NAME: ZAFFAR-UL-LAH KHAN

CLASS: BBA VI SEC: (ii)

GR#: 252066

TERM REPORT

“GLOBAL STRATEGY AND MANAGEMENT”

Topic:
“Corporate Strategies and its Implementations”

Submitted To: Sir Ghayas Tahir

Submission Date: 7THmay, 2009
Corporate Strategy:
Corporate strategy is the selection and development of the markets (or industries) in
which a firm competes. Therefore, corporate strategy deals with what industries (or
markets) a firm seeks to compete in. Business level strategies (low cost,
diversification, and focus) that were discussed last chapter are HOW a firm competes
in a single market or industry. Therefore, corporate strategy and business strategy
describe very different issues.
Unlike business level strategy, work on corporate strategy
frameworks is not nearly as advanced or well done. Most emphasis is on describing
corporate strategy. Describing corporate strategy involves two primary dimensions,
vertical integration, where firms engage in activities that were formerly done by their
buyers or suppliers and diversification where they enter additional markets. While that
often gets a lot of attention, “How diversified is the firm?” is not really that important
for understanding why firm performance differs. What really allows corporate strategy
to result in superior firm performance are what I’ll call the “building blocks of
corporate strategy” - sharing resources, transferring competencies, and creating
specific assets. However, before moving into them, best to go ahead and lay out how
corporate strategy is described.

Describing Corporate Strategy:

There are two basic descriptive dimensions of corporate strategy, how diversified and
how vertically integrated an organization is. It may be helpful to think of both of these
dimensions as a continuum.

• Diversification occurs when a firm enters a new industry or market. Just like
when we discussed Porter's Five Forces, the definition of an industry or market is
critically important. There are formal classification codes, the North American
Industrial Classification System (previously Standard Industrial Classification
codes – see box in external analysis), for trying to classify all industries in an
economy. However, for our purposes the NAICS is not very useful. However, it is
critical when doing your analysis to carefully define industries in describing firm
diversification. For example, was Coca-Cola's move from carbonated beverages
into bottled water an instance of diversification? Depending on how you define the
industry, it could be yes or no. How diversified a firm is can be determined by
what portion of its sales are derived from different markets. The larger a
percentage of sales are derived from different markets/industries the more
 diversified the firm can be said to be. A wide range of labels can be applied to the
level of a firm's diversification from single business (95% of sales from one
industry), dominant business (70% from one industry) to diversified (less than
70% from any one industry). While single business firms are usually found in fast
moving, rapidly evolving industries where there is a need to focus, there are
exceptions. William Wrigley, the chewing gum manufacturer, is perhaps the most
famous single business firm. However, most large firms engage in some
diversification.

Related vs. Unrelated:

Diversification can be either related or unrelated. The key issue here is if the
operations of the firm in the new industry share some link in with the firm's existing
value chain. Is there some value adding activity that can be shared? For example, is
there a production facility, a distribution network, or a marketing competence that
both can use? Historically it was thought that related diversification would be better
than unrelated diversification. However, the
Coordination costs of related diversification appear to consume a lot of the expected
benefits. Therefore, while most firms seem to engage in related diversification its
benefits are only slightly, if at all, better than unrelated.

• Vertical integration occurs when a firm takes on activities that were

formally done by others on its behalf. In a way, vertical integration is just a special
case of diversification, a firm is diversifying into either its suppliers' or its buyers'
industries. For example if a company starts to make components for its products on
its own or if it starts to distribute products directly to customers it is engaged in
vertical integration. Ford Motor Company under Henry Ford was extremely
vertically integrated going so far at one time as to own the iron ore mines that
fueled its steel mills that fed its automobile assembly operations. However,
recently vertical integration has fallen out of favor in preference to contract
manufacturing and outsourcing. It will be interesting to see how the expansion of
the internet creates opportunities for firms to vertically integrate downstream into
direct distribution. A firm's level of vertical integration can be modeled using an
industry (rather than a firm) value chain. An industry value chain models all the
significant value adding steps that occur in an industry from the most basic raw
materials to the final consumers. The more of these activities a firm encompasses
 the more vertically integrated it is. A firm that enters activities to its left on the
industry value chain, replacing a supplier, is said to be vertically integrating
"upstream". A firm entering activities to its right, supplanting a buyer, is said to be
moving "downstream". So continuing the historical Ford example, Ford buying
coal mines would be upstream while him buying a dealership would be
downstream vertical integration. Vertical integration entails coordination
(bureaucratic) costs just like related diversification. For example, a major issue for
vertically integrated firms is transfer prices, what should one part of the firm
charge another? Furthermore, a vertically integrated firm faces greater
technological risk and demand uncertainty. In many ways vertical integration is a
lot like financial leverage, when times are good, they are very good as the firm
profits all along the value chain, but when they go bad, it's correspondingly bad all
along the value chain.
However, both sets of these terms are wholly arbitrary and simply descriptive. If a
firm is single business versus dominant business matters little to answering our
question of why firm performance differs. Some value chain function can almost
always be claimed as being shared to meet the definition of "relatedness". Likewise,
vertical integration, upstream or downstream, which is better? Therefore, while it is
important to be aware of these descriptive terms, the key issue is how well an
organization is able to share resources, transfer competencies and create specific
assets regardless of the description of its corporate strategy.

