = ƒ (quality of elements, internal & external consistency, mutually reinforcing)
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Corporate Strategy:
An Historical Perspective
•
•
•
•
•
•
•
Origins of the Modern Corporation
The Multidivisional Corporation
Postwar Patterns of Diversification
The Conglomerates
Downsizing, Outsourcing, and Restructuring
Diversification in Emerging-Market Economies
Beyond the Trends
Grant, R.M. (2002), “Corporate Strategy: Managing Scope and Strategy Content,” In Handbook of Strategy
and Management, A. Pettigrew, H. Thomas, and R. Whittington (eds.), London, Sage, pp. 72-97.
Lecture 1 © Furrer 2002-2008
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Origin of the Modern Corporation
(Chandler, 1977)
• The company is a recent phenomenon. Even where economies of
scale encouraged larger production units, the limited size of local
markets constrained the growth of individual firms.
• With the increasing size of firms, management developed as a
specialized and professional activity. The modern corporations
utilized administrative hierarchies and standardized systems of
decision-making, financial control, and information management.
These structures enabled companies to expand the size and scope
of their activities.
• Consolidation through merger and acquisition resulted in the
appearance of the first “holding companies” during the late 19th
century. Beyond the appointment of the subsidiary boards of
directors, the parent exercised little strategic or operational
influence over the subsidiary companies.
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The Multidivisional Corporation
• The multidivisional corporation was a response to the problems
posed by increasing size and diversification both for traditional
industrial enterprises and the new holding companies.
• The innovators: DuPont de Nemours and General Motors in the
1920s created separate product divisions, each independently
responsible for operations, sales and financial performance, leaving
to the corporate head office the tasks of coordination, strategic
leadership and control. (See Chandler, 1962)
• During the next 30 years, the multidivisional structure became
increasing prevalent within the US and Europe.
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Functional
Structure
Matrix
Structure
Network
Structure
Size of Organization
Large
Simple
Structure
Multidivisional
Structure
Coordination and
Control Problems
Small
Young
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Age of Organization
Maturity
Ref.: Adapted from Greiner, 1972; Churchill and Lewis, 1983
Strategy and Structure
Growth Pattern
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Functional Structure
Chief Executive Officer
Finance
Production
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R&D
Accounting
Sales &
Marketing
Human
Resources
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Multi-Divisional Structure
Chief Executive Officer
Corporate
R&D
Division
Finance
Corporate
Finance
Strategic
Planning
Division
Production
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Engineering
Corporate
Marketing
Corporate
Human
Resources
Division
Accounting
Sales &
Marketing
Division
Human
Resources
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Postwar Patterns of Diversification
• Not only were companies becoming more diversified, but their
diversification strategies progressed from closely-related to more
loosely-related businesses, and then towards unrelated businesses
(See Wrigley, 1970; Rumelt, 1974).
• Tools of strategic analysis developed in the 1970s and 1980s
permitted standardized yet sophisticated approaches to
diversification and resource allocation decisions. These tools
included business portfolio analysis (Haspeslaugh, 1983), industry
analysis (Porter, 1980), and PIMS models (Buzzel and Gale, 1987).
• However, the rise of “professional management” had other
implications. The separation of ownership from control encouraged
salaried top managers to pursue diversification as a means of growth,
often at the expense of profitability (Marris, 1964, cf. Agency
theory: Jensen and Meckling, 1976, 1986).
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Pattern of Diversification
Core Business
Closely related businesses
Increasingly unrelated
businesses
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Source: Collis and Montgomery (2005)
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Firms Vary by Degree of
Diversification
Low Levels of Diversification
> 95% of revenues from a single
Single-business
business unit
Dominant-business
Between 70% and 95% of revenues from
a single business unit
Moderate to High Levels of Diversification
<70% of revenues from a single
Related-Diversified
business unit
Businesses share product, techno-logical
or distribution linkages
High Levels of Diversification
Business units not closely related
Unrelated-Diversified
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Ref.: Rumelt, 1974 21
Firms Vary by Degree of
Diversification
0.0
Related Ratio: Proportion of a firm’s revenues derived
from its largest single group of related businesses.
