Theory Tutorial No.

01
Corporate Level strategy
Content
1. What is corporate level Strategy?
1.1-3: Introduction about Corporate level strategy
1.4: Corporate strategy triangle of Collis and Montgomery
1.4.1. Vision, goals, and objectives
1.4.2. Resources
1.4.3. Businesses
1.4.4. The role of corporate Office, including its structure, systems & Processes
1.4.5. Corporate Advantage
2. Historical Perspective of Corporate Strategy
3. Theoretical Approaches to Corporate Level Strategy
3.1.1. Industrial organization theory
3.1.2. Transaction cost theory
3.1.3. Agency theory
3.1.4. Strategic contingency and institutional theories and
3.1.5. Real option theory
4. Approaches to Corporate Level Strategies-Growth, Stability & Defensive Strategies

1 What Is Corporate Level Strategy?
1.1 Definition of Corporate Level Strategy - Corporate level strategy refers to the overall strategy for a
diversified company. It is concerned with the mix of businesses the company should compete in, and the
words corporate level strategy involves choices strategic managers must make
(a) Deciding in which businesses or industries a company should compete
(b) Which value creation activities it should perform in those businesses and,
(c) How it should entre, consolidate or exit businesses or industries to maximize long term profitability.
In succinct form, to differentiate corporate level strategy from business level strategy, Hofer and
chendel (1978) specify that corporate level strategy is concerned primarily with answering the question
what set of businesses should be in? Consequently, scope and resource deployment among business are
the primary component of corporate strategy. Corporate level strategy is the basis of coordinated and
sustained efforts directed towards achieving long- term business objectives.
CORPORATE STRATEGY - Corporate strategy is a firms overall approach to gaining a competitive
advantage by operating in several businesses simultaneously. Gaining a competitive advantage requires
setting a clear purpose for the entire organization and identifying plans and actions to achieve that
purpose.
1.2 Developing a competitive corporate strategy requires flexibility in terms of being able to reallocate
resources quickly and smoothly among different business units in response to changing market
conditions. In order to be able to respond to the dynamism in the business environment and enhance
competitiveness, organizations should develop flexible corporate strategies.
1.3 The challenge of corporate level strategy is to ensure that value is being added to every business in
the companys portfolio. The value must exceed its cost. Companies with good corporate strategies do
even better; they add more value than their peers in the industry. Ensuring that this value added
process is productive requires several actions by top management.
It must identify ways in which each businesses can be helped. This help must make possible a
major improvement in the business performance. Without an understanding of where
improvement potential exists, the search for value added cannot be real and substantial. These
improvement opportunities should be identified and agreed on through managerial dialog.
Central management must make sure that it possesses the skills to provide the help needed.
Different kind of improvement opportunities require different forms of help. Management see
that it has those capabilities.
It must construct a portfolio of businesses in which this constructive fit useful skills attuned to
the needs of the businesses exists. How businesses can be helped is bound to change over
time. The strength of the fit must be continually reappraised
Management must ensure that it is sufficiently familiar with the requirements for the success of
each business that it will not damage the business, whether by approving the wrong investment
proposals, appointing the wrong general managers, or giving poor strategic guidance.

1.4:Corporate strategy triangle of Collis and Montgomery
This encompasses all the different elements and activities that fall under the scope of corporate level
strategy. Three side of the triangle resources, businesses and organization represent the foundations
of corporate level strategy. Collis and Montgomery argue that only when they align in pursuit of a vision,
motivated by appropriate goals and objectives can resources, businesses and organization generate
a corporate advantage. Therefore there cannot be one single best corporate strategy, or even limited
set of corporate level strategies that lead to success. Instead there can be as many effective strategies as
there are possible coherent combinations of constructive elements. A corporate level strategy creates
value when its five elements fit together as system.
1. Vision, goals, and objectives
2. Resources
3. Businesses
4. The role of corporate Office, including its structure, systems & Processes
5. Corporate Advantage








