c

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c
Corporate Strategy is the pattern of major objectives, purposes or goals &
essential policies or plans for achieving those goals, stated in such a way as to
define what business the company is in, is to be in & the kind of company it is or
is to be.
c
corporate-level strategy, is concerned with the overall scope of an organisation
and how value will be added to the different parts (business units) of the
organisation.This could include issues of geographical coverage, diversity of
products/services or business units, and how resources are to be allocated
between the different parts of the organisation. For Dell the push into consumer
electronics was an important corporate decision because it would affect the
whole company.In general, corporate-level strategy is also likely to be
concerned with the expectations of owners ʹ the shareholders and the stock
market. It may well take form in an explicit or implicit statement of ͚mission͛
that reflects such expectations. Being clear about corporate-level strategy is
important: it is a {

of other strategic decisionsa

Core Areas of Corporate Strategy

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Corporate-level issues
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In this context, there are two central concerns of the corporate strategy The
first is strategic decisions about the
   
 
 As Exhibit 1
suggests, scope decisions are about the 

   

 (and the markets
for those products) and the  
  



 of the business
units in a corporate portfolio. These are important decisions because they raise
significant implications about how such scope and diversity are to be managed
to create value above and beyond that created at the business unit level. This,
then, is the second central concern of the corporate strategy: how is  
(or destroyed)  

as distinct from the business level in
organisations? This requires an understanding of the different 
 


the corporate level might play and how it might seek to   

of
interests.
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RO
CT INTERNATIONAL

IVERSITY
IVERSITY

CORORATE MANAGING THE

ARENTING ROLES ORTFOLIO

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Exhibit 2 represents a simplified multi-business company structure. It shows a
number of business units grouped within divisions and above those a corporate
centre.
Above the business units, managers are usually providing services and, quite
likely, strategic guidance to business units as well as acting to control or
coordinate business-level activities. They will also take decisions that may affect
many business units; for example, which to invest in and which not to invest in;
and sometimes which to divest. In all these roles they are, at least in theory,
seeking to add value to that created at the business-unit level.

ccc c c

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cIn these levels of management above that of business units are referred to as
the corporate parent. So, a corporate centre or the divisions within a
corporation which look after several business units act in a corporate parenting
role. Of course it could be that there are parts of the corporate centre that do
interact with customers: a central call centre or a customer service department
in a commercial organisation, for exampleacc
c
A.PRODUCT/MARKET DIVERSITY
c

cc
Diversification is typically defined as a strategy which takes the organisation
into new markets and products or services and therefore increases the diversity
that a corporate parent must oversee.Diversification might be undertaken for a
variety of reasons, some more valuecreating than others. Three potentially
value-creating reasons for diversification are as follows.
First, there may be efficiency gains from applying the organisation͛s existing
resources or capabilities to new markets and products or services These are
often described as 

, by contrast to economies of scale. If an
organisation has under-utilised resources or capabilities that it cannot
effectively close or dispose of to other potential users, it can make sense to use
these resources or capabilities by diversification into a new activity. In other
words, there are economies to be gained by extending the scope of the
organisation͛s activities.
For example, many universities have large resources in terms of halls of
residence,which they must have for their students but which are under-utilised
out of term-time. These halls of residence are more efficiently used if the
universities expand the scope of their activities into conferencing and tourism
during vacation periods.
Second, there may also be gains from applying 

   
 
  { 
to new markets and products and services. At the corporate parent
level, managers may develop a capability to manage a range of different
products and services which, although they do not share resources at the
operational unit level, do draw on similar kinds of overall corporate managerial
skills.
Third, having a diverse range of products or services can 


 
.
With a diverse range of products or services, an organisation can afford to
crosssubsidise one product from the surpluses earned by another, in a way that
competitors may not be able to. This can give an organisation a competitive
advantage for the subsidised product, and the long-run effect may be to drive
out other competitors, leaving the organisation with a monopoly from which
good profits can then be earned. While profitable for the organisation, this may
be less good for consumers.

