Corporate Strategy and
Organizational Design
Inhoudsopgave
Week 1: Corporate Strategy & Diversification.......................................................................................................................... 2
§1.1 Lecture......................................................................................................................................................................................2
§1.2 Workgroup...............................................................................................................................................................................7
§1.3 Study questions......................................................................................................................................................................10
§1.4 Case: Amazon.com.................................................................................................................................................................12
Week 2: Ownership of the firm.............................................................................................................................................. 13
§2.1 Lecture....................................................................................................................................................................................13
§2.2 Study questions......................................................................................................................................................................18
§2.3 Workgroup and Case: Short-termism and shareholder primacy...........................................................................................22
Week 3: Managing for Stakeholders....................................................................................................................................... 24
§3.1 Lecture....................................................................................................................................................................................24
§3.2 Study questions:.....................................................................................................................................................................31
§3.3 Workgroup // Case: Fixing FaceBook (Presenting)................................................................................................................32
Week 4: Choosing the firm’s vertical boundaries.................................................................................................................... 34
§4.1 Lecture....................................................................................................................................................................................34
§4.2 Study questions......................................................................................................................................................................41
§4.3 Workgroup // Case Lego: Consolidating Discrtibution (Written assignment).......................................................................41
Week 5: Hoirzontal Growth M&As and Alliances.................................................................................................................... 42
§5.1 Lecture....................................................................................................................................................................................42
........................................................................................................................................................................................................49
........................................................................................................................................................................................................50
........................................................................................................................................................................................................50
§5.2 Study questions......................................................................................................................................................................54
§5.3 Workgroup // Case Bayer-Monsanto: The Challenges of a Mega Merger............................................................................54
Week 6:................................................................................................................................................................................. 56
§6.1 Lecture....................................................................................................................................................................................56
§6.2 Study questions......................................................................................................................................................................64
§6.2 Workgroup // Case Main Case: Reawakening the magic: Bob Iger and The Walt Disney Company (Written assignment).65
1
,Week 1: Corporate Strategy & Diversification
§1.1 Lecture
What is strategy?
Is the art of outperforming rivals in a dynamic competitive environment over long periods of time.
Plan to adapt
Compete industry
Long run: sustained
What is this course about? (Con’t)
Topics covered will consider the concept of Corporate Strategy:
The definition of, and limits to, the boundaries of the firm and the resultant implications for the
corporate portfolio
The tools of corporate growth (including internal development, acquisitions, and alliances) and the
resources for sustained success
Corporate governance as key to how multi-business firms can be governed such that stakeholders’
interests are attended to
The organizational structures, systems and governance mechanisms needed to realize corporate
value
Corporate vs. Business strategy
Corporate: where do we compete, in terms of products geographical and customer. We define the
boundaries?
Business: How to compete (ToS)?
Corporate strategy
“Corporate strategy is the pattern of decisions in a company that determines and reveals its objectives,
purposes, or goals, and defines the range of businesses the company is to pursue [Lecture 1,4], the kind of
economic and human organization it is or intends to be [Lecture 5,6], and the nature of the economic and
noneconomic contribution it intends to make to its
shareholders, employees, customers, and communities
[Lecture 2,3].” (Andrews in Foss, 1997, p 52.)
What businesses to compete in?
How should the business strategies of the individual
units be integrated and managed?
What do we need to value? How do we deliver
value? How do we sustain?
2
,The triangle of Corporate Strategy
Corporate strategy:
• Is guided by a vision of how a firm, as a whole, creates value.
• Is a system of interdependent parts (not a collection of individual parts).
• Must be consistent with, and capitalize on, opportunities outside the company.
• Alignment of these elements is the source of corporate advantage
• What are the design choices?
ACID test for any corporate strategy
The company’s business must not be worth more to another owner
Premises of Corporate Strategy (very important, remember them!!!!!!!)
1. Competition occurs at the business level (they don’t compete, the corporation are strategically
creating the plan. (Kraft doesn’t compete with P&G; but Oreo with LU)
2. Being part of a diversified company involves inevitable costs for business units (you have to
follow Kraft policies; your money subsidies new businesses)
3. Shareholders can diversify directly at a lower cost (Needs to ability to create value. Spreading the
risks)
Premises of Corporate Strategy (Con’t)
The central issue in corporate strategy is how the corporation adds competitive value to
its businesses by creating synergies
Parenting advantage
The best parent companies create more value in their businesses than
rivals would. (Example: Influence of a corporation (kraft) on their
businesses (Lu’s)
If a parent company is to own a particular business, not only must it be
able to add value to that business but also it should be capable of
adding more value than any other potential parent.
