Students
Chapter 7
Chapter Outlines
Corporate and Multi-Business Unit Strategy
For giant corporations operating in many different fields, the process of strategic management becomes even more complicated. They must manage their own corporate strategies as well as the strategies of their individual business units. This chapter examines the tools and processes by which a corporation manages its business units for both their betterment, and the betterment of the corporation as a whole.
PepsiCo and the Restaurant Business
PepsiCo
Restaurants History
Timeline of major events in PepsiCo Restaurants
PepsiCo Restaurant International (PRI) was a world leading fast food chain consisting of Taco Bell, Kentucky Fried Chicken, and Pizza Hut. PRI was created when the Pepsi Cola Company decided to buy into the quick service food industry as a medium for pushing their soda products. All three restaurants performed well and experienced solid growth, following their acquisition by Pepsi. By the mid-nineties, however, the market had matured and growth from PRI had begun to taper. It was then that CEO Roger Enrico devised a plan to spin off PRI from PepsiCo. The spin off created Tricon Restaurants (later YUM! Brands), and PepsiCo earned seven billion dollars.
Introduction
Business level strategy concerns individual business strategies in individual markets. However, there are many corporations that operate in multiple industries. Within each industry are specific business units of the corporation that have unique strategies equipped to compete with that particular industry's customers and rivals. Because of these unique strategies, it is necessary for these business units to operate with a certain degree of independence. Thus, a corporation may have a competitive advantage in some markets and with some units, but not in others.
Corporate Level Strategy
BCG
Matrix
Netmba's detailed explanation of the BCG Matrix
Both
Sides of Corporate Diversification
Gordon M. Bodnar, Charles Tang, and
Joseph Weintrop explain the value created by both global and industrial
corporate diversification
Strategy
Analysis of the Walt Disney Company
Yale School of Management case study
of the Walt Disney company demonstrated how diversification and synergy can be
powerful tools in gaining competitive advantage
Diversification
Strategy and Profitability
Richard P. Rumelt explains the profitability
of diversification and the conglomerate organizational model
Corporate
Restructuring: a Boon for Competitive Advantagel
G.C. Pathak's article
makes a case for restructuring as a means for gaining competitive advantage
Corporate level strategy concerns what industries a corporation chooses to enter and why. Entering into multiple industries gives a corporation the power of diversification. Their different products in their different industries are more profitable together than individually because this diversity creates some new capability for the corporation. Corporate level strategy involves selecting the different industries a corporation should enter in order to best maximize the value of the corporate whole.
Managing multiple business units for a corporation is like an individual managing an investment portfolio, and the BCG Matrix illustrates it as such. This 2X2 matrix places business units according to their growth rate, and their strength in their particular industry. Using this matrix, a firm can decide what level to invest in its business units.
The challenge of corporate strategy is to find industries to invest in that will yield value greater than the investment it took to enter them. When acquiring other firms as a means of entering a market, a firm will either acquire it at less than its projected value or by acquiring a firm and then improving its net present value (NPV) through further investment. Acquiring a firm can be very costly, as there is often a premium involved with the purchase, and the buying firm must inherit all the operational costs associated with the purchased firm; therefore firms must carefully analyze potential purchases to make sure they are a wise use of resources. A firm would not go through all the trouble of acquisition if they did not expect their acquisition to increase the value of the corporation. Of course, acquisition is only one mode of entry. Firms can also create their own units from scratch in a new industry. This, like acquisition, is also very expensive, and requires the same caution and careful analysis. Either way, the goal is synergy. This is when the value of the whole is more than the summed value of the various parts. With a successful corporate strategy, the corporation is worth more than the total value of the individual business units.
Synergy is a resource like any other for a corporation, and it is very difficult to imitate or substitute. Thus, synergy provides a competitive advantage for corporations at the corporate strategy level.
The portfolio approach to corporate strategy is often associated with the conglomerate organizational model. This is described by Rumelt as companies that diversified into multiple, unrelated businesses through the acquisition of large numbers of business units. In this model the business units are largely independent, and as long as the corporation makes sure to acquire strong business units, it can be very successful. However, the conglomerate model is not an automatic success. With largely independent business units, there is little opportunity for synergy and without synergy a corporation will be worth less than the sum of its parts.
Another strategy at the corporate level is restructuring. This is where a corporation restructures its units by reorganizing assets and activities in order to unlock their potential. The key to this strategy is identifying underperforming units, knowing how to reorganize their assets and activities effectively, and having the discipline to carry it all out, including their ultimate sale.
Just as the relationship of the business units and corporation are important, so too is the relationship of the business units amongst themselves. An idea at the heart of this is transferring skills and transferring activities. One thing that connects every business unit in a corporation to each other is their access to the various resources the corporation can offer. Sometimes this sharing is more indirect, through the corporation, and sometimes it is direct from unit to unit. The ability of the units to share their resources amongst each other, and the corporation's ability to facilitate this sharing, can be key sources of synergy and so key components of corporate level strategy.