Related diversification
Related diversification can be defined as strategy development beyond current
products and markets, but within the capabilities or value network of the
organisation.
For example, Procter and Gamble and Unilever are diversified corporations, but
virtually all of their interests are in fast-moving consumer goods distributed to
retailers, and increasingly in building global brands in that arena. They therefore
benefit from capabilities in research and development,consumer marketing,
building relationships with powerful retailers and global brand development.
Drawing on the idea of the value network, one way of thinking of different
forms of related diversification are:
èc Vertical integration describes either backward or forward integration into
adjacent activities in the value network.
Ãc Backward integration refers to development into activities concerned
with the inputs into the company͛s current business (i.e. they are
further back in the value system). For example, raw materials,
machinery and labour are all important inputs into a manufacturing
company, so the acquisition by a car manufacturer of a component
manufacturer would be related diversification through backward
integration.
Ãc Forward integration refers to development into activities which are
concerned with a company͛s outputs (i.e. are further forward in the
value system), such as transport,distribution, repairs and servicing.
èc ]orizontal integration is development into activities which are
complementary to present activities. For example, many organisations have
realised that there areopportunities in other markets for the exploitation of
the organisation͛s strategic capabilities ʹ perhaps to displace the current
providers as a new entrant.

Unrelated diversification
If related diversification involves development within current capabilities or
the current value system, unrelated diversification is the development of
products or services beyond the current capabilities or value network.
Unrelated diversification is often described as a ͚conglomerate strategy͛.
Because there are no obvious economies of scope between the different
businesses, but there is an obvious cost of the headquarters, unrelated
diversified companies͛ share prices often suffer from what is called the
͚conglomerate discount͛ ʹ in other words, a lower valuation than the
individual constituent businesses would have if standalone.

Diversification and performance

Because most large corporations today are diversified, but also because
diversification can sometimes be in management͛s self-interest, many scholars
and policy-makers have been concerned to establish whether diversified
companies really perform better than undiversified companies. After all, it
would be deeply troubling if large corporations were diversifying simply to
spread risk for managers,to save managerial jobs in declining businesses or to
preserve the image of growth, as in the case of Enron.
]owever, these are the averages, and some scholars have found exceptions:
èc Conglomerates in developing economies often perform well, indicating the
capacity for internal markets for labour and capital to do better than
external markets.
èc Conglomerates have tended to perform better since the early 1970s,
indicating the potential for improving managerial skills in managing
unrelated diversification.

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High

Performance

Low Undiversified Related Unrelated

Limited extensively
Diversification diversified

B.INTERNATIONAL DIVERSITY AND INTERNATIONAL STRATEGY

The reasons why organisations might pursue a strategy of international
diversification are reviewed. Then two dimensions of international diversity are
discussed. The first relates to the markets in which an organisationoffers its
products and/or services. The second relates to the location of an organisation͛s
value-adding activities which occurs, for instance, when an organisation sets up
manufacturing operations in a foreign country. The implication in terms of the
resulting generic types of international strategy are then discussed as well as
the implications for performance.
Reasons for international diversity
There are many reasons for organisations to follow a strategy of
internationalisation.
First, there may be 
 {



:
èc The { 
  

     can be seen as both cause
andconsequence of the internationalisation of individual organisations.
There is evidence of homogenisation in some markets; for example, the
international success of consumer products such as the Sony PlayStation and
the worldwide reach of sports-clothing manufacturers such as Nike and
Adidas-Solomon.
Globalisation thereby relates not only to contextual factors such as
worldwide homogenisation of consumer demand but also to the  
{ 


in which activities are tightly integrated and coordinated on
a crossnational basis and the whole world is seen as a potential area of
operation.
èc Firms acting as suppliers to industrial companies may  




when these internationalise their operations. When BMW set up a
manufacturing site in Spartanburg, South Carolina, USA, for example, it
continued purchasing transmission systems from its established German
suppliers. Similarly, it may be necessary for organisations to have a presence
in the home marketof global customers (i.e. organisations with a global reach
such as Boeing) to gain access to, or credibility with, their global divisions or
subsidiaries.
èc By expanding its markets internationally a firm can {

  
 


 . An example of such market seeking international expansion
is the French Bank BNP Paribas that accelerated the search for possible
acquisitions in the USA after considering the French banking sector close to
consolidation.
èc There may also be opportunities to  

{ 

 

 

. For example:
ʹ The exploitation of 

 
. The success of US-based fast food
chains of the 1990s in particular largely exploited the general popularity of
American culture at that time and French firms have cashed in on homebased
cultural specifics associated with French cuisine, wines and perfumes.
ʹ 



allow firms to take advantage, for example, of tax
differentials.
ʹ It is not always the case that global reach makes sense. Exploiting

 


can help at times. Telephone company Cable
and Wireless has focused on exploiting regional differences and regional
specificity in smaller countries around the world.

