The following are my unedited notes from my reading of Corporate Strategy:
Corporate strategy versus business strategy
Corporate advantage versus competitive advantage
Two ways of increasing competitive advantage:
1.) raise the price customers are willing to pay
2.) lower the price suppliers are willing to sell for
Maximizing corporate advantage may or may not be consistent with maximizing the competitive advantage of each individual business
Some businesses could give up competitive advantage in their business in order to enhance the competitive advantage of other businesses in the portfolio
Corporate strategy matters at least as much as the analysis of industry competition (implication for passive investment analysis)
A natural, minimal benchmark for a corporate strategist is a passive investor
Synergy is therefore the means through which corporate advantage is created relative to a typical investor who can select the same portfolio of investments
Portfolio assembly can be a corporate advantage in cases of private/restricted capital markets
By coming into existence, the multi-business firm in effect destroys its own best benchmark
The super-rich may treat their business group as their own mutual fund
Corporate advantage is defined in terms of jointly owning businesses and synergies in terms of jointly operating them.
While an investor could create corporate advantage, an investor cannot extract synergies.
For a corporate strategist to create corporate advantage over what an investor can achieve in efficient capital markets, there must at least be some form of synergy between two businesses in the portfolio
To find synergies, construct a value chain for each business/division and look for opportunities to coordinate or economize activity
Forms of synergy
- Consolidation, creating value by rationalization across similar resources from similar value chain activities by eliminating redundancies, affects mostly costs and invested capital
- Combination, creating value by pooling similar resources from similar value chain activities, such as combining purchasing to obtain volume discounts or acquiring a competitor then raising prices for customers, impacts either costs or revenues
- Customization, creating value by co-specializing dissimilar resources in order to create greater joint value, results in improved value in production or consumption and involves modification of resources, the transfer of best practices can create unique value
- Connection, generates value by simply pooling the output of dissimilar value chain activities, for example customers may value being able to buy a bundle of different products and services together, the product development of one business is being connected to the distribution channel of another
One common negative synergy is brand dilution, ie, does the brand apply? Another is complexity. Another is market rivalry, this is a significant concern in the advertising industry, where when two firms who serve rivals merge, the chances of keeping both their clients is low
Governance costs act as taxes that eat into the potential benefits from synergies when they are attempted to be extracted
When an autonomous business becomes a division within another, the incentives of the owner and managers are necessarily diluted
Synergies are likely to generate significant transaction costs are less likely to be successfully realized in arms length relationships between independent firms than under common ownership
A management services firm is a kind of non-equity alliance
The more mature and efficient the capital markets in which a company operates, the greater the pressure on the company to engage in diversification primarily on the basis of potential synergies between existing and new businesses
The CEO should be spending the shareholders’ money on entry into new businesses only to extract value that the shareholder could not by investing directly in such a business on her own
In the absence of bargains, passing the synergy test is necessary but not sufficient to pass the diversification test
If some other corporate parent has even stronger synergies with a business than you do, you should consider divesting
An active policy of looking for divestiture opportunities is sensible
On average, a corporate parent that divests a business increases shareholder value
Imagine that, starting today, the two businesses would be moved into separate ownership and would be operated completely independently, with no communication or exchange of any kind between the two. How would the value of the businesses be effected?
Divesting when you can, and not when you have to is usually preferable
Outsourcing often carries significant transaction costs
Think about the multi-business corporation as a collection of value chain activities
One should be able to read the corporate strategy of a company in its organization chart: what kinds of activities does the top management feel are essential to integrate?
Pure forms of organization: by activity, by output, by user/customer
Grouping similar activities together emphasizes economies of scale at the expense of economies of scope, whereas grouping different activities together does exactly the opposite
Every grouping arrangement emphasizes certain interactions but excludes others, which show up as opportunity costs and bottlenecks
No structure is permanent
Don’t forget about how to integrate activities while you’re thinking about ways to partition them up
Corporate management functions:
- Treasury
- Risk management
- Taxation
- Financial reporting
- Company secretary
- Legal counsel
- Government relations
- Investor relations
The goal of resource allocation in the portfolio is thus to push businesses further away from the origin toward the top and right, away from the investment threshold (pg 212)
One low hanging fruit for multi-business firms in terms of corporate strategy is to actually give thoughtful consideration to capital allocation decisions within the portfolio
In the M&A and Post-merger Integration process, Evaluation refers to a post-transaction review of what went right and wrong
On average, acquirers do not benefit (in terms of market cap) from an acquisition; most target shareholders benefit from an acquisition
The ICSA Company Secretary’s Handbook, resource for corporate management
A House Rises 