Role of Corporate Office
Structure Systems Processes
IF
Fits


Corporate Advantage

1.4.1:Vision, goals, and objectives Corporate vision refers to the definition of the domain of the firms
activities, such that it is primarily concerned with establishing the boundaries of the firm that is what set
of businesses should we be in? if the vision describes what a firm wants to be, the firm also needs a set
of short-term goals and objectives. Whereas goals refers to qualitative intentions, objectives indicate
specific, short and medium term quantitative targets.At the corporate level, goals and objective often
pertain to the choice of the firms main corporate value creation mechanism. An outstanding corporate
strategy is not a random collection of individual building blocks but a carefully constructed system of
interdependent parts.
1.4.2:Resources constitute the critical building blocks of strategy because they determine what a firm
wants to do but what it can do. If all firms had identical resources, all would pursue the same strategy,
and the basis for competitive advantage would disappear (Barney, 1991). It is only when importance
resource differences arise among firms that each can develop its distinctive strategy. Moreover,
resources determine the range of market opportunities that are appropriate for the firm to pursue.,
with a major impact of corporate strategy (Collis and Montgomery, 2005). Resources thus are the
ultimate source of value creation, both within and across businesses, identifying, building, and
developing these valuable resources are critical aspects of both corporate and business strategy.
The resources that provide the basis for corporate advantage range along a continuum from the highly
specialized at one end to the very general at the other.



1.4.3: Businesses - Corporate level strategy refers to the multimarket or multi-business activities of a
firm. Business refers to the industries or markets in which a firm operates, as well as to the business
level strategy it adopts in each. Industry choice is critical to the long term success of a corporate
strategy, and the best predictor of firm performance is the profitability of the industries in which it
competes
1.4.4: The role of corporate office: structure, systems and processes: in a diversified firm,corporate
managers rarely can or should make all critical business unit decisions. The corporate office could decide
to minimize its involvement and delegate most operational decisions to business unit, making them as
independent as possible; alternately it can play an important role in the business units decision making
process to increase coordination across business units. The corporate office influences the business
unitsdecision through the firms organizational structure, systems, and processes. Organizational
structure refers to the way the firm is divided into discrete unit that delineates the allocation of
authority within the corporate hierarchy. Systems are formal policies and routines that govern
organizational behaviour whereas processes describes the formal elements of an organizations
activities.
1.4.5: Corporate advantage is the way a company creates value through the configuration and
coordination of its multi-business activities. If corporate strategies are tailored to a firm's resources and
opportunities, a company can create a meaningful corporate advantage.

2. Historical Perspective of Corporate Strategy
2.1: The corporate level strategy of firms has undergone enamours change in the last 50 years affecting
both their scope and organizational structure. The merger and acquisition (M&A) booms in 1960s and
1980s. In 1990s capital market pressures forces many diversified firms to reassess their business
portfolios, the size of their headquarters, and the way they coordinated and controlled their
multimarket activities. In 2000s, new collaborative structures such as joint ventures, strategic alliances,
and franchising largely because of revolution of informational and communication technology,
globalization, new emerging markets and cost escalating in developed markets. More recently, business
scandals, world financial crises, economic turmoil and corporate governance issues demands the new
corporate strategies for firm sustainability

2.2 The historical evolution of corporate strategy can be understand from different business patterns.

Origin of the
modern
corporation
Entrepreneurial firm has a long been recognized as the fundamental unit of
business and an institution for organizing productive activity. People have engaged
in production and trade since prehistoric times, but most of these business
activities were undertaken within clans.
With the advent of railroad, and the telegraph changed the way of doing business
and multiple subsidiaries were established and coordinated from a single office.
With the increasing size of firms, management developed as a specialized activity.
These modern corporations applied administrative hierarchies and standardized
decision making, financial control, and information management systems. These
structures enabled the companies to expand the size and scope of their activities
even further
Consolidation through mergers and acquisitions resulted first holding companies
during the late nineteenth century as firms acquired controlling interest in a
number of subsidiaries. Beyond the appointment of the subsidiary board of
directors though, corporate headquarters exercised little strategic or operational
influence over their subsidiaries.

The multi- The multi-divisional firm re-merged as a response to the problem posed by the
divisional
corporation
increasing size and diversification path taken by traditional industrial enterprises
and the new holding companies.
The diversification When firms becoming diversified, their diversification strategies
progressed from closely to more loosely related businesses, and
then toward unrelated businesses
The
conglomerates
By the early 1970s, the emergence of a new type of firm the conglomerate with
no core business, and no direct linkages between its many businesses represented
the height of the diversification trend. These conglomerates created by multiple
Acquisitions, exemplified the belief in the generality of management principles and
the irrelevance of industry specific knowledge for the top management tasks of
leadership, control, and strategic direction.
Downsizing,
outsourcing and
refocusing
The dominant trends of the last two decades of the twentieth century were
downsizing and refocusing. Large industrial firms reduced both their product
scope, by focusing on their core businesses, and their vertical scope, through
outsourcing. The extent of outsourcing and vertical disintegration has given rise to
a new organizational form; the virtual organization, whose primary function is to
coordinate the activities of a network of suppliers

