Business 42001- Knez

Business 42001- Knez

Competitive Strategy

Lecture 5: - Introduction to Corporate Strategy

1 University of Chicago/Knez

Corporate Strategy Vs. Business Unit Strategy

Corporate Strategy Corporate Resources

Business Unit A

Industry A

Business Unit Strategy

Business Unit B

Business Unit C

Industry B

Industry C

Business Unit Strategy

Business Unit Strategy 2

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Corporate Strategy A CORPORATE STRATEGY is a plan for creating value through the ownership and management of a related set of businesses. It defines what businesses a company should be in and how the activities and resources of these businesses should be coordinated to maximize shareholder value. Traditional corporate level strategy issues include:  Financial Performance What is the current and future financial performance of each business unit? What impact is their performance having on overall shareholder value?  Value Creation What corporate-wide resources and capabilities are required to create shareholder value? Is there coherence between the firm’s lines of business and these distinctive resources and capabilities?  Alignment Are the strategic plans and operating structures of the individual businesses consistent with corporate level objective? 3 University of Chicago/Knez

Corporate Value Creation - 3 Dimensions 

Shareholder Value creation for the multi-business corporation occurs when the value of the whole is greater than the sum of the parts.



Scope economies - the ability to spread fixed costs across multiple business activities, are the primary source of economic value created at the corporate level.



There are three fundamental ingredients to corporate level value creation: Businesses: The set of industries and markets the company competes in and the business strategies adopted in each of these markets. Resources and Capabilities: the set of tangible and intangible organizational assets that both support competitive strategies at the business unit level, and can be transferred across business units under the corporate umbrella. These organizational assets are the basis of the scope economies (or synergies) underlying the corporate strategy. Coordination and Control: The actually creation of value requires the appropriate corporate structure, systems, and processes to coordinate and control the these corporate resources and capabilities across the corporate entity.

*See Collis & Montgomery: Creating Corporate Advantage University of Chicago/Knez

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Horizontal Integration: Driving Factors  The primary factors driving horizontal integration are tangible and intangible Scope Economies: the cost of producing and selling multiple products together is lower than the cost of producing and selling the same quantity of goods individually.  Tangible Scope Economies are usually generated by spreading fixed costs across multiple activities such as:
production, marketing, purchasing, R&D, and distribution.  Intangible Scope Economies are usually generated by sharing of “knowhow” across distinct business units (or groups of business units) such as:
a certain type of distinctive expertise in a functional area (e.g. marketing, product management, manufacturing, supply chain)
a more broadly defined (process-based) capability.

*See chapter 2 of textbook for the underlying economics of scope economies **In the Collis & Montgomery article Creating Corporate Advantage, they use the terms private versus public resources instead of tangible versus intangible, respectively. 5 University of Chicago/Knez

Tangible Scope Economies Create Tradeoffs

 Scope Economies and Standardization

– Generating tangible scope economies requires that multiple activities are performed in a (relatively) standardized way. Standardization is required when a single, large fixed investment is spread across multiple activities.  Global versus Local Optimization

– The standardization required to generate the scope economies creates a tradeoff - the optimal design of an activity at the business unit level (local) may be inconsistent with the optimal design required to exploit scope economies across business units (global).

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Case Questions - General Electric Case 5: General Electric Healthcare, 2006 Case Preparation Questions: 1. Using the Collis – Montgomery framework, characterize GE’s strategy for creating a corporate advantage in the global medical products market. 2. What is the strategic rationale for buying Amersham? What are the critical assumptions that underlie this strategic rationale? Case Write-Up Questions: 1. How does GEMS achieve synergies (tangible and intangible scope economies) through its Global Product Company strategy? (40%) 2. What are some tradeoffs they face in generating the above synergies? (20%) 3. How is GE intending to create value through its acquisition of Amersham? (40%) 7 University of Chicago/Knez

Case Questions: Disney 

Case: The Walt Disney Company: The Entertainment King

Case Preparation Questions 1. 2. 3.

What do you think were the key success factors for Disney during the Walt Disney years? How has the underlying logic of Disney’s corporate strategy changed during the Eisner era? What was the “simplest” step Eisner took to create significant shareholder value?

Case Write-up Questions: Consider the Collis & Montgomery corporate advantage framework (as outline on page 73 of the HBR article Creating Corporate Advantage). 1. What are the critical resources that are the basis for Disney’s corporate strategy? (40%) 2. How do the critical resources you identified above determine the set of businesses they are in? Are there any businesses that do not fit this formula? (30%) 3. What are the important coordination and control mechanisms used by Disney to optimize the value created from their critical resources? ((30%)

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