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DISCERNING
Corporate
Strategy
 Sougata
Ray
<Learning
Curve>
>Corporate strategy in the Indian Context
>Strategy as a multidimensional concept
>Essential components of corporate strategy |
1.
Introduction
Indian industry has been undergoing a metamorphosis in the last
one decade, thanks to liberalization, globalization and privatization.
It has been facing much lower regulatory interference and hurdles
and enjoying a far greater autonomy in areas such as capacity
and business expansions, import and export, sourcing of technology
and raw materials, decisions about the location of their production
units, pricing and product mix, funding and so on. On the one
hand, Indian industry has been blessed with a host of new opportunities
for opportunities for growth, profit, expansion, diversification
into new areas of business, internationalization, divestment,
consolidation, mergers and acquisitions, accessing funds, technology
and other resources, forming strategic alliances and joint ventures,
etc; on the other hand, it has been subjected to intense pressure
of competition from domestic and foreign competitors and demanding
and sophisticated customers. The juggernaut of economic reforms
has brought about an irreversible and qualitative change, not
only in the business environment, but also in the managerial mindset,
frame of reference and approaches in India.
With the diminishing influence of regulatory authorities, the
responsibility now lies with strategic managers to scan the environment,
identify the opportunities and resources, understand the demand
of customers, be alert of the potential threat of competition,
and formulate and implement the right mix of strategies expeditiously.
There are clear indications that proactive companies such as Reliance,
Ranbaxy, Dr. Reddy’s Laboratory, Bharti, Hero Honda and BPCL
which moved swiftly and acted strategically, have made early gains
and are poised to reap huge benefits in the future. Increasingly
Indian managers are realizing the importance of thinking and acting
strategically. The frequent visits of some of the world-renowned
strategy gurus such as Tom Peter, C.K. Prahalad and Michel Porter
to address Indian managers provide the ample testimony that strategy
and strategic management are going to occupy the center stage
of corporate mindset in the coming years. The mind-boggling array
of strategy pronouncements by companies, as reported in business
press, also signify the growing importance of the concept. However,
we observe that a woeful lack of clarity prevails among the executives
and the commentators alike about the concept of strategy, its
domain and applicability.
The concept of strategy has emerged as one of the broadest and
most complex concepts in management. It is also perhaps the most
used and abused word in the business lexicon. It is now fashionable
to use any business term with a prefix of strategic and a suffix
of strategy. To understand strategy one needs to be aware of the
basic tenets of strategic management, a relatively young field
of management. Strategy is the core concept of strategic management,
around which the discussions revolve and theories are built. Strategic
management deals with the issues, concepts, theories, approaches
and action choices related to an organization’s interaction
with the external environment. It entails identification of opportunities
and threats, exploitation of opportunities through formulation
of goals and strategies, i.e., the means to achieve goals and
implementation of the same by acquiring, nurturing, deploying,
leveraging and stretching different resources and capabilities.
It spreads across different levels from corporate headquarters
to single businesses to functions and even to specific actions
within those functions and provides an integrated, future oriented
and long-term view of organizations.
One of the distinctive characteristics of strategic management
field is that it advocates purposive or goal-directed behavior
of organizations. It advocates that every organization should
have a vision, mission and a set of core values and beliefs to
survive and succeed for a long period of time. While vision provides
the stimuli and mission sets the limit to which an organization
attempts to reach, core values and beliefs provide the base or
foundation. Strategy acts as the conduit (the means) to take the
organization towards the vision standing on the foundation of
core values and beliefs. Therefore, any attempt to formulate strategy
of an organization starts with visioning - identification of its
purpose/mission and core values and beliefs. Further, the purpose
and mission, being a bit elusive and far-fetched, get translated
into a set of specific and measurable objectives that act as the
milestones towards reaching vision.