Concluding Thoughts and Caveats
Strategy-Structure
Database
Richard P. Rumelt's own explanation of his three ratios and nine
categories for diversification
Competition,
Market Selection, and Growth
Vincenzo Denicolo and Piercarlo Zanchettin's
article explains the market selection process and its effect on competition
Daimler-Chrysler:
Why the Marriage Failed
AutoObserver's theories on the failed merger
between Daimler and Chrysler
Multipoint
Competition, Mutual Forbearance, and Entry into Geographic Markets
Lucio
Fuentelsaz and Jaime Gomez's article explaining the complexities of multipoint
competition and mutual forbearance
- Diversification is generally described as being either related or unrelated. Rumelt provided the best known framework for categorizing diversification. Using three values, the specialization ratio, the related ratio, and the vertical ratio, Rumelt's framework placed firms into one of nine categories: single business, dominant-vertical, dominant-unrelated, dominant-constrained, dominant-linked, related-constrained, related-linked, unrelated business, and conglomerate. These categories have been generalized over the years into simply related and unrelated diversification. Firms with related diversification are generally thought to be stronger due to their ability to easily synergize and transfer skills and activities. There are, however, plenty of cases of related diversification failing and unrelated diversification succeeding. The key though is always synergy.
- The goal of any corporation is to be worth more than the sum of its units. However, there are plenty of occasions where poor strategy can leave a corporation with a value that is lower than the sum of its parts. These corporations cannot grow, and thus cannot survive in the market. The market has a way of eliminating such corporations, and this phenomenon is known as market selection. A well known mechanism of this is the hostile takeovers. These takeovers are facilitated by corporate raiders, who while notorious, actually serve a necessary role.
- There is an inevitable tension in any business unit between serving the corporate level strategy needs of the corporation, and serving the business level strategy needs of the business unit. Corporations often try to manage these dual responsibilities through a structural mechanism known as the “M-form.” This is where the units operate “semi-autonomously.” They are free to operate business level strategies, but only within the mandates determined by the corporation.
- A merger, acquisition, or new venture that looks good on paper will not produce the desired effects unless the businesses can be effectively integrated. Thus, the attitudes of the employees, the cultures and styles of the combined firms, and the operating norms and practices are just as important to the success of a corporate strategy as the issues related to products and markets. Thus, all of these things must be taken into account in analyzing an acquisition or a diversification. Daimler's failed merger with Chrysler is a fine example of this.
- Multi-point competition is a corporate level phenomenon where corporations compete across multiple business units. Since a business unit from a corporation has bargaining power over an independent due to the synergy it derives from its corporation, the independents will often become diversified in order to compete. Sometimes this can lead to mutual forbearance, where corporations will actually choose to compete less vigorously due to their broad interdependence.
Summary
Corporate level strategy, just like business level strategy, is devised to gain a firm competitive advantage. This is done through the management of the multiple business units. Action taken at the corporate level must be carefully analyzed to satisfy what Porter describes as the “better-off” test. Will the corporation be better off with or without a business unit? The question is simple enough. However, the answer can have substantial ramifications for the value of the corporation.
Key Terms
Business-level strategy
That part of a firm's strategy that focuses on how a single business or a single business unit will compete in its industry or business environment.
Conglomerate
A corporation that is highly diversified and involved in a number of unrelated businesses.
Corporate raider
A person who purchases or attempts to purchase a controlling interest in a company against the wishes of the current management. The raider will often then sell off the assets of the company and generate a substantial profit.
Core competence
A factor that can enable better products, services, and methods and that can be shared across different units or activities of a firm. They are embedded in the firm's resources and so are difficult to observe and imitate directly.
Diversification
A strategy for expanding organizational scope or reducing organizational risk by adding additional products, services, locations, or customers to a company's existing portfolio.
Hostile takeover
A change in ownership that occurs against the wishes of the target company's management and board of directors.
Mode of entry
The way in which a firm enters a new country or place or business. For example, it can enter by exporting, licensing, joint venture, or direct investment.
Mutual forbearance
Said to occur when, because of their mutual interdependence, rival firms engage in tacitly collusive or non-competitive actions across a range of common market interactions.
Net present value
The current value of an investment's future net cash flows, discounted by the effects of time and risk, minus the initial investment. A positive NPV suggests a good investment.
Profit center
A business unit or department within a larger corporation that is treated as a distinct entity, with its own revenues, expenses, and profit.
Strategic business units
SBUs) are distinct and semi-autonomous units within a larger corporation. They will often operate in their own industry, with their own business-level strategy, and with full responsibility for their own revenues, costs, and profits.
Synergy
Applies in situations where different units cooperate to produce more than could be produced otherwise. Stated simply, synergy is said to occur when the whole is greater than the sum of the parts.
Time value
Refers to the current value of a sum of money to be received or paid at some time in the future, adjusted either for the growth that will occur through earnings or for the discount taken to reflect opportunity costs.