3. Theoretical Approaches To Corporate Level Strategy
3.1 As explained previously, corporate level strategy is the way a company creates value through the
configuration and coordination of its multimarket activities. In comprehending the corporate level
strategy, following theoretical approaches play an important role
1. Industrial organization theory
2. Transaction cost theory
3. Agency theory
4. Strategic contingency and institutional theories and
5. Real option theory

3.1:1:Industrial Organization (IO) theory
This suggests that the firm's profitability and growth prospects depend upon the external environment
confronting the firm and the firm's actions and reactions to such factors. Accordingly firms behavior is
strongly influenced by their relative market power within the industry and their strategies aim to
increase this power or compensate for their lack of power. IO perspective posits that firms diversify their
activities because doing so increase their market power by reducing their independence on a single
business, which improves firm performance.

3.1.2: Transaction cost theory
This theory proposes an alternative explanation for the existence of multi-business firms. Transaction
cost theory proposes that companies try to minimize the costs of exchanging resources with the
environment and that companies try to minimize the bureaucratic costs of exchanges within the
company. The theory sees institutions and markets as different forms organizing and coordinating
economic transactions. Williamson (1975) identified factors that would lead to high transaction
costs that cause market failure. Diversification thus is potential response to market failures

3.1.3: Agency theory
Agency theory is concerned the conflict of interest between shareholders and top management.
Diversification can enhance a firms value which would serve the interest of both shareholders and top
management.
3.1.4: Strategic contingency and institutional theories
Another explanation for corporate level strategy derives from strategy contingency theory
(Venkatraman, 1989) and institutional theory (Kogut, Walker & Anand, 2002) in which the underline idea
is that a fit between a firms strategy on the one hand external and internal contingencies on the other
increase performance. Then investing in different types of businesses, manufacturing different types of
products, vertical integration, geographical expansion helps the firms reduces its dependence on a
single product, service, market or technology.

3.1.5: Real option theory
Real option theory addresses the concept of flexibility by taking into account uncertainty in corporate
strategy decision. It builds on option theory which was developed in financial field. An option is the
right, but not the obligation, to buy or sell a specified assets at a pre-specified price on a pre-specified
date (Amram & Kulatilaka, 1999). Real option theory provides a mean to study the value of corporate
level strategy.

4. Approaches To Corporate Level Strategies
4.1 Corporate level strategies can be approached in number of ways. In this S-2 Syllabus, we use
three approaches to corporate level strategy that companies use to decide which business they should
be in
1. Directional/Grand strategy
I. Growth strategies - expansion into new products and markets
ii. Stability strategies - maintenance of the status quo and retrenchment
iii. Defensive/Recovery strategies reduce the companys level of activities
2. Portfolio strategy
Portfolio strategy is a corporate level strategy that minimizes risks by diversifying investments among
various businesses or product lines. Simply portfolio strategy guides the strategic decision of firms that
compete in a variety of businesses and determine the mix of business units and product lines
that will provide a maximum competitive advantage.
3. Parental strategy
parent strategy is a strategy that determine the manner in which management coordinates activities
and transfers resources and cultivates capabilities among product lines and business units.

GROWTH STRATEGY Growth strategy is adopted when the organization wants to create high levels of
growth in one or more of its areas of operations or business units. Growth can be achieved internally by
investing or externally by acquiring additional business units. Mainly growth strategies include
diversification and concentration (integration). In addition international entry strategies are also
included
STABILITY STRATEGY - A strategy that seeks to maintain the status quo to deal with the uncertainty of a
dynamic environment, when the industry is experiencing slow- or no-growth conditions, or if the owners
of the firm elect not to grow for personal reasons.
DEFENSIVE/RECOVERY STRATEGY - Defensive strategies are used to reduce the size or scope of a firms
activities by cutting back in some areas or eliminating entire business. Defensive strategy include
strategies such as Retrenchment turnaround, captive company, sell out/divestment, bankruptcy and
liquidation
Chapter Summary
In this chapter we have described the concept of corporate level strategy and its key elements. It is
discussed that corporate level strategy is concerned primarily with answering the question what set of
businesses should be in? Moreover the chapter highlighted the evolution of corporate level strategy and
presented theoretical approaches that can be used in comprehending the corporate level strategy.
Further approaches to corporate level strategy directional, portfolio, and parent were outlined.
This chapter has also underlined the growth, stability, and retrenchment strategies