Summary Book CH 1, 2, 3, 4, 5, 7, 9, 10, 11 & 12
Puranam, P. and B. Vanneste (2016). Corporate strategy: Tools for analysis and decision-
making. Cambridge: Cambridge University Press.
,Table of Contents
Introduction .............................................................................................................................. 3
Chapter 1 – Corporate Advantage ............................................................................................ 3
Chapter 2 – Synergies: Benefits to Collaboration ..................................................................... 7
Chapter 3 – Governance Costs: Impediments to Collaboration ............................................. 11
Chapter 4 – Corporate Diversification .................................................................................... 15
Chapter 5 – Ally or Acquire? ................................................................................................... 19
Chapter 7 – Divestiture: Stay or Exit ....................................................................................... 23
Chapter 9 – Designing the Multi-Business Corporation .......................................................... 26
Chapter 10 – Designing the Corporate HQ ............................................................................. 29
Chapter 11 – Managing the M&A Process .............................................................................. 34
Chapter 12 – Managing the Alliance Process.......................................................................... 40
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,Introduction
Corporate strategy refers to the strategy that multi-business corporations use to compete as
a collection of multi businesses. These may each constitute a division within the corporation,
or may each be a legally distinct company, whose shares are held by a parent company.
Good corporate decisions are those that give the best current information and can be
explained and defended to others. This book provides an active guide for decision-making and
goes beyond a passive understanding of what corporate strategy is.
Chapter 1 – Corporate Advantage
Corporate strategy: the strategy that multi-business corporations use to compete as a
collection of multiple businesses (whereas business strategy involves a single business).
Business model: comprises the set of choices about customers, products, and value chain
activities that every business must make (‘who/what/how’).
Two businesses are different if their business models differ from each other on at least one of
these dimensions.
Difference 1: Single vs. Multi-Business
Industries are usually distinguished from each other in terms of low cross-price elasticity of
demand – a price change within one industry has negligible effects on the demand for goods
in the other industry.
Difference 2: Competitive Advantage vs. Corporate Advantage
The goal of business strategy is to maximize the net present value (NPV) of a business, i.e., its
future cash flows discounted for their timing and riskiness.
Willingness-to-pay (WTP) is the most that buyers will pay for a firm’s product. The actual price
will be equal to or less than the WTP, or a firm will sell nothing.
Willingness-to-sell (WTS) is the least price for which suppliers will provide all inputs for a firm’s
product, including raw materials, capital and
labor.
Competitive advantage occurs when the
difference between WTP and WTS is greater
than that of the competitor.
Two ways to increase competitive advantage:
raising the price of the WTP of consumers or
lowering the price of the WTS of suppliers.
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,Corporate advantage exists if the collection of business owned together is somehow more
valuable than the sum of values of individual businesses owned in isolation from each other.
Business unit level factors (management or capabilities) explain a big part of the variance in
the returns of businesses, but the corporate level also explains a substantial part.
Difference 3: Who Is the Competition?
Competition business strategist: anyone who can influence a business’ cost or revenues
adversely.
Competition corporate strategist: anyone who can assemble a similar portfolio of businesses.
Two types:
- Investors;
o Only cash flow rights, no decision rights.
- Other corporate strategists;
o Decision rights in the businesses through administrative control exercise by
corporate headquarters (HQ).
Identifying competition helps the corporate strategist formulate an appropriate corporate
strategy. Main strategy of investors is portfolio assembly. Corporate strategists can use
business modification.
Corporate Advantage from Portfolio Assembly: The ‘Selection’ Approach
A passive investor is a minimal benchmark for a corporate strategist: a corporate strategist
should at least be doing better than someone who has no decision power over the individual
business.
V[AB] = future cash flows discounted at a discount rate. A discount rate is used to assign a
present value (PV) to the cash flows that occur in the future.
Value can be created in two ways:
- Influencing cash flows;
o Buy low and sell high;
- Decrease the discount rate;
o Diversification (lowers risk).
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,Discount rate depends on three factors:
o Timing of the cash flows;
o Riskiness of the cash flows;
o Beneficiary of the cash flows.
Corporate Advantage from Business Modification: The ‘Synergy’ Approach
A corporate strategist cannot rest content with the gains from risk diversification or bargain
hunting if a typical investor can also access them.
Synergies are a central concept in corporate strategy. Synergy is an umbrella term for various
ways in which the cash flows and discount rates can be modified through joint operation (i.e.,
collaboration and joint decision-making) across them. Synergy is therefore the means through
which corporate advantage is created relative to a typical investor who can select the same
portfolio of investments.
Nevertheless, sometimes investors may not have access to the equivalent portfolio. Then,
acting as an investor with preferential access to investments can allow an investor to select
the portfolio if the portfolio can be merely selected and typical investors cannot.
How much corporate advantage is enough? Lower bound: create no less value from the
portfolio of businesses than any other actor would. Varies by institutional context.
Corporate advantage must necessarily rest on some form of synergy, which requires
modification of the cash flows or the discount rates of businesses; otherwise assembling a
portfolio of individually good but unlinked businesses may suffice.