It is to be noted that like that of any living entity, vision
and values of an organization are not static and permanent. These
change with time and place. As a result, strategy, the conduit
between the two, is also dynamic and changes as the organization
modifies its vision or values or both. Take the example of the
public sector enterprises in India and many other economies in
transition. Many of these organizations were founded with a vision
to achieve self-reliance for the nation guided by a set of core
values very much rooted in socialistic thinking. However, in the
last one or two decades, for many of these enterprises the vision
of self-reliance has been replaced by the vision of global leadership
or economic success. Similarly, many of the core values such as
financial austerity and equitable distribution of wealth among
employees are given a go by in favor of consumerism and performance-linked
distribution of wealth. Therefore the strategies adopted by these
enterprises have to make a dramatic departure from the past.
The pioneering scholars of strategy (Andrews, 1971; Ansoff, 1965;
Chandler, 1962, etc.) in the initial years conceptualized strategy
as a comprehensive and descriptive concept. It was used to subsume
purpose or goals and means to achieve the same, i.e. the broad
approaches, policies and tactics to be adopted. However, with
the development of the field, modern day strategy scholars explicitly
separate goals and means for greater clarity and precise evaluation
of the efficacy of the means (Venkatraman, 1989). Therefore, the
boundary of strategy is now more narrowly defined. If the goal
is to maximize shareholder wealth, strategy provides the road
map as to how the company will maximize shareholder wealth. It
will indicate the businesses the company will be in, the competitive
position that it will hold in each of these businesses, and how
it will create and sustain corporate and competitive advantage
over other competing firms. Accordingly, it is envisaged that
strategy of an organization serves two primary purposes of defining
the segment of environment in which it operates and providing
guidance for subsequent goal-directed activity within that niche
(Hofer & Schendel, 1978). In the process, strategy provides
the basic direction and prepares the company to meet future challenges
(Goold & Luchs, 1993).
It is also realized that because organizations are collective
representations of different business and functional units, each
of them must be having its own set of goals, which may not necessarily
be same as the goals of the corporate headquarters looking after
the interests of the entire organization. Hence, if the goals
are different, the means to achieve them, i.e., strategies are
likely to be different. This understanding has led to the hierarchical
division of strategy into three broad levels - corporate, business
and functional strategy. Since strategic management aims to integrate
key functions by adopting a general management perspective, the
field is concerned with the corporate and business strategy only,
leaving the functional strategy to be dealt with by respective
functional areas. The strategy of the whole corporation is called
the corporate strategy and the strategy of the individual business
unit is called the competitive strategy. Business level strategy
is about how to compete in an industry and emerge victorious in
it. As competition is at the core of a business level strategy,
it is often termed as competitive strategy. In the remaining part
of the paper, we will attempt to demystify the concept of corporate
strategy and leave the discussion on competitive strategy for
the future.
Corporate strategy is a multidimensional concept - it has pieces
or elements. Once these elements are identified, orchestrated
and fitted properly, they give rise to a coherent and comprehensive
whole, called corporate strategy. A comprehensive strategy statement
must include all these elements and their linkages. In the following
section, I shall identify and explain a set of elements of corporate
strategy of a corporation.
2
Essential Elements of Corporate Strategy
Corporate strategy simply put is the overall strategy for a diversified
firm, a firm having more than one business. The classical definition
of corporate strategy, as given by Andrews (1971) states: “it
is a pattern of major objectives, purposes or goals and essential
policies and plans for achieving these goals, stated in such a way
as to define what business the company is in or is to be.”
Business here signifies the combination of both the product/services
(vehicle to fulfill certain need of consumer) and the market (consumers
whose need is being fulfilled). According to this definition corporate
strategy is concerned about defining the organizational purpose,
selection of business, allocation of resources among different businesses,
and the way of managing the array of businesses.
The scope of corporate strategy was quite broad in Andrews’
definition, and is far too general to provide meaningful practical
guidance to corporate strategists in resolving some of the critical
problems facing diversified corporations (Goold & Luchs, 1993).
In the subsequent years, since the seminal work of Rumelt (1974),
corporate strategy became synonymous with diversification strategy,
until a spate of corporate restructuring in the eighties and nineties
restored the balance by directing the focus of enquiry to many other
facets of corporate strategy. Diversification is viewed as the entry
of a firm into new lines of activities for broadening the base of
its businesses by investing in new products, new consumer or geographic
markets, or market segments. Several action choices are made within
the broad rubric of diversification strategy itself. Depending on
the variation in the scope of product and/or market, and its relation
with the existing businesses of the firm, these choices are termed
differently such as vertical and horizontal integration, related
diversification, conglomerate diversification and globalization.