Strategies of internationalisation may also be pursued to build on and 

  

  { 
:
èc By internationalising companies are able  {
  
   
 
soas to  

   { 
. For example, the American online
retailer Amazon.com and coffee retailer Starbucks were able rapidly to gain
strong competitive positions in countries such as the United Kingdom by
leveraging their existing strategic capabilities in this new market.
èc The  
  
       
 allows an organisation to
access and develop resources and capabilities in ways not possible in its
͚home͛ country thereby enhancing its competitive advantage and
competitive position. In order to improve its cost efficiency General Electric,
for example,employs a workforce of more than 11,000 in India who conduct
back-office activities such as analysing credit risks and analysing insurance
claims, for services provided in other countries around the globe. Companies
may also seek to   
{
by entering markets that are
strategically important as a source of industry innovation ʹ for example, the
USA for computer software, Germany for industrial control equipment, or
the UK for popular music.
There may also be {
in strategies of internationalisation:
èc International diversification allows firms to reap 
 
  by
expanding the size of the market they serveThe opportunity for exploiting
economies of scale are likely to be highest in markets characterised by cross-
nationally 
 



 and needs. In such markets
products can be developed and produced in centralised manufacturing
operations without need for substantial adaptation to local demand.
èc V {
  

 


 

: for example, in the automobile
industry, the presence of Toyota in all three of the major ͚arenas͛ (North
America,Europe and Asia Pacific) allows it to balance reduced sales in one
arena due to stagnating economic conditions by sales in an arena with more
positive economic growth rates. And the recovery in the Asian markets in the
early years of this century allowed firms such as Canon, Sony and Matsushita
 Electric to expand production of mobile phones, digital cameras and flat-
screen televisions despite continued stagnation in Europe.

Market selection and entry

The process of market entry requires an organisation to select attractive and
profitable national markets and to identify the appropriate entry mode.
Accordingly, countries can initially be compared along the dimensions identified
in the PESTEL framework before the industry- and market-specific conditions
are evaluated.
Some factors that require particular attention in comparing the attractiveness
of national markets are these:
èc  
 
reflected in indicators such as the GDP and levels
of disposable income which help in the estimation of the potential size of the
market. Companies must also be aware of the stability of a country͛s
currency which may affect its income stream.
èc The    
  may create significant opportunities for
organisations. For example, Scottish Enterprise provided a subsidy in order
to attract the 2003 MTV music awards to the Scottish capital Edinburgh,
while political and regulatory changes can create opportunities for
international expansion as with Deutsche Post. The 


 
of national
markets will also be an important factor in assessing the attractiveness of
national markets for entry, in particular:
ʹ 



  


 
;
availability of necessary  



such as appropriately skilled labour;
ʹ
  
 {



 
: a key factor in deciding between
exporting and local production. The higher these barriers are, the more
attractive local production will be.
èc The similarity of  


 
 

 

with the organisation͛s
home country can provide an indicator of any changes to established
products,processes and procedures which may be required.
èc The extent of      


 that an organisation might face when
doing business in the country. In broad terms political risk relates to the
effect that political and social events or conditions may have on the
profitability of a firm͛s activities and the security of its investments. Key
types of political risks include:
ʹ V



 arise from the policies and decisions of host
governments,including changes in tax laws and restrictions on expatriate
employment and, in increasingly rare instances, from the expropriation of an
organisation͛s investments.
ʹ Notably, risks can arise not only from governmental intervention but also
from the absence of effective regulation and control. For example,Microsoft has
been engaged in an ongoing effort to ensure the 
    
    


 in the face of product piracy in China, while the lack of consistent
legislation and effective law enforcement has led to serious contractual and
financial problems for Canadian oil exploration companies in Russia. Similarly,


  remains a serious problem in a number of countries, with often
negative effects on direct foreign investment.
ʹ  
  


are linked to developments in the international political
economy and include the effects of economic sanctions. For example, US
strategic interests have had an important effect on the construction and routing
of oil pipelines in the Caspian region.
ʹ V
 


to employees arising from civil unrest, violent crime and the
threat of kidnapping are of concern to organisations operating in countries
as diverse as South Africa, Russia and the Yemen.
Once a particular national market has been selected for entry, an organisation
needs to choose which, if any, value-adding activities are to be located in that
market. Entry modes differ in the degree of resource commitment to a
particular market and the extent to which an organisation is operationally
involved in a particular location. The key entry mode types are: exporting,
contractual arrangement through licensing and franchising, joint ventures and
alliances and foreign direct investment which may involve the acquisition of
established companies and ͚greenfield͛ investments, the development of
facilities ͚from scratch͛.

