Corporate Strategy, Ownership, and Governance
Session 1 - Skills Workshop: Collecting, Processing, and Analysing Data for Research
in Corporate Strategy and Governance
Punaram, P. & Vanneste, B. 2016 Corporate Strategy: Tools for analysis and decision-
making, Cambridge University Press, Chapter 1
- Corporate strategy refers to the strategy that multi-business corporations use to
compete as a collection of multiple businesses. It is different from strategy for a single
business firm, or business strategy.
- Differences between business and corporate strategy:
• Difference 1: Single vs. multi-businesses
Business strategy involves a single business, whereas corporate strategy involves
multiple businesses. Each business has its own business strategy. The corporate
strategy of the corporation cuts across and affects all these businesses.
• Difference 2: Competitive advantage vs. corporate advantage
You have a competitive advantage over a competitor when your difference between
buyers' WTP and suppliers' WTS sell is greater than your competitor's difference
(between their buyers' WTP and their suppliers' WTS). Corporate advantage has
traditionally been understood as in some sense doing better than the sum of the parts
(i.e., individual businesses). Thus, it exists if the collection of businesses owned together
is somehow more valuable (i.e., generates higher total NPV) than the sum of values of
individual businesses owned in isolation from each other.
• Difference 3: Who is the competition?
For a business strategist, the competition is anyone who can influence a business' cost
or revenues adversely. This includes direct rivals, but also buyers, suppliers, potential
entrants, and companies that sell substitutes (Porter's five forces). For a corporate
strategist, the competition is anyone who can assemble a similar portfolio of businesses.
There are two types of such competitors: (1) investors (e.g., mutual funds) and (2) other
corporate strategists (MNCs, CEOs, boards, internal and external advisors, CSOs, etc.).
- Identifying the competition helps the corporate strategist formulate an appropriate
corporate strategy. Because investors have cash flow bat no decision rights, their main
strategy is portfolio assembly. In addition, corporate strategists can also use business
modification.
- Corporate advantage from portfolio assembly: the "selection" approach
More corporate advantage is better, but how much is necessary? A natural, minimal
benchmark for a corporate strategist is a passive investor. A corporate strategist should at
least be doing better than someone who has no decision power over the individual
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businesses. But how can an investor create corporate advantage at all, without such
power? The answer lies in the definition of the NPV of a portfolio of businesses A and B:
V[AB] = Future cash flows discounted at a discount rate
A discount rate is used to assign a present value (PY) to the cash flows that occur in the
future. It follows that value can be created in two ways: influencing cash flows or
decreasing the discount rate. If we take as a benchmark the performance of a passive
investor, who can create corporate advantage merely through selection of a good
portfolio of businesses, then a corporate strategist ( with the same portfolio, but who
administratively controls her selected portfolio of businesses) must in this example at least
do better than the V[ABC] achieved by the three owners (e.g. V[ABC] > V(A) + V(B) + V(C)).
- Corporate advantage from business modificiation: the "synergy" approach
Synergy can be perceived as an umbrella term to describe the various ways in which the
cash flows and is discount rates of businesses in a portfolio can be modified through joint
operation (i.e., collaboration and joint decision-making) across them. Thus, synergy is the
means through which corporate advantage is created relative to a typical investor who can
select the same portfolio of investments. So how much corporate advantage is enough for
a corporate strategist? Ideally, a corporate strategist would maximise corporate
advantage. But at a minimum, she should create no less value from the portfolio of
businesses than any another actor would.
- Corporate strategy is the strategy of multi-business corporations and the goal is the
pursuit of corporate advantage.
- Useful corporate strategies in different contexts:
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- Corporate advantage exists if joint ownership of businesses is more valuable than the
same businesses owned separately. This is the case if quadrant III and IV are more
valuable than quadrants I and II, respectively. If an investor can easily select and
assemble a portfolio similar to a corporate strategist (i.e., compare quadrant I to Ill) then
a corporate strategist potentially can only do better through modification of businesses
(i.e., compare quadrant III and IV). Synergies may also exist between businesses that are
owned separately (i.e., if quadrant II does better than quadrant I):
- The notion of corporate advantage requires a comparison between something we can
observe - the performance of a multi-business corporation - and a counterfactual that
we cannot - the aggregate performance of the individual businesses if they had been
operating in isolation from each other:
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- If an investor can replicate the portfolio of businesses that a corporate strategist
controls, then corporate advantage exists relative to this investor only if the corporate
strategist can extract synergies, i.e., modify the cash flows or discount rates of
businesses. Seek corporate advantage and pursue synergies mean the same thing if an
investor can replicate the portfolio of businesses that a corporate strategist controls.
- Different corporate strategists may generate different levels of corporate advantage for
the same portfolio of businesses, so to compete with other potential controllers of the
same portfolio; the goal of the corporate strategist is to maximise corporate advantage.
- Risk reduction is always useful for bondholders (because their loans become more
secure) and for top managers and employees (if their jobs become more secure).
Whether risk diversification by a corporate strategist leads to a lower discount rate for
shareholders depends on whether the shareholders themselves are diversified, and
what sort of risk is being reduced:
- Diversification by a corporate strategist can lower systematic risk for a portfolio
containing businesses that face substantial bankruptcy costs, whose cash flows are not
correlated, and in periods of financial downturn.
- When the different businesses are internal divisions the corporation is called a multi-
divisional corporation. This structure will typically have an integrated treasury function
at corporate HQ that manages cash for the entire corporation.
- Another way to organise different businesses is to structure each as a separate
company, whose shares are held by a parent holding company.
- The term conglomerate is applied to either form when the collection of industries (and
therefore businesses) the company is involved in appears so diverse as to show little
coherence (at least in the eyes of the analyst covering the company).
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