Corporate Diversification
What is diversification
Growth strategy
When a firm simultaneously engages in multiple business activities, products, or country markets.
Successful Diversification
To achieve successful diversification a company must first take an objective look at its existing businesses
and the value added by the corporation...That understanding should guide future diversification as well
as the development of skills and activities with which to select further new businesses.
3
, Diversification as an avenue for growth
Motives
1. Growth
But be aware of the costs of entry into a different
product market
2. Spreading risk
By combining businesses with uncorrelated financial
flows, but limited value creation
3. Value creation
Economies of scope: sharing resources and capabilities across multiple business along the value
chain;
Economies of scope: average cost per unit, being less when multiple products are produce
Economies of scale: average cost many products, less costs for the same product.
4. Economies from internalizing transactions:
o Internal capital markets
o Internal labor markets
Good, bad & Ugly reasons why firms diversify (Montogromery, 1994)
Resource view Market Power view
- Excess capacity in productive factors (+ indivisibilities) - Increase bargaining power
- Firm learning - Cross-subsization
- Economies of scope - Mutual forbearance
Agency View Risk & Control view
- Empire building - Co-insurance of risks
- Managerial Entrenchment - Revenue stability
- Reduce employment risk - Address market failures
- Transaction costs of mkt > coordination &
bureaucratic costs within the firm
Diversification should be in the interests of shareholders, not of managers
Managerial Hubris (unrealistic view of managers who can manage unrelated business – limit in
knowledge)
Empire making
Diversification and Performance
Research has found that diversified firms not always outperform non- diversified firms.
Causality: Diversification ⇥?⇤ Profitability.
No consistent relationship BUT evidence of an inverted-U (omgedraaide U) relationship.
o Curvilinear relationship between diversification and performance (accounting and market
based): moderate levels of diversification lead to higher levels of performance than either
limited or extensive diversification.
Most studies show that related diversification outperforms unrelated diversification.
Unrelatedness
Refers to having NO clear opportunity to transfer skills or share important activities
/ Two product are unrelated when they neither serve the same product market nor share use of resources
Relatedness
4
Organizational Design
Inhoudsopgave
Week 1: Corporate Strategy & Diversification.......................................................................................................................... 2
§1.1 Lecture......................................................................................................................................................................................2
§1.2 Workgroup...............................................................................................................................................................................7
§1.3 Study questions......................................................................................................................................................................10
§1.4 Case: Amazon.com.................................................................................................................................................................12
Week 2: Ownership of the firm.............................................................................................................................................. 13
§2.1 Lecture....................................................................................................................................................................................13
§2.2 Study questions......................................................................................................................................................................18
§2.3 Workgroup and Case: Short-termism and shareholder primacy...........................................................................................22
Week 3: Managing for Stakeholders....................................................................................................................................... 24
§3.1 Lecture....................................................................................................................................................................................24
§3.2 Study questions:.....................................................................................................................................................................31
§3.3 Workgroup // Case: Fixing FaceBook (Presenting)................................................................................................................32
Week 4: Choosing the firm’s vertical boundaries.................................................................................................................... 34
§4.1 Lecture....................................................................................................................................................................................34
§4.2 Study questions......................................................................................................................................................................41
§4.3 Workgroup // Case Lego: Consolidating Discrtibution (Written assignment).......................................................................41
Week 5: Hoirzontal Growth M&As and Alliances.................................................................................................................... 42
§5.1 Lecture....................................................................................................................................................................................42
........................................................................................................................................................................................................49
........................................................................................................................................................................................................50
........................................................................................................................................................................................................50
§5.2 Study questions......................................................................................................................................................................54
§5.3 Workgroup // Case Bayer-Monsanto: The Challenges of a Mega Merger............................................................................54
Week 6:................................................................................................................................................................................. 56
§6.1 Lecture....................................................................................................................................................................................56
§6.2 Study questions......................................................................................................................................................................64
§6.2 Workgroup // Case Main Case: Reawakening the magic: Bob Iger and The Walt Disney Company (Written assignment).65
1
,Week 1: Corporate Strategy & Diversification
§1.1 Lecture
What is strategy?
Is the art of outperforming rivals in a dynamic competitive environment over long periods of time.