C. VALUE CREATION AND T]E CORPORATE PARENT

In one major multinational corporation the Finance Director claimed that no

business within its portfolio, having been divested, had not done better on its
own or with another corporate parent. ]is point was that the value-adding
activities of the corporate parent should not be taken for granted. In the
absence of clarity about how it adds value to its business units, it is in danger of
merely being a cost to them and therefore reducing or destroying the value
created by them. It is the role of any corporate parent to ensure it does add
value rather than destroy it.
Indeed how corporate parents create value is central not only to the
performance of companies but also to their survival. Investors and potential
investors are continually seeking ways to achieve better returns. In so doing
they make choices between one corporation and another on the basis of many
of the issues discussed in this chapter. In this sense competition takes place
between corporate parents for the right to own businesses.
Value-adding and value-destroying activities of corporate parents.
There are those who argue that corporate parents should, indeed, be able to
add value and there are those who argue that generally they do not. These
differing views are now summarised.
The value-adding activities
Being clear about this is important for three main reasons
èc Ô
: because in the absence of such clarity it is likely that the corporate
parent will undertake activities and bear costs that have nothing to do with
adding value to the business units, and are therefore just costs which
diminish value.
èc 
    
 


: because corporate managers need to
make clear to stakeholders what the corporation as a whole is about. In the
absence of doing so, investors (and this might be the government for public
sector organisations)can become confused, for example, about why certain
businesses are within a portfolio, or how a corporate parent might add value
to them and their judgement will affect share price or investment decisions.
èc Clarity to business units: internally, if business unit managers are not be
able to make sense of what their corporate parent is there for, they
inevitably feel as though the corporate centre is either little more than a cost
burden, or that corporate executives lack clarity of direction. In either case
they are likely to become demotivated. They will also wish to know if their
business is seen as central to corporate aspirations or not. If they are not
clear, it is unlikely that they will manage the business in ways to enhance
the overall aspirations of the corporation. Indeed, strategic decisions at the
business level could run counter to corporate strategy.

A second role is that of  
 within business units to improve

performance or to develop business unit strategy. For example:
èc by regularly monitoring the 

  of business units and their
senior executives against the standards they have been set;
 èc by taking action to 
{


 

 , for example
by replacing managers, selling off businesses or ensuring turnaround of
poorly performing divisions or businesses;
èc actively seeking to     

 { 
 of the
business unit. This might, for example, include helping to internationalise
a traditionally domestic business;
èc   
of people and managers in business units;
èc helping  

  { 
of business units;
èc achieving


 across business units and encouraging  {

and 
  across business units which could result in products or
services which a single unit could not deliver.

Third, the corporate parent may be able to offer 



 




to help business units such as:
èc 
 , particularly during the early days of new ventures.
èc V    
 from resource sharing, particularly in the use of
infrastructure,support services and other overhead items.
èc



{   
    { 
 that can be used across business
units. In a multinational corporation such as Shell or Unilever this will
include moving executives from business unit to business unit across the
world to gain experience of different international markets and
operations. The corporate parent may also have 

of its own that
can be helpful to business units.
èc Providing 

and


not available within smaller units
èc m 
  

 



 that might help foster
innovation and learning. Centrally organised knowledge management
systems have become commonplace in large corporations.
èc ·
, for example in access to markets or in purchasing, by
combining the purchasing power of the business units.
èc Skills in {

 external linkages or collaborations and accessing
 
  

.

D.MANAGING T]E CORPORATE PORTFOLIO

It should be seen that each of these rationales has implications in terms of the
number and nature of the business units within such a group; or vice versa, the
number and nature of business units will have implications for the rationale the
parent might adopt. To take two examples: a parent acting as a portfolio
manager might be able to manage a very diverse set of businesses with no
particular similarities between them, largely by setting financial targets,
whereas a synergy manager needs to understand the businesses well and can
therefore probably only cope with a limited number of related-type businesses.
The converse of this argument is also important; the extent of diversity of a
corporate portfolio should inform the role played by the corporate parent. For
example, it would be foolish for managers of a highly diverse portfolio to try to
adopt the role of a synergy manager,unless of course they chose to change the
portfolio radically.
Each tool gives more or less focus on one of three criteria:
èc the {  of the portfolio, e.g. in relation to its markets and the needs
of the corporation; the
 

of the business units in the portfolio
in terms of how profitable they are or are likely to be and how fast they
are growing; and
èc the degree of ͚ ͛ that the business units have with each other in terms of
potential synergies or the extent to which the corporate parent will be good at
looking after them.

