Scope of the Firm

Corporate Strategy
Creating Corporate Advantages
Defining Corporate Strategy
Corporate Strategy is the way a company creates
value through the configuration and coordination of
its multi-market activities
The definition has three important aspects:
– Value Creation - the generation of superior financial
performance (rents) from multi-market activities that create
corporate advantages
– Configuration - the multi-market scope of the corporation
(product/market diversification, geographic focus, and
vertical boundaries)
– Coordination - the management of activities and
businesses that lie within the corporate hierarchy
Source: Collis and Montgomery, Corporate Strategy, 1997
Corporate Strategy 2
Goal of Corporate Strategy:
Corporate Advantage
The goal of corporate strategy is to build corporate
advantage so as to earn above normal returns
• analogous to a competitive advantage in a business unit
Three tests of the existence of corporate advantage:
• Does ownership of the business create benefit somewhere
in the corporation? (Does parentage matter?)
• Are those benefits greater than the cost of corporate
• Does the corporation create more value with the business
than any other possible corporate parent or alternative
governance structure?
Source: Collis and MOntgomergy, 1998
Corporate Strategy 3
Three Dimensions of Corporate Strategy
Business Diversification - Horizontal expansion
Vertical Integration - forward or backward expansion
Geographic Scope - geographic and/or global expansion
Corporate Strategy 4
Corporate Strategy:
Three Fundamental Issues
1. Can the corporation create economic value by
changing its scope? (Rent-generating opportunities)
Vertical integration
Geographic expansion
2. Should activities be undertaken inside the
corporation, or accessed through contracts, joint
ventures, alliances, or other institutional
arrangements? How should the corporation grow?
3. How should the corporation be structured and
managed to enhance the combined value of its
individual business units?
Corporate Strategy 5
Levels of Strategy
Business Strategy (competitive strategy)
is concerned with how a firm competes
within a particular market
Corporate strategy is concerned with
where a firm competes
Corporate Strategy 6
Levels of Strategy (cont’d)
• Business-Level Strategy (competitve strategy)
– How to create competitive advantage in each busness in
which the company competes:
• low cost leadership
• differentiation
• focus low cost/ focus differentiation
– Business (or Competitive) Strategy is concerned with the
use of resources and capabilities to create competitive
advantages in each of businesses or industries in which a
company competes
• Corporate-Level Strategy (companywide strategy)
– Corporate (or Company-wide) Strategy is the overall plan for
a multi-business unit company.
– Corporate strategy is what makes the corporate whole add
up to more than the sum of its business unit parts
Corporate Strategy 7
Premises of Corporate Strategy
Competition occurs at the business unit level
• corporations don’t compete; only their business units do
• value is created at the business unit level, it is only added at the
corporate level
• Successful corporate strategy must grow out of and reinforce competitive
Corporate Strategy inevitably adds costs and
constraints to business units
• Corporate overhead and costs of communication between HQ and SBUs
• bureaucratic costs, costs of coordination, costs of monitoring
Shareholders can readily diversify themselves
• Shareholders can diversify their own portfolios of stocks, and they can
often do it more cheaply with less risk than corporations
• Shareholders can buy shares at market prices and avoid paying large
acquisition premiums
Corporate Strategy 8
Implications from these Premises
Corporate Strategy cannot succeed unless it truly
adds value to business units:
– by providing tangible benefits that offset costs of lost
• economies of scope in operations
• economies of scale in administration and internal financing
– add value to shareholders in a way that shareholders could
not replicate by themselves
Corporate Strategy 9