Integrating some of these Porter (1987) argues that strategic management
at the corporate level involves mainly one of the following four
activities: portfolio management, restructuring, transferring skills,
and sharing activities across businesses.
In other words, primary choices in corporate strategy are the choice
of businesses and how to manage the inter-linkages of different
businesses (i.e., organization) to better utilize corporate resources
(Goold, Campbell & Alexander, 1996). This conceptualization,
however, limits the scope of corporate strategy as outlined by the
founding scholars such as Andrews and Ansoff. This narrowing down
of the scope of corporate strategy, though it has helped bring in
more clarity in the concept, provides an incomplete treatment of
the same from a corporate strategist’s point of view.
A corporate strategist is concerned not only about choice of business
portfolio, but also about portfolio of geographical markets for
acquisition of inputs, locating various value chain activities and
selling of outputs. He is concerned about the fundamental choices
regarding direction and priority of growth. He is also concerned
about modes or vehicles through which such choices are effected.
There are concerns about how to sequence and time the different
corporate strategic moves for greater effectiveness. A corporate
strategist is also concerned about facilitating efficient allocation
of corporate resources, linking the businesses and geographically
dispersed activities, and transferring resources across businesses
and locations to build synergy leading to corporate or parenting
advantage. This requires putting the right organization structure,
systems, processes and policies that would bind and guide different
business and organizational subsystems to work in unison towards
a common purpose. Finally he is also concerned about the corporate
perspective, fundamental values and beliefs and the economic logic
that would shape managerial assumptions, help take positions in
the face of trade off and guide him to make strategic choices.
If a corporation has to have a corporate strategy, then it must
necessarily have these elements as depicted in Figure 1. We develop
these elements and illustrate these domains of choice in more detail
in the following section, emphasizing how essential it is that they
form a unified whole.
2.1
Corporate Positioning or Scoping
Decisions regarding selection of portfolio of businesses and decisions
regarding geographical markets, both in terms of factor inputs,
transformation processes and other value chain activities, and reaching
the customers by selling of outputs, determine the position of the
corporation in the environment. More specifically this positioning
element of corporate strategy reflects the scope of the corporation
by defining the breadth and spread of the range of activities engaged
in, viz., product/market scope (line of business), nature and geographical
scope of factor inputs (technology, land, labor, capital, equipment,
information, etc.), composition of capital structure, location of
value chain activities, manufacturing and service units, targeted
consumers, etc.
Strategy literature has identified three dimensions related to the
scope of a corporation i.e., vertical scope, product scope and geographical
scope (Barney, 1998). Vertical scope and product scope respectively
indicate the vertical and horizontal spreads of product market choices
and together outline the domain of business of a firm. The geographic
scope captures the geographical spread of both factor and product
markets. Therefore, all the decisions regarding entry into, and
exit from, lines of business, geographical spread of manufacturing,
marketing and other value chain activities for catering to customers,
composition and acquisition of resources such as capital, technology,
raw material, physical assets and human collectively determine how
the corporation is positioned. This position is characterized by
different labels such as focused or conglomerate and regional, national
or global.
Johnson and Johnson defines its corporate position as a global baby
care company that fulfils the need of the parents around the globe
by providing complete range of baby care products, produced in multiple
continents. This position gets redefined from time to time. For
example, Asian Paints, which had a corporate position of a focused
national paint company by catering to industrial and household customers
in Indian market, has been systematically repositioning itself in
the recent years to become a global player by entering into a number
of other country markets. Similarly, Reliance Industries, a vertically
integrated company covering the complete textile value chain has
been repositioning itself to be a diversified conglomerate by entering
into a range of businesses such as power generation and distribution,
insurance, telecommunication, and information and communication
technology services.
2.2 Setting the Corporate Direction and Priorities
Another important element of corporate strategy is setting the direction
for growth and priority in order to heighten the likelihood of success.