In the matrix, if quadrant III and IV are more valuable than quadrants I and II, corporate
advantage exists because joint ownership of businesses is more valuable than the same
businesses owned separately.
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,Corporate Advantage Is a Goal, Not a Measure
In practice, corporate advantage is very difficult to measure. The performance of a multi-
business corporation we can measure, but the aggregate performance of the individual
businesses if they had been operating separately not.
Corporate advantage is thus an imperfectly measurable, but nonetheless useful benchmark
for corporate strategists, to use as a conceptual touchstone when contemplating strategic
decisions.
Internal divisions: multi-divisional, integrated treasury function at corporate HQ that
manages cash for the entire corporation.
Parent holding company: structure each business as a separate company whose shares are
held by the parent. If both the businesses and the holding are listed, there is information about
the value of holding shares in the individual businesses and the value of holding shares in the
holding company when those businesses are part of a holding company.
Conglomerate: when the collection of industries the company is involved in appears so diverse
as to show little coherence.
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,Chapter 2 – Synergies: Benefits to Collaboration
Corporate advantage: to create more value from jointly owning a portfolio of business than
the sum of their values when they are owned independently. The true goal of the corporate
strategist.
When investors have equivalent investment opportunities, the threshold for the extent of
corporate advantage that a corporate strategist must create is higher and can only be met
through synergies.
What Are Synergies?
Operational synergy: if two businesses operated jointly are more valuable than the two
businesses operated independently, where operated jointly means that decisions across the
two businesses are coordinated with the aim of enhancing joint value.
The synergy test differs from the corporate advantage test:
- Corporate advantage is defined in terms of jointly owning businesses and synergies in
terms of jointly operating them. Can be achieved contractually or though common
ownership.
- The corporate advantage test is about the portfolio of the business, the synergy test is
about any two businesses.
Where Do Synergies Come From? Value Chains and Resources
Value chain: represents the set of activities that must be performed to produce a product or
a service and bring it to a customer.
- Primary activities: scale of activity varies directly with the level of production;
- Secondary activities: scale doesn’t depend on level of production.
The distinction between primary and secondary activities does not always have to be made,
e.g., when considering synergies between the corporate HQ and an individual business. The
HQ can be the location of centralized functions or the location of skills and brands that can
generate value when linked to individual business.
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,Resources: the factors of production: assets, capabilities, organizational processes, firm
attributes, information, knowledge.
When looking for operational synergies between businesses, we are looking for valuable ways
to coordinate decision-making across the value chain activities of the two businesses.
What Types of Synergies Are There?
Four synergy operators, 4C’s:
First, resources can be more or less similar to each other. Classic distinction:
- Economies of scale: producing more of the same product leads to lower average cost.
- Economies of scope: when producing different products together leads to lower
average costs than if those products had been produced separately.
Linking similar resources produces advantages of scale, linking dissimilar resources produces
advantages of scope. Similarity of resources is a matter of degree.
Second, there can be variation in the extent to which the resources underlying value chains
activities being linked must be modified. The extent of modification required is useful to
understand the frictions that will eat into the value created by the synergies.
i. Consolidation
Consolidation: creating value by rationalization across similar resources by eliminating
redundancies. Affects mostly costs and invested capital. Gains come from elimination, so
resources need to be adjusted.
ii. Combination
Combination: creating value by pooling similar resources (from similar value chain activities).
Two instances are combining purchasing to obtain volume discounts or acquiring a competitor
and then raising prices for customers.
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, iii. Customization
Customization: creating value by co-specializing dissimilar resources in order to create greater
joint value. Customization of resources results in improved value in production or
consumption.
iv. Connection
Connection: creating value by pooling the outputs of dissimilar value chain activities, with little
modification.
Benefits 4C’s framework:
- Provides a structured approach to identifying synergy opportunities by analyzing the
value chain.
- Helpful in differentiating synergies along aspects such as the difficulty of predicting
their value, ease of realization and steady state management efforts required.
- Makes it easy to explain the sources of value to investors, managers and customers.
The synergy analysis should not end with the 4Cs. It is only complete when a financial forecast
of synergy realization has been made, because:
- Quantification of synergy impact forces you to make your assumptions explicit;
- It guides you towards synergies that are really value enhancing;
- It provides a ranking of which synergies to prioritize.
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, Who Benefits from Synergy? One-Sided vs. Two-Sided Effects
When analyzing synergies, it is important to make a distinction between one- or two-sided
synergies.
V(A) and V(B) are standalone values of company A and B. V(AB) is their value when operating
jointly.
Synergies form linking their value chains is S, where: S = V(AB) – V(A) – V(B), or: S= S(A) + S(B),
where S(A) and S(B) represent the synergies experienced by firm A and firm B.
Test is passed if S(A) + S(B) > 0.
- Two-sided benefits: S(A) > 0 and S(B) > 0.
- One-sided benefits: if one business gains more than the other. This requires agreement
on some form of side payment from one business to the other.
Do Negative Synergies Exist?
The value of two businesses can be lower than the sum of their values when operating
independently. Different instances:
- Brand dilution;
- Organizational complexity;
- Concerns about the independence of action of two businesses under the same
corporate umbrella.
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