The Benefits of Corporate Strategy: The Building Blocks of

Corporate Advantage:

All (well 90 %+) corporate strategies are motivated by what we'll term the three
building blocks of corporate strategy: shared resources, transferred competencies, and
the creation of specific assets. While there are many possible reasons given for things
like diversification, they can almost all be traced back to one of these three
motivations.

• Sharing resources is taking something an organization already has and

using it in a new industry. For example, Wal-Mart plunking down one-hour photo
labs in its stores is an example of sharing a resource. WMT already has stores (a
resource) located all over the country. Adding this service is simply a matter of
 sharing its existing resource. Economies of scope, efficiencies gained due to the
breath of one's goods/services, is a fundamental example of sharing resources.

• Transferring competencies are taking something that an organization is good

at and using it in a new industry. The most famous example of this of all time was
Henry Ford and his mass production/assembly line techniques. Today Ford is most
famous for cars, however Ford took his ideas and applied them to farm equipment,
large trucks, and even airplanes! Some of these businesses remain to this day as you
can still find Ford farm equipment.

• Specific Assets Much more complex is the idea of specific assets. Specific
assets are assets that have a much lower value in their next best use OR to their
next best user.8 A great example of a specific asset might be a textbook for a
college course. It has great value if you are a college student in that course, but
it doesn't have many alternate uses, e.g. fire starter, and few people other than a
college student taking that course would pay a lot of money for it. Therefore, it
is a specific asset. Common examples of specific assets are things like
uniforms and pipelines. It may be helpful to think of specific assets as assets
that have been customized. This is because by customizing something it
frequently becomes more valuable to the person or firm who did the
customizing but less valuable to everyone else. Specific assets are important for
corporate strategy for two reasons. First, if you don't own the specific asset it
probably will not get created at all. After all Ford is not likely to ever produce a
car in your school’s color scheme with your mascot painted on the hood. If you
want one, you’ll have to have it done yourself. Second, you frequently want to
own specific assets so that you are not "held up" by an opportunistic partner.
Hold up can occur when the provider of a specific asset decides to withhold it
from you at a critical time. For example, what if you rented your textbook from
me rather than owned it? I might have an incentive to increase the rental rate
right before the exam when you needed the book the most. You might be able
to take me to court and win for violation of contract, but by then the test is long
past. You’ll have to pay my higher rent.This is what economists mean when
they refer to “hold up.” A great illustration of the building blocks comes from
Jack Welch’s managerial evaluation system at GE - probably the most
diversified large company in the U.S. The central focus of the system was the
divisional director's ability to recognize, develop, and SHARE the talent of
 their executives. If someone had someone who was really good at solving
problem X that another division had, then they were expected to share that
person. This further encouraged employees to devote themselves to learning
about GE and doing a great job, they knew good work would be rewarded. This
is a classic example of why sharing resources, transferring competencies, and
getting people to invest in specific assets (especially important for
organizational knowledge) is important for the management and ongoing
success of diversified corporations. Managerial attention should be paid to
these three factors on an ongoing basis, not just at the time a diversification or
vertical integration decision is made. Therefore, in order for a corporate
strategic decision to help result in a sustained competitive advantage for a firm
the benefits from the shared resources, transferred competencies, and specific
assets must be greater than the integration and bureaucratic costs of performing
the function internally. However, this leads to an interesting question, what
about firms that have pursued completely unrelated diversification yet have
performed quite well? While these are rather rare, examples of these firms have
included Hanson Trust and present day Berkshire Hathaway (BRK). What may
have happened is that these firms wind up embodying a control or resource
allocation function (perhaps capital) that is superior to what their component
firms could do individually. For example, Warren Buffet often targets
acquisitions on the foundation of taking away the current CEO's headaches of
dealing with boards and regulators and letting the CEO get back to focusing on
running the company that they love.9 This of course is just a transferred
competency on the part of BRK that takes over corporate governance concerns
of the CEO. Warren Buffet’s exceptional skill in investing could also be a
transferred competency and his company's excellent Credit rating a shared
resource.

• Warning on Matrices Initially, consulting groups and managers attempted

to deal with the complex challenges of corporate strategy through "matrices."
The matrices, e.g. Boston Consulting Group (Stars, Problem Children, Cash
Cows, and Dogs), you often see associated with corporate strategy can be great
external analysis tools and visual aids. However, since they don't tell you how
to share resources, transfer competencies, or create specific assets, they are
"mostly worthless" for explaining why firm performance differs. While
matrices may have some value as investment guides for managers, there are
superior frameworks for investing based on the work of economists and
financial experts, so their value here is suspect as well.