Kshitij Awasthi

 Corporate Strategy
▪ What business(es) should we be in?
▪ How will we coordinate or integrate businesses to
create value?
 Business Unit Strategy
▪ To whom will we sell, for what price?
▪ How will we source, manufacture, distribute, etc.
our product?

Adapted from M. Porter, 2001, HBR

  “The way a company creates value through
the configuration and coordination of its
multibusiness activities.”
-- Collis & Montgomery, 1998

Source: Creating Corporate Advantage, Collis & Montgomery, HBR, 1998

 External
Analysis

Strategic Strategy Competitive

Mission Objectives
Choice Implementation Advantage

Which Businesses
Internal to Enter?
Analysis
• Vertical Integration
Corporate Level • Product Diversification
Strategy • Geographic Diversification

Mode of Entry?
• Internal Ventures
• Strategic Alliances
• Mergers & Acquisitions
4
 Vertical Product Geographical
Scope Scope Scope

[A] Single V1
Integrated V2
P1 P2 P3 C1 C2 C3
Firm V3

[B] Several
V1
Specialized P1 P2 P3 C1 C2 C3
Firms Linked V2
by Markets V3

In situation [A] businesses 1, 2 & 3 are integrated within a single firm.

In situation [B] businesses 1, 2 & 3 are independent firms linked by markets.

4
 What businesses should the firm be in?
 How does corporate strategy create value?
 How should the corporate office manage the
group of businesses?

6
 What businesses should the firm be in?
 External view: Diversify into an attractive industry
 Internal view: Diversify into an industry where resources
and capabilities required for competitive advantage are
similar to firm’s existing resources and capabilities

7
 How does corporate strategy create value?
▪ The degree to which the businesses in the portfolio are
worth more under the management of the company than
they would be
▪ As a portfolio of investments made by equity holders or
▪ Under separate ownership

8
 How should the corporate office manage the group of
businesses?
▪ Organization structure
▪ Control

Business Units
9
 Single ~ Low
 Related ~ Medium
 Unrelated ~ High

10
Source: Hitt, Ireland & Hoskisson, 2004 11
 How does P&G benefit from diversification?
▪ What is the level/type of diversification?

12
 Operational relatedness
▪ Share value chain activities
 Corporate relatedness
▪ Leverage resources and capabilities

13
 Horizontal Scope

output-products Prod./Ind. A Prod./Ind. B Prod./Ind. C

Sales Sales Sales

Distrib Distrib Distrib

Manuf. Manuf. Manuf.

Vertical Scope

...
Sales Sales Sales
Input-products

Distrib Distrib Distrib

Manuf. Manuf. Manuf.

...
 Horizontal Scope
output-products Prod./Ind. A Prod./Ind. B Prod./Ind. C
Sales Sales Sales

Distrib Distrib Distrib

Manuf. Manuf. Manuf.

Vertical Scope

...
Sales Sales Sales
Input-products

Distrib Distrib Distrib

Manuf. Manuf. Manuf.

...
 Horizontal Scope

output-products Prod./Ind. A Prod./Ind. B Prod./Ind. C

Sales Sales Sales

Distrib Distrib Distrib

Manuf. Manuf. Manuf.

Vertical Scope

...
Sales Sales Sales
Input-products

Distrib Distrib Distrib

Manuf. Manuf. Manuf.

...
 Horizontal Scope

output-products Refrigerators Aircraft Engines Prod./Ind. C

Sales Sales Sales

Distrib Distrib Distrib

Manuf. Manuf. Manuf.

Vertical Scope

...
Sales Sales Sales
Input-products

Distrib Distrib Distrib

Manuf. Manuf. Manuf.

