EXAM SUMMARY
Meeting 1 - Corporate Strategy: Selection and Synergy
Lecture:
Corporate strategy challenges:
Corporate strategy is not only a matter of selecting in which markets a firm is active, but
increasingly a quest for synergy. Course has a resource and capability focus (synergies
between units, businesses, people etc. → operate on different levels) → decisions on the
portfolio of businesses. With industries converging, corporate strategists play a big role
in driving innovation → new product or technology. New collaborations to create
opportunities for growth and competitive advantage. Choose more often for acquisitions
→ for innovations and synergy because they lack resources = resource gap - increasingly
important today since no time to develop yourself.
Resources drive business success - Resource Based View:
Each business of a corporation depends on a set of resources for its competitive
advantage, and whether it is able to do so depends on the VRIN criteria (4 attributes):
- Value: if it’s able to generate rents; when resource meets market demand
- Rareness: if it’s not commonly found among rivals; leading to superior rents
→ Determine rent generating potential at a point in time
- Inimitable: it is difficult to replicate due to causal ambiguity, information asymmetries and
social complexity; requires understanding of nature and history
- Non-substitutability: cannot be easily replaced; requires understanding of use value
→ Determine rent generating potential over time - sustain CA over time
➔ Corporations! add to rent generating potential through control, coordination and
organization; they act as a (dynamic) capability, and drive resource creation.
➔ Control resources businesses, align resources, coordinate across units for synergies
➔ Consider the way resources are created from a dynamic capability perspective.
Corporates use dynamic capabilities:
Dynamic capabilities are “the firm’s processes that use resources - specifically the
processes to integrate, reconfigure, gain and release resources (divestiture) - to match
and even create market change. Dynamic capabilities thus are the organizational and
strategic routines by which firms achieve new resource configurations as markets
emerge, collide, split, evolve, and die.” and… “can be disaggregated into the capacity”
1. to sense and shape opportunities and threats,
2. to seize opportunities, and
3. to maintain competitiveness through enhancing, combining, protecting, and, when
necessary, reconfiguring the business enterprise’s intangible and tangible assets.”
,Four components of a dynamic capability - modes of corporate resource creation:
1. Reconfiguration processes: processes transform and recombine assets and resources
- 1) consolidation of support activities after M&A, 2) reconfigure SBUs to allow one BU
to exploit economies of scale and scope which other BUs can benefit from
2. Leveraging existing resources: identify nature resource; recognize opportunity for
advantage; implement necessary organizational changes / create conditions whereby
resource can be transferred. Leveraging: 1) application or scope of resource extended
into other domains; 2) resource is replicated (managers must understand)
3. Learning: two strategies, 1) supportive culture; 2) creation through tough control
4. Integration: coordinate and integrate resources and assets, centre can drive resource
creation by recognizing where congruences and complementarities exist → encourage
to pool skills and resources; and cross-divisional linkages / interactions
➔ Components focus on different synergies, capabilities can be used for different
purposes such as sensing, shaping and seizing.
Organic growth and synergy:
Corporate strategy as a selection mechanism serves as a platform for the competitively
more implicative synergy mechanism in the hands of the corporate strategist.
- Investors can only duplicate the portfolio of businesses, not decide on how businesses
are operated.
- Corporate strategists not only control businesses, but are also in position to
coordinate and organize resources → create dynamic capabilities
- Use of dynamic capabilities to reconfigure, leverage, learn and integrate resources
- Synergies requiring resource modification and driven by dissimilar resources most
competitive potential → create something unique, modification makes even more unique
- Dynamic capabilities to achieve such synergies – notably integration – most valuable
➔ While corporate advantage can only be created internally, synergy advantage can
exist internally and externally with partners; synergy-able firms focus their dynamic
capabilities on balancing internal and external synergies
Videos and chapter:
Chapter 1 - Corporate advantage:
Corporate and business strategy:
➢ Single vs. multi-businesses: each business has its own business strategy - business
model (different in at least one of the who, what, how dimensions: customers, products,
activities) - but the corporate strategy affects all the businesses. How to compete in a
business vs. decisions about in which businesses to compete.
➢ Competitive advantage vs. corporate advantage: goal business strategy = maximize
the net present value (NPV) of a business, achieved by ensuring the willingness-to-
pay (WTP) of buyers of outputs is higher than the willingness-to-sell (WTS) of suppliers
of inputs. Corporate advantage when the collection of businesses owned jointly is more
valuable than the sum of values of individual businesses owned separately.
➢ Who is the competition?