The growth share (or BCG) matrix

One of the most common and long-standing ways of conceiving of the balance
of a portfolio of businesses is in terms of the relationship between market share
and market growth identified by the Boston Consulting Group (BCG). The terms
typically used to refer to the types of businesses in such a portfolio.
èc A star is a business unit which has a high market share in a growing
market. The business unit may be spending heavily to gain that share, but
experience curve benefits should mean that costs are reducing over time
and, it is to be hoped, at a rate faster than that of competitors.
èc A question mark (or problem child) is a business unit in a growing
market, but without a high market share. It may be necessary to spend
heavily to increase market share, but if so, it is unlikely that the business
unit is achieving sufficient cost reduction benefits to offset such
investments
èc A cash cow is a business unit with a high market share in a mature
market.Because growth is low and market conditions are more stable, the
need for heavy marketing investment is less. But high relative market
 share means that the business unit should be able to maintain unit cost
levels below those of competitors. The cash cow should then be a cash
provider (e.g. to finance stars or question marks).
èc Dogs are business units with a low share in static or declining markets
and are thus the worst of all combinations. They may be a cash drain and
use up a disproportionate amount of company time and resources
Balance in a public sector portfolio.
The different services offered by public sector organisations can also be
considered in terms of the balance of a portfolio,the key judgements are
concerned with (a) the organisation͛s ͚ability to serve effectively͛ by providing
perceived value for money with the resources which are available to it, and (b)
the political attractiveness of its services in terms of the extent to which it can
gain stakeholder and public support for funding. Not all serviceswill be public
sector ͚stars͛ in this respect. Some may be services required politically
or because of public need, but for which there are limited resources ʹ the
͚political hot box͛. In many respects this is where the National ]ealth Service
in the UK finds itself. Similarly ʹ and a point often forgotten by public sector
managers when reviewing their portfolio of activities ʹ a provider of public
services may be mandated to provide some statutory services and find
resources ͚locked up͛ in so doing. There are still other services that a public
sector provider may have undertaken effectively for many years but for which
there is little popular public support or funding attractiveness: these are
referred to as the ͚golden fleece͛ in the matrix. ͚Back drawer issues͛ are the
equivalent of dogs in the BCG matrix; they have neither political (or public)
support, nor sufficient resources.
In a review of the public sector portfolio, they are the sorts of service which, if
possible, should be dropped.

Roles in an international portfolio

èc ͚Strategic leaders͛ are subsidiaries that not only hold valuable resources
and capabilities but are also located in countries that are crucial for
competitive success because of, for example, the size of the local market
or the accessibility of key technologies.
èc ͚Contributors͛, subsidiaries with valuable internal resources but located
in countries of lesser strategic significance, can nevertheless play key
 roles in a multinational organisation͛s competitive success. The Australian
subsidiary of the Swedish telecommunications firm Ericsson played such a
role in development of systems important for the firm͛s development.
èc Though not contributing substantially to the enhancement of a firm͛s
competitive advantage, ͚implementers͛are important in the sense that
they help generate vital financial resources.
èc ͚Black holes͛ are subsidiaries located in countries that are crucial for
competitive success but with low-level resources or capabilities. This is a
position many subsidiaries of American and European firms found
themselves in over long periods in Japan. Possibilities for overcoming this
unattractive position include the development of alliances and the
selective and targeted development of key resources and capabilities.

Why have corporate strategies anyway?

The notion of corporate strategy assumes that

corporations own and control businesses in a range of
markets or countries. But ͚transaction cost͛ economist
Oliver Williamson believes that such diversified
corporations should only exist in the presence of
͚market failures͛.1 If markets worked well, there would
be no need for business units to be coordinated
through managerial hierarchies. Business units could
be independent, coordinating where necessary simply
by transacting in the marketplace. The ͚invisible hand͛
of the market could replace the ͚visible hand͛ of
managers at corporate headquarters. There would
be no ͚corporate strategy͛.
Market failures favouring the corporation occur for
two reasons:
l ͚u
  ͛: people cannot know
everything that is going on in the market, so
perfectly rational market transactions are
impossible. Information, for instance on quality
and costs, can sometimes be better inside the
corporate fold.
l ͚Ê

͛: independent businesses trading
between each other may behave opportunistically,
for example by cheating on delivery or quality
promises. Cheating can sometimes be policed and
punished more easily within a corporate hierarchy