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Article summary Corporate Level Strategy CLS
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This summary entails all articles of the subject Corporate Level Strategy (CLS) in order to prepare for the exam (Strategic Management, Tilburg University).
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Corporate Level Strategy articles summaryElla van de Loo
Week 1
Feldman, E. R. 2020. Corporate strategy: Past, present, and future. Strategic Management Review, 1
(1), 179-206.
How corporate structures and the managers that oversee them can add value to or destroy value in
their constituent businesses.
Corporate scope decisions (M&A, alliances and divestitures) have the potential to create or destroy
enormous amounts of shareholder value, to significantly impact operating performance and to
impose major organizational consequences on companies. However, the outcomes of corporate
strategy decisions that companies make fall far short of expectations and often fail to solve the
underlying problems that motivated them in the first place. Consequence being demand for advice.
Most business schools offer a course on M&A or corporate strategy – suggesting its importance.
Furthermore much publications are on corporate strategy.
- What is corporate strategy and how does it fit into the field of strategy?
Research is concerned with explaining what enables firms to enjoy sustainable performance
advantages over competitors.
Debate between IO-rooted (= industrial organization economics) and RBV-rooted (= resource-based
view) scholars. IO view: industry structure and firms’ positions therein are key determinants of their
relative performance. RBV view: differences in performance are driven by the idiosyncratic and
inimitable resources and capabilities that companies have at their disposal.
In a series of variance decomposition studies contradicting findings were found. IO scholars tended to
find evidence of a more significant industry effect than a business unit effect on firm performance.
RBV the other way around. These perspectives divided the field of strategy into two parts;
competitive strategy and corporate strategy.
Research in competitive strategy is animated around analysing how markets, resources, technologies
and organization might explain differences in firm performance.
Research in corporate strategy seeks to address a different question: how do managers set and
oversee the scope of their firms. That is, how do managers determine which business belong within
their firms and which do not, what transactions to undertake to achieve that scope, how to allocate
resources among their constituent businesses, and how to coordinate or promote interdependencies
across those businesses.
- A framework for corporate strategy (to organize and add structure to the different topics and
phenomena that scholars in this field study)
Core of corporate strategy research: how managers set and oversee the scope of their firms. 3
components:
1. Managers coordinate resources within the boundaries of their firms (=intra-organizational
actions)
2. Managers coordinate relationships with other companies across the boundaries of their firms
(= inter-org actions)
3. Managers decide which businesses belong within the boundaries of their firms and which not
(= extra-org actions)
, - Intra organizational actions
Is about coordinating how resources are utilized and deployed within the boundaries of the firms.
This could include: deciding how to allocate resources to productive uses, determining how to
leverage certain resources across multiple business units to promote synergies and
interdependencies, etc.
Perspectives that are informative in depicting how managers make these kinds of decisions are:
o Dynamic capabilities
Entails a firms ability to integrate, build, and reconfigure internal and external competences to
address rapidly changing environments. Diversified firms are fertile ground in which to study this
because managers must decide whether and how to apply key capabilities across their component
business and the consequences of doing so.
Evidence found that legacy divestitures (verouderde desinvesteringen?) are associated with a decline
in the operating performance of the divesting firms, attributable to the verdwijning of core
capabilities the were accumulated over time in those companies original (legacy) businesses.
o Resource redeployment
Understanding the value of managers having the flexibility to internally redistribute non-financial
resources across the component businesses. Diversified firms are a critical context again. Raises
distinction between intra-temporal economies of scope (= synergies) = managers contemporaneously
(gelijktijdig) share key resources across business over time and inter-temporal economies of scope in
which managers choose how to reallocate resources across their business units over time.
The common theme emerging from literature on dynamic capabilities and resource redeployment is
that the key intra-organizational action that managers must take is to deliberately and proactively
leverage the stocks of resources and capabilities that exist within their firms, both over time and
especially in the face of rapidly changing environmental conditions
o Agency theory
Importantly though, managers do not always pursue the best interests of the firm. Nevertheless, the
underlying intra-organizational function of managers coordinating how resources are utilized and
deployed within the boundaries of their firm remains the same.