- Business strategy: rivals industry influence cost or revenues adversely (five forces)
, - Corporate strategy: anyone who can assemble a similar portfolio of businesses
1) Investors e.g. mutual funds→ limited power cash flow, rights over returns -
portfolio assembly strategy (have cash flow but no decision rights)
2) Other corporate strategists: e.g. other multi-business corporations, their CEOs,
boards, and advisors → have decision rights through administrative control
exercised by corporate HQ - use business modification as strategy
➔ Activist shareholders can both take stake in a company and pressure a CEO
Corporate strategy acts along two mechanisms:
1) Corporate advantage from portfolio assembly: the “selection” mechanism:
The NPV of a portfolio of businesses A and B: V[AB] = Future cash flows discounted at a
discount rate. Value can be created in two ways: influencing cash flows or decreasing the
discount rate. Investors not able to influence cash flows, but may be able to spot bargains:
"buy low and sell high”, and decrease discount rate: timing; riskiness; risk diversification (of
portfolio = unsystematic). If passive investor can create corporate advantage through
owning jointly / selection, then a corporate strategist must do better than V[ABC].
Sufficient in emerging economies if investors do not have access to the equivalent portfolio.
➔ Boundaries of a firm: organic vs. inorganic growth - make or buy decision portfolio
➔ Level of diversification: shaped by business models; relatedness businesses
2) Corporate advantage from business modification: the “synergy” mechanism:
Synergy is the means through which corporate advantage is created by a corporate
strategist. → Synergy: various ways in which cash flows and discount rates of
businesses in a portfolio can be modified through joint operation (collaboration and joint
decision-making power). Reduce systematic (market) risk for lower discount rate when
shareholder unlimited investment opportunities /can diversify unsystematic (business) risk.
➔ Synergies between businesses: bring together similar + complementary resources,
accessing external resources through acquisitions/ alliances - organic vs inorganic
➔ Innovation: integrate corporate knowledge resources, access external knowledge
Chapter 2: Synergies: benefits to collaboration
If synergies in underlying value chain segments are the potential gains from collaboration
across different businesses, governance costs are the "tax" that eats into these benefits.
Synergy test: V(AB) > V(A) + V(B)
Where V(A/B) is the Net Present Value (NPV) of business A/B
when operated independently. V(AB) is the NPV of business A
and B when they operate jointly. NPV = cash flows adjusted
for discount rate. Whether modification by integrating activities
enhances the value → reducing costs or enhancing revenues.
Operated jointly implies decisions across the two businesses
are coordinated with the aim of enhancing joint value.
Corporate advantage test: V[AB] > V(A) + V(B)
V[AB] is the NPV of business A and B when they are owned
jointly. In performing this test corporate strategists compete
with other corporate strategists and investors.
, Main synergy approaches: manage alignment, and create fit + synergy in two main ways:
- Cost reducing synergies: economies of scale and scope; subadditive; 2+2=3 →
costs of two companies operating together will be lower than the costs of two
businesses operating separately (joint variable or fixed costs lowered by linking)
- Revenue enhancing synergies: superadditive; 2+2=5 → more revenues than
business create separately e.g. because combining manufacturing facilities increases
the quality (more valuable output) of product and leads to more sales.
Synergy operators - 4C → ways synergies created depends on similarity and modification:
Each operator answers the following question: given two value chain activities, A and B,
belonging to two distinct businesses, each operating independently, what are some ways in
which operating decisions in these activities could be coordinated to create value?
Similarity of Resources
Similar Dissimilar
Modification of High Consolidation Customization High Synergy/ competitive
resources required potential
Low Combination Connection Low
Cost Revenue
Type of synergy
- Combination: reduce costs - higher volumes supplier or buy competitors, pooling
resources. Value drivers costs (bargaining power supplier) and revenue (customers)
- Connection: bundle to economize on the search + transaction costs of making separate
purchases (marketing/distribution) - cross-selling and applying a common brand.
- Consolidation: combination of two manufacturing facilities leads to a reduction in
workforce or integration needs modification to a plant to facilitate resources of the other.
→ value drivers: cost and invested capital (assets)
- Customization: business operating a plant and other business making a product based
on new technology for which it needs to use the plant of the other for production.
Co-specializing / bundling and transferring intangible assets e.g. knowledge and IP. →
Improved value in production or consumption (either the final product works better or
costs less).
➢ Similar resources - more value and bargaining power, economies of scale
➢ Dissimilar resources - better features and sales in new markets, economies of scope
(producing different products together leads to lower average cost)
➢ Modification increases the competitive potential of the synergy.
