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This video aims to explain some basic concepts of what corporate strategy entails. How
it differs from business strategy. And in which ways corporate strategy contributes in
organisational success. The field of knows many sub-disciplines to specific study areas.
The main areas of attention are:
• Business strategy: how business compete in their respective markets and
industries. It involves what businesses can do to become better than their rivals.
• Decisions about how we compete in a business
• About creating competitive advantage
• Competitors are main rivals in the industry
• International strategy
• Corporate strategy: deal with specific and unique issues that help organisations
become more than the sum of its parts and derive more value from the business
portfolio it is composed of. Thus, look at what businesses, markets, and industries
they are active.
• Domain selection: Decisions about in which businesses we compete
• About creating corporate advantage, informed by domain selection.
Corporate advantage exists when owning a set of businesses leads to more
value and higher returns than when these businesses are not owned by one
organisation.
• Competitors are those that can assemble same portfolio, which could be other
organisations or investors that have control over the cash-flows.
Selection & Synergy
Corporate strategy acts along two mechanisms:
1. Selection mechanism - portfolio assembly - joint ownership
• Decisions about in which businesses to be active
• Decisions about which businesses to jointly own
• All those decisions lead to a portfolio of businesses that organisations
assemble.
2. Synergy mechanism - business modificaiton - joint operations
, 2. Synergy mechanism - business modificaiton - joint operations
• Decisions about inter- business activities (how to align and coordinate the
activities of its businesses)
• Decisions about which businesses to jointly operate
• Typically made to enhance the value created by each business by sharing
activities among them (technological development for all businesses to
improve performance, quality, or efficiency - lower costs through improved
volumes).
You can plot these mechanisms along the axis of a matrix.
• Left-bottom corner: separate businesses (not jointly owned, nor operated)
• Left-upper corner: if a business would bring business together under a single roof
(jointly owned, operated independently). Corporate advantage would emerge if
the company create more value from owning both (leveraging a strong brand for
both businesses)
• Right-upper corner: an investor could bring the same business with the same call/
core together. In that way the businesses would compete together with the same
strategies to the company. The corporate strategist is able to create more
advantages through synergy. The investor is not able to achieve that. This is the
case when the product of one of the businesses is adjusted to be more applicable
to the product of the other business to create a more advanced end product.
• Right-bottom corner: if the two businesses can not be owned together, they could
still be operated together (in many cases) and create synergy. This happens often in
alliances, two independent companies cooperate to provide for advanced
products. A strategist is still able to negotiate in an alliance, but is not able to
decide for the other company.
,Traditionally, corporate strategy functioned mainly as a selection mechanism. It involved
the decisions where to compete. Nowadays, corporate strategy is much more and
increasingly viewed as a synergy mechanism. A quest for synergy. A large portion of the
reason for this is that corporate strategists have many more opportunities to create value
through joint operation, through synergy, and then through joint ownership.
Variance decomposition
Variance decomposition studies explain which percentage of firm performance can be
attributed to, typically, industry, business, and corporate effects.
, • Schmalensee (1985) found that 19.6% of the performance of companies could be
attributed to the industries they were operating in. The other 80.4% combined all of
the other sources of performance (including some statistical error).
• Rumelt (1991) found that only 8.3% could be attributed to industry, but 46.4% was
due to business effects, and 0.8% was explained by corporate effects.
• McGahan & Porter (1997) found that are comparable to the previous in that over
18% of performance was industry related and more than 31% was business related.
Only 4.3% was due to corporate effects.
• Chang & Singh (2000) found that corporate effects could even count for 7.6% of
the variance of performance. Business effects were the largest at 50.2% while the
industry effect were close to 16%.
• McGahan & Victer (2010) & Makino et al. (2004) added country effects.
Multinational corporates operated businesses internationally do not only
experience industry effects but also specific country effects. While both studies
suggest that country effects play a relatively small rol, they also show a comparable
pattern to the other studies.
• Karniouchina et al (2013) show that corporate effects account for more than 15% of
performance.
Over time, variance decomposition studies have shown that corporate effects vis-a-vis
business and industry effects generally have become larger in explaining performance.
Most likely, as a result of synergy driven decisions.
Collis & Montgomery (1998) echo these findings: “the way a company creates value
through the configuration and coordination of its multi-business activities” (corporate
strategy). Companies decide which businesses they control and how these business
create competitive advantage. To create synergistic value, they coordinate the resources
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