- Inter-organizational actions
Two perspectives that are useful in conceptualizing how managers make decisions on coordinating
relationships with other companies across the boundaries of their firm:
o Relational view
,Unique combinations of resources or capabilities that are brought together by transaction partners,
especially alliance partners, can lead to supra-normal profits. The combinations are often called:
relational capabilities, and they can serve as important sources of learning and knowledge
accumulation. This relational view stands in contrast to both the IO (holds that firms derive ultra-
normal profits from the industries in which they operate and their positions in them) paradigm and
the RBV (which holds that firms derive supra-normal profits from their idiosyncratic resource
positions) perspective.
o Network theory
Reveal that ties between companies, especially their alliance partners, can be a key source of
strategic knowledge and learning, and therefore value creation. Organizations do not only learn from
their managers’ accumulated experiences, but they also learn from their repeated interactions with
their counterparties. Exp: acquiring firms that have prior alliance relationship with the target
outperform, as well as firms that accumulate more acquisition experience.
The key point that emerges from the relational view and network theory is that interactions between
firms matter a great deal for both the development of capabilities and the accumulation of
knowledge within a focal organization. These ideas underscore the importance of understanding how
managers set and oversee firm scope from an inter-organizational standpoint, since their learning,
knowledge, and capabilities are shared across firm boundaries.
- Extra organizational actions (deciding which business belong within the boundaries of firm)
Primary actions: undertaking and implementing M&A and divestitures. Here managers can choose
whether or not to prioritize their own interests – resource reconfiguration theory and agent theory
are quite salient in conceptualizing extra-organizational actions.
o Resource reconfiguration theory: acquisitions – means through which managers can
access and incorporate valuable new resources and capabilities. Divestitures
(desinvesteringen) – allow managers to remove obsolete or less useful resources in
order to improve both the composition of businesses in their portfolios and their overall
strategy.
Corporate scope is treated dynamically within this paradigm, with divestitures viewed
as a positive part of the reconfiguration process.
o Agency theory: managers pursuing their own self-interest in their decision making.
M&A are viewed as agency-driven decisions that managers make to enhance their own
personal utility or wealth, as compensation is strongly correlated with the scope and
size of the firm. Divestitures are viewed as solutions to the conflicts resulted from
agency-driven scope expansions (exp: over-diversification, info asymmetries). Although
the negative sides, the function of managers deciding on which businesses do belong
remains the same.
- Possible future research on intra-organizational research
Looking at the structure and composition of top management teams and human capital and
experience of corporate executives and board members might achieve goals. Other is looking at
different types of owners (exp is long/short term oriented). Other is looking at how managerial
cognition, biases, and heuristics might shape strategic decision-making outcomes. Other is looking at
the density of ownership and control (where family-owned is very dense and a publicly traded
company is very loose).
All look at how these difference could influence resource allocation decisions.
- Possible future research on inter-organizational research
Arising from the relationship between firms, whether the accumulation of experience might generate
spillovers across transaction types – exp: might firms that have greater amount of accumulated
, acquisition experience perform better when they undertake divestitures, and vice versa. Other is,
arising from the interaction with external intermediaries (investment bankers, lawyers, consultants),
how inter-organizational relationships between firms and their intermediaries might influence
decision-making and performance. Other is, arising from firms interaction with counterparties within
specific corporate strategy transactions, what factors might motivate two specific firms to choose to
engage in an alliance versus an acquisition with one another. Other, is to look at the previous and
conceptualize triadically – involving an acquiring/divesting-firm or business unit that is being bought
or sold.
- Possible future research on extra-organizational actions
Further consider the insight that corporate strategic transactions can fundamentally change the
composition of resources and capabilities within the firms. A key direction is that managers may be
able to use corporate strategy transactions sequentially, rather than as one-off events.
Strategy is a sequence of events, rather than a single strategic plan.
- Corporate strategy research significant advances it could make
o To conduct more large-scale, rigorous, empirical research into how corporate strategy
transactions are actually executed in practice.
o To conduct research that helps managers add greater structure and avoid decisions
biases in selecting and implementing their corporate strategies.
o More research on understanding the policy implications and regulation of corporate
strategy, as well as how firms can manage regulation strategically (taxes, trade, interest
rates). Exp: Brokaw Act of 2016; regulated shareholder activism, with potentially
significant implications for how managers and boards of directors should think about
the demands of activist investors.
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