Competition occurs at the business-unit level and it is essential that a firm uses the tools of competitive strategy in order to create a competitive advantage for its business units. Many firms have more than one business unit and compete in multiple industries. That being said, a multi-business firm must have a corporate strategy that drives its decisions about the scope of businesses it should operate in, and how to structure the relationships between these businesses. This multi-business strategy is called a corporate strategy.
A corporate strategy succeeds when it enables a firm to improve the average competitiveness of its individual business units, and thus to create and capture value that exceeds the sum of the firm’s individual parts. It accomplishes these outcomes by facilitating linkages between business units at a given time and by creating opportunities for these units to build off of each other’s strengths.
Underlying the logic of a firm’s corporate strategy is the firm’s business model, which comprises the firm’s choices about how it operates and creates value. These choices involve a firm’s policies, assets, and how it governs itself, including “compensation practices, procurement contracts, the location of facilities, assets employed, the extent of vertical integration, and other activities that direct the scope of a firm’s current and future activity. Competitors in an industry may have divergent business models, and their respective corporate strategies will reflect these differences. Transactions that are core to the value created by one firm may be peripheral for another, and such differences will affect the corporate strategy of each firm.
The lens of value creation and value capture is the essence of corporate strategy. Value capture denotes the difference between the price that the firm receives from its customers and the price it pays to suppliers for inputs. How should a firm use corporate strategy to capture value? Value creation is when the firm creates something new base don its strengths and existing businesses. How should this firm organize to implement its corporate strategy?
To answer these questions consider the following:
- Firms should consider three issues: Synergy, ownership, and organization.
- For synergy, firms should answer whether or not a business is better off with the firm than without it.
- To decide whether to own or buy in the market, firms often consider asset specificity, frequency, and uncertainty. Asset specificity involves the extent to which the assets (tangible or intangible) involved to produce the good or service in question can be easily deployed for some other purpose. If not, then the purchasing firm needs to be careful of hold-up and the producing firm may not invest in improvements because a change in the market could mean that the assets are no longer valuable. If the proposed transactions occur frequently, a firm has little incentive to invest in facilitating it, therefore more likely to occur in the spot market. Uncertainty calls for hedging and long-term contracts.
- The ownership test is one when the firm decides whether or not to own a company. The ownership can happen through vertical or horizontal diversification. In general, the more robust the markets, the more likely firms will buy in the market rather than own.
- Alternatives to ownership can be long-term contracts; alliances; and preferred agreements.
- Value capture is different from value creation. Value capture involves realizing the benefits of a strategic move such as capturing margins, the cost of an acquisition, or post-acquisition surprises that destroy value.
- Organizationally, creating and capturing value is possible through structure and processes. The most challenging aspect of corporate strategy is the balance between autonomy and coordination.
In brief, ask the following to capture value: Why would someone choose us versus our competitors? What is our unique value to customers? To create value ask who we serve and what we offer. Corporate strategies address the how and why to combine and manage multiple business units under the same corporate roof.
One way to test yourself on corporate strategy is to review what is happening right now with General Electric. Follow the progression of decisions they are making and you’ll get great lessons about effective and ineffective corporate strategy.