No one right corporate strategy
An effective corporate strategy is a consistent set of five elements that together as a system lead to corporate advantage that creates superior value.
Corporate Strategy:
The way a firm seeks to create value through the configuration and coordination of its multimarket
Vision
– Successful corporations have one
– Ambitious aspiration
– Defined domain (boundaries of the firm)
– Ethical values
Goals & Objectives
– Specific short- and medium-term quantitative
targets (objectives)
– Qualitative intentions (goals)
Resources
– Assets, skills, and capabilities of the firm
– Critical building blocks of strategy
• Determine what a firm can do
• Determine competitive advantage at the business
unit level
• Determine range of market opportunities
• Ultimate source of value creation both within and
across businesses
Businesses
– The industries in which a firm operates, and the
competitive strategy it adopts in each
• Industry choice is critical to the long-term success of a
corporate strategy
• Best predictor of firm performance is the profitability of
the industries in which it competes
• A firm’s competitive strategy within each industry
affects corporate performance
• Superior returns, in the long run, are created only by
effective strategies that create competitive advantages
• Structure
– Division of a corporation into discrete units
– Formal organization chart shows allocation of
authority inside the corporate hierarchy
• Systems
– Formal policies and routines
– Rules that define how tasks are to be fulfilled
• Processes
– Informal elements of an organization’s activities
– A firm’s internal design should flow from its strategy
and be customized to fit its resources and businesses
– No one optimal set of structures, systems, and
processes for all firms
– Firm’s internal design should flow from its
strategy and be customized to fit the resources
and businesses of the particular firm
– Inappropriate design often causes failure of
otherwise well-constructed corporate strategies
RBV believes that most corporate advantages
are realized at the business-unit level, where
individual businesses use the benefits of
corporate affiliation to outperform their rivals in
a particular industry.
Unlike competitive-based view, RBV maintains that
• Effective corporate strategy is not just about competing in attractive businesses,
having valuable corporate resources, and having efficient management systems.
•But the 5 elements (vision, goals & objectives, resources, businesses, and organization) must be
viewed as an integrated system. The elements should depend and support each
others. When this mutually reinforcing occurs, it creates “internally consistent”
strategies.
There are unlimited variety of effective corporate strategies.
• However, many corporate strategies have serious flaws and do not serve to enhance
firm value.
Some strategies fail because of weaknesses in individual elements of the strategy
Firm lacks valuable resources
Portfolio of business may be in unattractive industries
Organizational design may be too interventionist and bureaucratic
Some strategies fail because of the elements of its strategy are not a coherent whole
Firm’s resources may not make important contribution to competitive advantage
Organizational design may prevent sharing of valuable resources across its
Vision
Is there a clear and well-articulated corporate
vision?
Firms may confuse what they want to achieve with what
they want to become
In some cases, goals and objectives do not emanate
from a vision, they drive it
• Internal Consistency
Are the elements of the firm’s corporate strategy
aligned with one another?
Do they form a coherent whole?
Firms that work at cross-purposes with themselves often fail to
develop or leverage the kind of system that yields important
advantages
May lack clear sense of how the firm intends to add value to its
businesses
Test for consistency
Competitive advantage
Control
Coherence
External Consistency
Does the strategy fit with the eternal environment?
Is the strategy sustainable against changing
environmental and competitor strategies?
Strategy must stand up to competitive challenges
Strategy must be robust to predicted changes in the
environment
• Feasibility
Is the organization being asked to do too much in too
short a time?
Is the strategy too risky?
Create the right balance between a challenging strategy and
overextending the firm
Evaluate whether the intended path is predicated on favorable
resolution of too many uncertainties
• Corporate Advantage
Does the strategy truly produce a corporate advantage?
Is value creation from that advantage ongoing?
Three types of cooperate advantage
Does ownership of the business create benefits somewhere in the
corporation?
Are these benefits greater than the cost of corporate overhead?
Does it create more value than any other possible corporate
parent or alternative governance structure?