Plan to adapt
Compete industry
Long run: sustained
What is this course about? (Con’t)
Topics covered will consider the concept of Corporate Strategy:
The definition of, and limits to, the boundaries of the firm and the resultant implications for the
corporate portfolio
The tools of corporate growth (including internal development, acquisitions, and alliances) and the
resources for sustained success
Corporate governance as key to how multi-business firms can be governed such that stakeholders’
interests are attended to
The organizational structures, systems and governance mechanisms needed to realize corporate
value
Corporate vs. Business strategy
Corporate: where do we compete, in terms of products geographical and customer. We define the
boundaries?
Business: How to compete (ToS)?
Corporate strategy
“Corporate strategy is the pattern of decisions in a company that determines and reveals its objectives,
purposes, or goals, and defines the range of businesses the company is to pursue [Lecture 1,4], the kind of
economic and human organization it is or intends to be [Lecture 5,6], and the nature of the economic and
noneconomic contribution it intends to make to its
shareholders, employees, customers, and communities
[Lecture 2,3].” (Andrews in Foss, 1997, p 52.)
What businesses to compete in?
How should the business strategies of the individual
units be integrated and managed?
What do we need to value? How do we deliver
value? How do we sustain?
2
,The triangle of Corporate Strategy
Corporate strategy:
• Is guided by a vision of how a firm, as a whole, creates value.
• Is a system of interdependent parts (not a collection of individual parts).
• Must be consistent with, and capitalize on, opportunities outside the company.
• Alignment of these elements is the source of corporate advantage
• What are the design choices?
ACID test for any corporate strategy
The company’s business must not be worth more to another owner
Premises of Corporate Strategy (very important, remember them!!!!!!!)
1. Competition occurs at the business level (they don’t compete, the corporation are strategically
creating the plan. (Kraft doesn’t compete with P&G; but Oreo with LU)
2. Being part of a diversified company involves inevitable costs for business units (you have to
follow Kraft policies; your money subsidies new businesses)
3. Shareholders can diversify directly at a lower cost (Needs to ability to create value. Spreading the
risks)
Premises of Corporate Strategy (Con’t)
The central issue in corporate strategy is how the corporation adds competitive value to
its businesses by creating synergies
Parenting advantage
The best parent companies create more value in their businesses than
rivals would. (Example: Influence of a corporation (kraft) on their
businesses (Lu’s)
If a parent company is to own a particular business, not only must it be
able to add value to that business but also it should be capable of
adding more value than any other potential parent.
Corporate Diversification
What is diversification
Growth strategy
When a firm simultaneously engages in multiple business activities, products, or country markets.
Successful Diversification
To achieve successful diversification a company must first take an objective look at its existing businesses
and the value added by the corporation...That understanding should guide future diversification as well
as the development of skills and activities with which to select further new businesses.
3
, Diversification as an avenue for growth
Motives
1. Growth
But be aware of the costs of entry into a different
product market
2. Spreading risk
By combining businesses with uncorrelated financial
flows, but limited value creation
3. Value creation
Economies of scope: sharing resources and capabilities across multiple business along the value
chain;
Economies of scope: average cost per unit, being less when multiple products are produce
Economies of scale: average cost many products, less costs for the same product.
4. Economies from internalizing transactions:
o Internal capital markets
o Internal labor markets
Good, bad & Ugly reasons why firms diversify (Montogromery, 1994)
Resource view Market Power view
- Excess capacity in productive factors (+ indivisibilities) - Increase bargaining power
- Firm learning - Cross-subsization
- Economies of scope - Mutual forbearance
Agency View Risk & Control view
- Empire building - Co-insurance of risks
- Managerial Entrenchment - Revenue stability
- Reduce employment risk - Address market failures
- Transaction costs of mkt > coordination &
bureaucratic costs within the firm
Diversification should be in the interests of shareholders, not of managers
Managerial Hubris (unrealistic view of managers who can manage unrelated business – limit in
knowledge)
Empire making
Diversification and Performance
Research has found that diversified firms not always outperform non- diversified firms.
Causality: Diversification ⇥?⇤ Profitability.
No consistent relationship BUT evidence of an inverted-U (omgedraaide U) relationship.
o Curvilinear relationship between diversification and performance (accounting and market
based): moderate levels of diversification lead to higher levels of performance than either
limited or extensive diversification.
Most studies show that related diversification outperforms unrelated diversification.
Unrelatedness
Refers to having NO clear opportunity to transfer skills or share important activities
/ Two product are unrelated when they neither serve the same product market nor share use of resources
Relatedness
4