Most organizations begin as single business corporations serving
a limited geographical market. At this stage most of these organizations
have various options to grow - they can expand the current business
by grabbing more share of the local market, move to other markets,
diversify into new businesses or all at a time. For large diversified
global corporations too, the growth options are not limited. They
can add new businesses in the portfolio to become more diversified,
they can divest or sell off businesses to downsize or consolidate,
can enter new country markets or withdraw from some, can expand
the capacity of all businesses or rationalize the asset and employee
base. However, given limited organizational capacity and resources,
most corporations are rarely in a position to pursue all the options
simultaneously. Priorities are assigned and tradeoffs are often
made in choosing these options. Moreover, even if the corporate
positioning leads to the choice of more than one business and location,
the choice has also to be made on how much emphasis will be placed
on each of them. Some business, for instance, might be identified
as centrally important, while others are deemed secondary. Priorities
are assigned with respect to the treatment meted out to different
stakeholders. For some companies, shareholders’ interest is
supreme, for some others, the customer is the king, and yet others,
employees’ interest is the ultimate. Accordingly, depending
on the priorities, the strategies adopted by these companies are
likely to differ. Therefore, one must remember that an important
element of corporate strategy is to provide clear direction of growth
and corporate priority in resource allocation.
This is evident in the following examples. One-time opportunities
to enter many new industries beckoned to most Indian companies after
the initiation of economic liberalization in the early nineties.
There were also opportunities to expand capacity and consolidate
the competitive position in existing businesses. In response to
the emerging situation some companies made a trade off by going
for either capacity expansion and improving global competitiveness
or diversification to new industries. However, there were others,
which availed of both kinds of opportunities. Asian Paints and Ranbaxy
were companies, which concentrated on the existing businesses to
enhance capacity and improve global competitiveness. However, the
former gave more priority to consolidate the position in the domestic
market, the later vigorously pursued to be a global player. On the
other hand, companies like Videocon and Hindustan Lever (HLL) aggressively
expanded their existing businesses and diversified into many new
businesses.
2.3
Corporate Strategy Vehicles or Modes
Beyond deciding on the corporate positioning and direction of growth,
the strategist also needs to decide how to get there. The means
for attaining the needed presence in a particular business or geographic
area should be the result of deliberate strategic choice. If the
decision is to expand the business portfolio, one needs to specify
how the company is going to accomplish it. By relying on organic
greenfield expansion or if there are other vehicles - such as joint
ventures or acquisitions - that offer a better means for achieving
the broadened scope? If the decision is to go for international
operations, what should be the entry mode or vehicle - greenfield
ventures, acquisitions of a company already existing in the target
market, or some sort of co-operative arrangement through either
licensing, joint venture or strategic alliance? For example, Reliance
Industries decided to start its telecom business through a greenfield
expansion, unlike Tata Sons that entered the telecommunication business
through an alliance with AT&T of USA. Similarly, though archrival
Pepsi Cola had entered India through a joint venture, Coca Cola
decided to enter Indian market with a wholly owned subsidiary,
Each vehicle has its merits and demerits that need to be carefully
considered. For example, an acquisition can give access to complementary
resources quickly, but problems may arise due to overestimation
of synergy and thereby overvaluation of the target and sometimes
during post acquisition integration requiring managers to waste
too much time. Similarly, synergistic alliances help diversify risk
associated with a single business and create economies of scope
across multiple businesses at a much lower capital investment and
financial risk. Cross-business and cross-border strategic alliances
also give the corporation greater flexibility to switch modes, if
required at a later date. However, gains in alliances need to be
shared with the partners and due to lack of complete control by
one firm, managing an alliance is more difficult compared to managing
other modes.
2.4
Staging of Corporate Strategy
Yet another important element of corporate strategy is staging -
sequencing, timing and pacing of major corporate moves of market
entry, expansion, divestment, etc. As discussed earlier, most organizations
face multiple choices to grow either by entering new businesses
or geographical markets. They have options to become leaner and
more efficient by selling off businesses or withdrawing from some
markets, or rationalizing the asset and employee base. However,
given the limited organizational capacity and resources, most corporations
are rarely in a position to pursue all the options simultaneously.