...
Source: Hill & Jones, 2006 18
 Honda
Technical Competes in 4-cylinder 1st gasoline-powered Civic Hybrid
Research Isle of Man TT 750cc car to meet US Low (dual gasoline/
Institute motorcycle motorcycle Emission Vehicle Standard electric)
founded races Portable Power products: Civic GS
1st
motorcycle: generator ground tillers, marine (natural
98cc, 2-cycle engines, generators, gas
Dream D pumps, chainsaws powered)
snowblowers

1946 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

N360 mini Acura Car

4 cycle division Home co-
The 50cc car generation
engine 1000cc
Supercub Goldwing system
Honda
Civic touring Enters Indy
Enters Formula 1 motor cycle car racing
First product: Grand Prix racing
Model A Honda FCX
clip-on engine fuel cell
for bicycles car
Source: Grant, 2008 19
 How does P&G benefit from diversification?
▪ What is the level/type of diversification?
 If diversification is beneficial, why doesn’t
P&G increase its diversification further?

20
 “Dominant logic” varies by business
▪ Knowledge/ capabilities/ strategies from existing
business may be different than those required in a
new business
 Increase in complexity as number of
businesses increase
 Limits to exploiting economies of scope due
to coordination problems
 Increase in bureaucracy and rigidity
21
Note: Considerable disagreement on the relationship between
diversification and performance
22
 Highly diversified

23
 Relationship between diversification and
performance may be different in emerging
economies
▪ Diversified firms fill institutional voids

24
Khanna & Palepu 1997 Harvard Business Review 25
 Advantages of business groups over multi-
business divisional structure
▪ More independent decision making at affiliates
▪ Incentive design is less constrained
▪ Better resource allocation and access to business
opportunities

Source: Ramachandran, Manikandan & Pant, Harvard Business Review, 2013

26
  Strategy work
▪ Sensing distant opportunities
▪ Pursuing stretch opportunities
▪ Shepherding cross-business opportunities
 Identity work
▪ Refresh identity
▪ Safeguard values
▪ Multiply goodwill

Source: Ramachandran, Manikandan & Pant, Harvard Business Review, 2013 27

 Managing the corporate portfolio
▪ BCG’s Growth Share Matrix
▪ Ashridge Portfolio Display

28
 Earnings: low, unstable, growing
Cash flow: negative
Annual real rate of market growth (%)

Earnings: high stable, growing

Strategy: analyze to determine Cash flow: neutral
HIGH

whether business can

?
be grown into a Strategy: invest for growth
star, or
will degenerate
into a dog

Earnings: low, unstable Earnings: high stable

Cash flow: neutral or negative Cash flow: high stable

Strategy: divest Strategy: milk

LOW HIGH
Relative market share
2910
Source: Grant, 2010
Related constrained Related linked Unrelated
diversification diversification diversification

Source: Hitt, Ireland & Hoskisson 30

P&G’s organization chart Source: Hitt, Ireland & Hoskisson 31
 Headquarters Office

President

Corporate
Corporate Corporate Strategic Corporate
Human
R&D Finance Planning Marketing
Resources

Strategic Strategic Strategic

Business Business Business
Unit Unit Unit

Division Division Division Division Division Division Division Division Division

32
GE’s organization chart 32
Source: Hitt, Ireland & Hoskisson
Notes
• Corporate headquarters has a small staff
• Finance and auditing are the most prominent functions
• Divisions are independent and compete for corporate resources
Source: Hitt, Ireland & Hoskisson 33
a Strategy implemented with structural form.

Source: Hitt, Ireland & Hoskisson 34

 External
Analysis

Strategic Strategy Competitive

Mission Objectives
Choice Implementation Advantage

Internal
Analysis

Business Level Corporate Level

Strategy Strategy

How to Position a Which Businesses

Business to Enter?
in the Market?
35
 What businesses should the firm be in?
▪ Assess attractiveness and capabilities required

36
 Are the businesses in the portfolio worth more
under the management of the company than
they would be
▪ under separate ownership or
▪ as a portfolio of investments made by equity
holders?
 Diversification adds value when
▪ Economies of scope exist
 Diversification has the potential to destroy
value when it is driven by managerial hubris/
self-interest
37
 How should the corporate office manage the
group of businesses?
▪ Managing the corporate portfolio
▪ Linking type of diversification to organizational
structure, integration mechanisms, performance
appraisal and compensation systems

38
✓✓✓Economies of scope
✓✓ Market power
✓? Financial economies
✓? Tax laws
? Low performance
? Diversifying managerial employment risk
× Increasing managerial compensation

39
40