The 4C framework
- Structured approach to identify synergy opportunities by analyzing the value chain
- Helpful in differentiating synergies along aspects such as difficulty of predicting
value; ease of realization; and management efforts required
- Makes it easier to explain the sources of value to investors, managers, customers
- Provides a ranking of which synergies to prioritize
Meeting 1 - Corporate Strategy: Selection and Synergy
Lecture:
Corporate strategy challenges:
Corporate strategy is not only a matter of selecting in which markets a firm is active, but
increasingly a quest for synergy. Course has a resource and capability focus (synergies
between units, businesses, people etc. → operate on different levels) → decisions on the
portfolio of businesses. With industries converging, corporate strategists play a big role
in driving innovation → new product or technology. New collaborations to create
opportunities for growth and competitive advantage. Choose more often for acquisitions
→ for innovations and synergy because they lack resources = resource gap - increasingly
important today since no time to develop yourself.
Resources drive business success - Resource Based View:
Each business of a corporation depends on a set of resources for its competitive
advantage, and whether it is able to do so depends on the VRIN criteria (4 attributes):
- Value: if it’s able to generate rents; when resource meets market demand
- Rareness: if it’s not commonly found among rivals; leading to superior rents
→ Determine rent generating potential at a point in time
- Inimitable: it is difficult to replicate due to causal ambiguity, information asymmetries and
social complexity; requires understanding of nature and history
- Non-substitutability: cannot be easily replaced; requires understanding of use value
→ Determine rent generating potential over time - sustain CA over time
➔ Corporations! add to rent generating potential through control, coordination and
organization; they act as a (dynamic) capability, and drive resource creation.
➔ Control resources businesses, align resources, coordinate across units for synergies
➔ Consider the way resources are created from a dynamic capability perspective.
Corporates use dynamic capabilities:
Dynamic capabilities are “the firm’s processes that use resources - specifically the
processes to integrate, reconfigure, gain and release resources (divestiture) - to match
and even create market change. Dynamic capabilities thus are the organizational and
strategic routines by which firms achieve new resource configurations as markets
emerge, collide, split, evolve, and die.” and… “can be disaggregated into the capacity”
1. to sense and shape opportunities and threats,
2. to seize opportunities, and
3. to maintain competitiveness through enhancing, combining, protecting, and, when
necessary, reconfiguring the business enterprise’s intangible and tangible assets.”
,Four components of a dynamic capability - modes of corporate resource creation:
1. Reconfiguration processes: processes transform and recombine assets and resources
- 1) consolidation of support activities after M&A, 2) reconfigure SBUs to allow one BU
to exploit economies of scale and scope which other BUs can benefit from
2. Leveraging existing resources: identify nature resource; recognize opportunity for
advantage; implement necessary organizational changes / create conditions whereby
resource can be transferred. Leveraging: 1) application or scope of resource extended
into other domains; 2) resource is replicated (managers must understand)
3. Learning: two strategies, 1) supportive culture; 2) creation through tough control
4. Integration: coordinate and integrate resources and assets, centre can drive resource
creation by recognizing where congruences and complementarities exist → encourage
to pool skills and resources; and cross-divisional linkages / interactions
➔ Components focus on different synergies, capabilities can be used for different
purposes such as sensing, shaping and seizing.
Organic growth and synergy:
Corporate strategy as a selection mechanism serves as a platform for the competitively
more implicative synergy mechanism in the hands of the corporate strategist.
- Investors can only duplicate the portfolio of businesses, not decide on how businesses
are operated.
- Corporate strategists not only control businesses, but are also in position to
coordinate and organize resources → create dynamic capabilities
- Use of dynamic capabilities to reconfigure, leverage, learn and integrate resources
- Synergies requiring resource modification and driven by dissimilar resources most
competitive potential → create something unique, modification makes even more unique
- Dynamic capabilities to achieve such synergies – notably integration – most valuable
➔ While corporate advantage can only be created internally, synergy advantage can
exist internally and externally with partners; synergy-able firms focus their dynamic
capabilities on balancing internal and external synergies
Videos and chapter:
Chapter 1 - Corporate advantage:
Corporate and business strategy:
➢ Single vs. multi-businesses: each business has its own business strategy - business
model (different in at least one of the who, what, how dimensions: customers, products,
activities) - but the corporate strategy affects all the businesses. How to compete in a
business vs. decisions about in which businesses to compete.
➢ Competitive advantage vs. corporate advantage: goal business strategy = maximize
the net present value (NPV) of a business, achieved by ensuring the willingness-to-
pay (WTP) of buyers of outputs is higher than the willingness-to-sell (WTS) of suppliers
of inputs. Corporate advantage when the collection of businesses owned jointly is more
valuable than the sum of values of individual businesses owned separately.
➢ Who is the competition?
