Lecture 1 © Furrer 2002-20081 Corporate Strategy Fall 2008 Lecture 1 Introduction to Corporate Strategy with an Historical Perspective Dr. Olivier Furrer

Lecture 1 © Furrer 2002-2008 1

Corporate StrategyFall 2008

Lecture 1

Introduction to Corporate Strategy

with an Historical Perspective

Dr. Olivier Furrer

Office: TvA 1-1-11, Phone: 361 30 79e-mail: [email protected]

Office Hours: only by appointment


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

2. An Historical Perspective(See Grant, 2002)

– 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


“Corporate strategy is the way a company creates value through the configuration and coordination

of its multimarket activities”

Corporate-Level Strategy

Collis and Montgomery, 1997, p. 5


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.



• 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.



• 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.


1970s: Little– Growth at any cost

– Weak rivals

– Fragmented, passive shareholders

– Ineffective boards

1980s: Increasing– Restructuring pathological

portfolios

– Takeover premiums increase

Pressure for Shareholder Value

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


Corporate-Level Strategy

What is Corporate Strategy?


- low cost- differentiation- integrated low cost/differentiation

- focused low cost- focused differentiation

How to create value for the corporation as a whole

A Diversified Company has 22 Levels of Strategy

How to create competitive advantage in each business in which the company competes

Corporate-Level Strategy (Company-wide Strategy)

Business-Level Strategy (Competitive Strategy)


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

Corporate Strategy Concerns 22 Key Fundamental Questions:


“Corporate strategy is the way a company creates value through the configuration and coordination of its multimarket activities” (Montgomery and Collis, 1997, p. 5)

Definition

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).


A Framework for Corporate Strategy

CA = ƒ (quality of elements, internal & external consistency, mutually reinforcing)

RESOURCES

VISION

GOALS & OBJECTIVES

BUSINESSES

ROLES OF CORPORATE OFFICE

STRUCTURE SYSTEMS PROCESSES

CORPORATE ADVANTAGE (CA)

Sou

rce:

Col

lis

and

Mon

tgom

ery

(199

7, 2

005)


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.


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.


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.

Lecture 1 © Furrer 2002-2008 16Young

Strategy and Structure Growth Pattern

MaturityAge of Organization

Size

of

Org

aniz

atio

n

Small

Large

Coordination and Control Problems

Simple Structure

Functional Structure

Multi-divisional Structure

Matrix Structure

Network Structure

Ref

.: A

dapt

ed f

rom

Gre

iner

, 197

2; C

hurc

hill

and

Lew

is, 1

983


ProductionFinance R&D AccountingSales &

MarketingHuman

Resources

Chief Executive Officer

Functional Structure


Division Division Division Division

ProductionFinance Engineering AccountingSales &

MarketingHuman

Resources

Strategic Planning

Corporate Finance

Corporate R&D

Corporate Marketing

Corporate Human

Resources

Chief Executive Officer

Multi-Divisional Structure


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).


Pattern of Diversification

Core Business

Closely related businesses

Increasingly unrelated businesses

Source: Collis and Montgomery (2005)


Firms Vary by Degree of Diversification

Single-business > 95% of revenues from a single business unit

Low Levels of Diversification

Dominant-business Between 70% and 95% of revenues from a single business unit

Related-Diversified <70% of revenues from a single business unit

Moderate to High Levels of Diversification

Businesses share product, techno-logical or distribution linkages

Unrelated-Diversified Business units not closely related

High Levels of Diversification

Ref.: Rumelt, 1974


Firms Vary by Degree of Diversification

Ref.: Rumelt, 1974

Unrelated Business

Related Business

Dominant-Unrelated

Dominant Business

Single Business

1.0 0.95 0.7 0.01.0

0.7

0.0

Specialization Ratio

Rel

ated

Rat

io

Specialization Ratio: Proportion of a firm’s revenues derived from its largest single business.

Related Ratio: Proportion of a firm’s revenues derived from its largest single group of related businesses.


The BCG Matrix

Ref: Adapted from The Boston Consulting Group, Inc., Perspectives, No. 66, “The Product Portfolio.” 1970.


Porter’s (1980) Five Forces Model of Competition

Threat of Substitute Products

Threat of New Entrants

Rivalry Among Competing Firms

in Industry

Bargaining Power of Buyers

Bargaining Power of Suppliers

Ref.: Porter, Michael (1980). Competitive Strategy. New York: The Free Press.


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.)


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.


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.


A Framework for Corporate Strategy

CA = ƒ (quality of elements, internal & external consistency, mutually reinforcing)

RESOURCES

VISION

GOALS & OBJECTIVES

BUSINESSES

ROLES OF CORPORATE OFFICE

STRUCTURE SYSTEMS PROCESSES

CORPORATE ADVANTAGE (CA)

Sou

rce:

Col

lis

and

Mon

tgom

ery

(199

7, 2

005)


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?

Documents

Lecture 1 © Furrer 2002-20081 Corporate Strategy Fall 2008 Lecture 1 Introduction to Corporate Strategy with an Historical Perspective Dr. Olivier Furrer