Unrelated
Business
0.7
DominantUnrelated
Single
Business
1.0
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Related Ratio
Specialization Ratio: Proportion of a firm’s revenues
derived from its largest single business.
Related
Business
Dominant
Business
0.95
1.0
0.0
0.7
Specialization Ratio
Ref.: Rumelt, 1974 22
The BCG Matrix
Lecture 1 © Furrer 2002-2008
Ref: Adapted from The Boston Consulting Group, Inc.,
Perspectives, No. 66, “The Product Portfolio.” 1970.
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Porter’s (1980) Five Forces
Model of Competition
Threat of
New Entrants
Bargaining
Power of
Suppliers
Rivalry Among
Competing Firms
in Industry
Threat of
Substitute
Products
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Bargaining
Power of
Buyers
Ref.: Porter, Michael (1980). Competitive
Strategy. New York: The Free Press.
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The Conglomerates
• By the early 1970s, the emergence of a new type of company with
no “core business” and no obvious linkages between their many
businesses represented the pinnacle of the diversification trend.
• The new conglomerates were of particular interest to finance
scholars armed with the tools of modern portfolio theory (Sharpe,
1964, Lintner, 1965). If individual investor could spread risk
through diversifying their portfolios of securities, what
advantages could the conglomerate firm offer?
• Studies of conglomerates have shown that their risk-adjusted
returns to shareholders are typically no better than those offered by
mutual funds or by matched portfolios of specialized companies
(Levy and Sarnat, 1970; Weston et al., 1972; etc.)
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Downsizing, Outsourcing, and
Restructuring
• The dominant trends of the last two decades of the 20th century were
“downsizing” and “refocusing” as large industrial companies
reduced both their product scope through focusing on their core
businesses and their vertical scope through outsourcing.
International expansion has continued however.
• These changes coincided with a more turbulent environment: the oil
shock of 1973-74, the floating of exchange rates in 1972, the
invention of the integrated circuit, and the upsurge of international
competition.
• The implication seems to be that during periods of market
turbulence, the effectiveness of firms’ internal administrative
mechanisms is reduced (Cibin and Grant, 1996). In these
circumstances, smaller, more focused firms operating close to
their markets can be more efficient and effective.
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Diversification in Emerging-Market
Economies
• This refocusing trend is less evident in Asia, Eastern Europe and
other emerging market economies than it is in the advanced market
economies of North America and Western Europe.
• A handful of chaebols continue to dominate the South Korean
business sector, while in Southeast Asia sprawling conglomerates
have even increased in prominence.
• These geographical differences may be partly explained by lack of
efficient, well-developed capital markets outside the US and
Western Europe, thus offering internalization advantages to
diversified companies (Khanna and Palepu, 1997).
• Despite the common trends towards diversification and
divisionalization across countries identified in the early 1970s,
substantial international differences remain in corporate
strategies of large companies.
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VISION
GOALS & OBJECTIVES
ROLES OF CORPORATE OFFICE
STRUCTURE
SYSTEMS
PROCESSES
Source: Collis and Montgomery (1997, 2005)
A Framework for Corporate Strategy
CORPORATE ADVANTAGE (CA)
CA = ƒ (quality of elements, internal & external consistency, mutually reinforcing)
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Next Session: Text Discussion 1
Justification for the Multibusiness Firm
– Presentations: Williamson (1991); Teece (1982);
Montgomery and Hariharan (1991); Jensen (1989).
– Write: One-page write-up by group.
– Key Questions:
• What is corporate strategy?
• What are the rationales for the multibusiness firms?
• What are the disadvantages for a corporation to be in
multiple businesses?
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