- Business strategy: rivals industry influence cost or revenues adversely (five forces)
, - Corporate strategy: anyone who can assemble a similar portfolio of businesses
1) Investors e.g. mutual funds→ limited power cash flow, rights over returns -
portfolio assembly strategy (have cash flow but no decision rights)
2) Other corporate strategists: e.g. other multi-business corporations, their CEOs,
boards, and advisors → have decision rights through administrative control
exercised by corporate HQ - use business modification as strategy
➔ Activist shareholders can both take stake in a company and pressure a CEO
Corporate strategy acts along two mechanisms:
1) Corporate advantage from portfolio assembly: the “selection” mechanism:
The NPV of a portfolio of businesses A and B: V[AB] = Future cash flows discounted at a
discount rate. Value can be created in two ways: influencing cash flows or decreasing the
discount rate. Investors not able to influence cash flows, but may be able to spot bargains:
"buy low and sell high”, and decrease discount rate: timing; riskiness; risk diversification (of
portfolio = unsystematic). If passive investor can create corporate advantage through
owning jointly / selection, then a corporate strategist must do better than V[ABC].
Sufficient in emerging economies if investors do not have access to the equivalent portfolio.
➔ Boundaries of a firm: organic vs. inorganic growth - make or buy decision portfolio
➔ Level of diversification: shaped by business models; relatedness businesses
2) Corporate advantage from business modification: the “synergy” mechanism:
Synergy is the means through which corporate advantage is created by a corporate
strategist. → Synergy: various ways in which cash flows and discount rates of
businesses in a portfolio can be modified through joint operation (collaboration and joint
decision-making power). Reduce systematic (market) risk for lower discount rate when
shareholder unlimited investment opportunities /can diversify unsystematic (business) risk.
➔ Synergies between businesses: bring together similar + complementary resources,
accessing external resources through acquisitions/ alliances - organic vs inorganic
➔ Innovation: integrate corporate knowledge resources, access external knowledge
Chapter 2: Synergies: benefits to collaboration
If synergies in underlying value chain segments are the potential gains from collaboration
across different businesses, governance costs are the "tax" that eats into these benefits.
Synergy test: V(AB) > V(A) + V(B)
Where V(A/B) is the Net Present Value (NPV) of business A/B
when operated independently. V(AB) is the NPV of business A
and B when they operate jointly. NPV = cash flows adjusted
for discount rate. Whether modification by integrating activities
enhances the value → reducing costs or enhancing revenues.
Operated jointly implies decisions across the two businesses
are coordinated with the aim of enhancing joint value.
Corporate advantage test: V[AB] > V(A) + V(B)
V[AB] is the NPV of business A and B when they are owned
jointly. In performing this test corporate strategists compete
with other corporate strategists and investors.
, Main synergy approaches: manage alignment, and create fit + synergy in two main ways:
- Cost reducing synergies: economies of scale and scope; subadditive; 2+2=3 →
costs of two companies operating together will be lower than the costs of two
businesses operating separately (joint variable or fixed costs lowered by linking)
- Revenue enhancing synergies: superadditive; 2+2=5 → more revenues than
business create separately e.g. because combining manufacturing facilities increases
the quality (more valuable output) of product and leads to more sales.
Synergy operators - 4C → ways synergies created depends on similarity and modification:
Each operator answers the following question: given two value chain activities, A and B,
belonging to two distinct businesses, each operating independently, what are some ways in
which operating decisions in these activities could be coordinated to create value?
Similarity of Resources
Similar Dissimilar
Modification of High Consolidation Customization High Synergy/ competitive
resources required potential
Low Combination Connection Low
Cost Revenue
Type of synergy
- Combination: reduce costs - higher volumes supplier or buy competitors, pooling
resources. Value drivers costs (bargaining power supplier) and revenue (customers)
- Connection: bundle to economize on the search + transaction costs of making separate
purchases (marketing/distribution) - cross-selling and applying a common brand.
- Consolidation: combination of two manufacturing facilities leads to a reduction in
workforce or integration needs modification to a plant to facilitate resources of the other.
→ value drivers: cost and invested capital (assets)
- Customization: business operating a plant and other business making a product based
on new technology for which it needs to use the plant of the other for production.
Co-specializing / bundling and transferring intangible assets e.g. knowledge and IP. →
Improved value in production or consumption (either the final product works better or
costs less).
➢ Similar resources - more value and bargaining power, economies of scale
➢ Dissimilar resources - better features and sales in new markets, economies of scope
(producing different products together leads to lower average cost)
➢ Modification increases the competitive potential of the synergy.
The 4C framework
- Structured approach to identify synergy opportunities by analyzing the value chain
- Helpful in differentiating synergies along aspects such as difficulty of predicting
value; ease of realization; and management efforts required
- Makes it easier to explain the sources of value to investors, managers, customers
- Provides a ranking of which synergies to prioritize