Assess both amount of value and timing of what value
creation occurs
Core competency
– Capability or skill
• Thread running through a firm’s businesses units
• Weaves units together into a coherent whole
– Uniquely defines a firm
– Source of value creation
For multi-business firm, core competency means portfolios of
competencies, not just portfolios of businesses. They, then,
discovered that “conglomerates eventually fail”.
– Firms differ in fundamental ways because each firm
possesses a unique bundle of resources
– Many of these resources cannot be accumulated
instantaneously
– Thus, a firm’s choice of strategy is constrained by its
current resource stock and the speed at which it can
acquire or accumulate new resources
Resources can be classified into three broad categories:
Tangible assets, Intangible assets, & Organizational capabilities
Tangible Assets
The easiest to value and often the only
resources appearing on a firm’s balance sheet
Real estate, production facilities, raw materials, etc.
May be essential to a firm’s strategy
Occasionally a source of competitive
Resources can be classified into three broad categories:
Tangible assets, Intangible assets, & Organizational capabilities
Intangible Assets
May play important roles in competitive
advantage (or disadvantage) and firm value
Company reputations, brand names, cultures,
technological knowledge, patents and trademarks,
accumulated learning and experience, etc.)
Not consumed in usage
Some can grow with use and provide a valuable base
for diversified expansion
Resources can be classified into three broad categories:
Tangible assets, Intangible assets, & Organizational capabilities
Organizational
Capabilities
Not factor inputs like tangible and intangible
assets
Complex combinations of assets, people, and
processes used to transform inputs into outputs
Govern the efficiency of the firm’s activities when
applied to the firm’s physical production
technology
Can be a source of competitive advantage (i.e.,
“lean” manufacturing)
As an explanation for enduring advantage stocks are
more important than current flows.
However, over time many flows accumulate into highly
valued resource stocks.
Flows are transitory and can be adjusted instantaneously
Stock levels carry over from period to period and only
accumulate slowly over time
Tip: In your analysis, first check the firm’s advantage of resource stock over
competitors, then recommend flow improvement, if any.
Tangible
Intangible
Capabilities
Research &
Development
Manufacturing
Distribution
Marketing
Human Resources
$
Resource Stocks Current Expenditures
RESOURCE
Store location 0.3 (store rental space)
Brand reputation
Employee loyalty
1.2 (advertising expense)
1.1 (payroll expense)
0.7 (shrinkage expense)
1.2 (distribution expense)
Tangible
Intangible
Capabilities Inbound logistics
Competitive Advantage
Industry average cost—Wal-Mart cost
(percentage of sales)
Total Advantage 4.5%*
*Each percentage point advantage is worth about $500 million to Wal-Mart
The value of a firm’s resources lies in the complex
interplay between the firm and its competitive environment
along the dimensions of
Demand
Scarcity
Appropriability
Demand
Does the resource produce something
customers desire, and for which they have a
high willingness to pay?
Does the resource contribute to competitive
advantage in the product market?
Are there alternative products or resources
that provide more value for the customer?
Scarcity
Is the resource rare?
Is the resource hard to copy?
Appropriability Can the firm capture the value created
by the resources?
– Resources differ dramatically in capacity—how much a
firm has and how long the supply will last
– Resources accumulate and decay at different rates—the
slower the rate of depreciation—the higher the durability
and the more valuable the resource
– Resources also differ greatly in specificity—some can be
used in a variety of applications and some in only one
Investing in resources
– Continuity and adaptability
– Commitment and flexibility
• Upgrading resources
– Improve quality
– Add complementary resources
– Develop new resources
– Enter new industries
• Leverage resources
– Leverage underutilized resources into other segments or
industries where they may create value
Rate of Profit > Competitive Level
Industry Attractiveness Competitive Advantage
Monopoly
Vertical
Bargaining
Power
Barriers
to Entry
Cost
Advantage
Differentiation
Advantage
•Patents
•Brands
•Retaliatory
capability
•Market
share
•Firm size
•Financial
resources
•Process
technology
•Size of plants
•Access to
low-cost input
•Brands
•Product technology
•Mktg., distribution &
service capabilities