Chapter 6

CORPORATE STRATEGY

 

        There are four key aspects of corporate strategy. The first has to do with the strategic management of the current set of businesses in the company’s portfolio and the allocation of resources among them. The second related aspect is the creation of shareholder value through corporate strategy. These first two aspects—portfolio techniques and value-based planning—will be covered in this part(Chapters 6, 7, and 8). The third aspect has to do with the realization of synergies across businesses and the identification and management of direct linkages between businesses. The fourth aspect is the strategy of diversification, whether through acquisition or internal development. The third and fourth aspects will be covered in Part IV, Chapter 9.


DIFFERENCES BETWEEN CORPORATE AND BUSINESS STRATEGIES

        For a company that has not diversified beyond its core business, corporate and business     strategies are inseparable. For example, the Bacardi Corporation has been in the rum business since its founding, and, with the exception of a local beer in one small market, it manufactured no other spirits besides rum. Bacardi’s corporate strategy was to be in the "light spirits" business. Its business strategy focused on becoming the number-one-selling spirits brand in the world. It manufactured no vodka, scotch, or bourbon (keeping its focus on a differentiated, premium rum). Its corporate strategy was simply to locate its production facilities in a few strategic locations (close to sugar cane or close to markets) and to allocate its rum distillate and marketing talent to the most promising markets around the world. In this setting, notice how corporate and business strategies intermingle.

        In 1993, however, Bacardi acquired Martini and Rossi, the Italian ver-mouth maker who had more than 100 brands and products in almost as many markets. Now Bacardi had a portfolio of liqueurs, scotches, cordials, and wines, as well as a hotel and a foods distribution business. The attention of senior management turned from the selling of rum to rationalizing a very diverse portfolio of products, brands, and operating companies (corporate strategy). Meanwhile operating management around the world focused on the specifics of competing in their various markets and businesses (business strategy).

        The Bacardi-Martini example highlights some of the differences between corporate and business strategic management. As further illustration, listen to the different words used in conversation by managers engaged in each. At corporate headquarters of a diversified firm, you might hear executives speaking of major acquisitions in the works that are (or are not) synergistic with current business, how this might affect EPS and the tax picture, and what the cash-flow implications are. Finally, they might discuss whether or not the proposed acquisition will help move them more solidly into the "energy business" or "technology business." These corporate strategy discussions tend to be somewhat abstract in nature.

        Now, at the division level you might hear discussions about working more closely with supplier X, meeting customer Y at a particular trade show, or planning a negotiating strategy for the next labor contract. This discussion might be coupled with speculation about how particular competitors are going to be handling the same issues. These are business strategy discussions.

        Note how they reflect a world of tangible events, people, and things, whereas the corporate-level discussion dealt with more abstract concepts.

        The classic argument that the railroads might have prospered in the wake of the growth of our highway system if they had defined their business as "transportation" rather than "railroads" was simply a suggestion to think of one’s business in more abstract (corporate) terms. Saying that your business is "transportation" does not tell you how to compete; that is, it does not define your business strategy—it merely helps to define your scope of activities. Although recognizing a business’s scope is important to survival in a changing world, it is clearly not enough. All three—corporate, business, and functional—are necessary strategic management activities.

CORPORATE STRATEGY IDENTIFICATION

        When firms expand into a variety of businesses, they frequently transfer successes in the initial business to the subsequent businesses. For example, when Bic Pen Corporation expanded beyond ballpoint pen production into disposable cigarette lighters, it used the same plastic-injection molding technology and similar distribution channels to sell what was essentially another mass-marketed, disposable consumer item. The additional learning required to design and produce this new product was relatively low, given that the same technology was employed in the factory: plastic was injected into a mold to form a casing, into which dispensable liquid was poured, and metal parts were attached to dispense the fluid.

        When firms adopt similar business strategies in different lines of business, they have adopted what we might term a generic business strategy across all their businesses. Hewlett-Packard and Texas Instruments are two firms that compete in various segments of the electronics industry, that employ generic strategies in many of their product lines, and whose generic strategies are quite distinct (see Table 6-1).

        Using generic strategies to build a corporation from a variety of businesses implies the cloning of an original strategy onto new businesses. This, of course, is only one means of extending the boundaries of the corporation into new domains. To the extent that a corporation expands by building upon a core business and the set of skills embodied in that business, we can say that it is realizing synergies across its businesses.

        At the other extreme are pure conglomerates, which are built through the acquisition of unrelated business. It was not unusual during the 1960s and the early 1980s for corporations to build conglomerates based on the theory that the acquisition of unrelated businesses in countercyclical industries would smooth out the cash flows for the whole corporation. This led to the development of a variety of portfolio planning techniques for managing corporate strategy by such firms as the Boston Consulting Group and McKinsey and Company. These techniques typically plotted the variety of businesses on a two-dimensional grid, with market position or market share on one dimension and industry growth or attractiveness on the other. The theory was that high-market-share businesses were likely to be lower-cost manufacturers than smaller-share businesses, simply as a result of volume or scale economies, which allowed those businesses to realize higher profit margins and greater cash throw-off per dollar of sales. With a portfolio of businesses, the cash throw-off from the better-positioned firms could be used to fund the growth of more promising—perhaps smaller-market-share—businesses in the portfolio.

        Essentially, these portfolio techniques were cash management methods for diversified corporations. The details of this approach are outlined in the next chapter, "Note on Portfolio Techniques for Corporate Strategic Planning."

 

Table 6-1
Examples of Generic Business Strategies


                                        Hewlett-Packard                             Texas Instruments

MARKETING
STRATEGY

                                        Industrial and some                         Consumer and industrial
                                            consumer markets                             markets
                                        High-tech, custom                          High-volume, low-cost
                                            products                                           standard products
                                        Premium price, lag                         Low price,push
                                            experience curve                               experience curve
                                        Promote quality/                             Promote availability/
                                            realiability/service                             price

PRODUCTION
STRATEGY

                                        Small plants                                     Large plants for large volume
                                        Small-batch/job-shop                     Mass-production technology
                                            technology                                     with automation and robotics
                                        Build capacity with                         Build capacity ahead of
                                            demand                                         demand

FINANCIAL
STRATEGY

                                        Self-funding ("pay as                     Allocate cash among
                                            you go") within divisions                 divisions according to need
                                        Make profits early on                     Fund ahead of experence
                                            through high margins                        curve

R&D
STRATEGY

                                        First to market with                        Improve existing products
                                            new products                                  in proven markets
                                        Primarily product R&D                  Both product and process R&D
                                        Features and quality                       Cost driven
                                            driven
                                        Design for product                         Design for cost reduction
                                            performance