Sometimes, if more than one option is chosen, sequencing is needed
in implementing these. Moreover corporate strategy has to provide
guidance not only in sequencing the corporate moves but also when
to time such moves and how rapidly to progress. These may pertain
to decision regarding when to enter or exit from a business, when
to enter or exit a country, when to upgrade the technology, when
to resort to financial restructuring and go for initial public offering,
etc. For market acceptance and overcoming resource limitations,
the timing of these moves becomes critically important. The staging
is very much unique to a corporation, depending on its own internal
and external situation.
Over the last decade, in response to economic liberalization, some
companies in India expanded the scale of existing businesses as
well as diversified into many new businesses. There were some companies,
which had divested some businesses to reduce the size of business
portfolio. However, the sequencing and timing of scale expansion,
diversification and divestment moves differed across companies.
For instance, Tata Iron & Steel Company (TISCO) had first consolidated
its position in the core steel business, then divested some of its
non-core businesses, and recently started diversifying into new
areas. However, Reliance Industries, while consolidating its position
in the existing businesses such as textile and petrochemicals, aggressively
entered new areas such as Information Technology, insurance, petroleum,
power and telecommunication. Yet, there were companies like Videocon
and BPL that had first diversified into new businesses and then
started consolidating once faced with stiff competition.
2.5
Creating Corporate Advantage
The role of corporate strategy does not end with the entry into
chosen businesses and geographical markets and setting the stage
for subsequent development. It has to devise means that facilitate
long-term survival and success of the company in those businesses
and markets. In other words, the corporate strategy must create
corporate or parenting advantage for the corporation on an ongoing
basis (Goold, Campbell & Alexander, 1996). However, before proceeding
further let me explain what I mean by corporate or parenting advantage.
Let us say there are three businesses A, B and C - A stands for
Automobile, B for Banking, and C for Cement. There are a number
of single business companies operating in these industries. At any
point in time the shareholders of a company X have the choice to
buy shares of these single business companies belonging to A, B
and C industries independently, thereby diversifying their own portfolio
of investment. The company X is justified in diversifying to A,
B and C businesses, only if the company can create more value for
the shareholders by virtue of simultaneous presence in A, B and
C businesses, than what shareholders could have achieved from the
return on three independent stocks in these industries. In other
words, the shareholder value of the diversified company X has to
be more than the summation of the share holder value of the individual
companies competing in A, B, and C industries independently. The
company X must be able to create this additional value, attributed
to the corporate or parenting advantage, linking these three businesses
together to create more value for the shareholder. This is achieved,
if multi-market presence leads to the enhancement of competitive
advantage in individual businesses rather than to its depletion;
and the corporate overhead costs of managing a diversified corporation
is less than the advantages obtained by bringing together various
skills and resources.
The moot question here is - how is the corporate advantage created
and sustained. To achieve corporate advantage a corporation needs
to do at least the following:
>Better choice of the business to compete in
>Superior acquisition and development of corporate resources
>Effective deployment, monitoring and controlling of corporate
resources
>Sharing and transferring of resources from one business to other
leading to synergy
Land or property, capital, information, patents, brand names, goodwill
and relationship with the regulators, suppliers, bankers and investors,
etc., are the corporate resources of a firm that are useful for
all businesses. Typically, the corporate headquarters of a diversified
corporation works as the internal market where different business
units compete for various corporate resources. Moreover, any diversified
corporation needs a set of distinctive resources and competencies
or strategic assets that are competitively superior and have the
potential to contribute to the benefit of multiple businesses. In
fact, these resources lie at the heart of creation of corporate
advantage. Core competencies and capabilities are such types of
resources, perhaps the most valuable among them. Therefore, in spite
of the internal competition among businesses for corporate resources,
the corporate headquarters has to ensure that the spirit of collaboration
exits and joint use of assets and sharing of core competencies and
capabilities happen across businesses.
Ownership structure (relative amounts of stock owned by individual
shareholders and institutional investors), composition of board
of directors (individuals responsible for representing the firm’s
owners by monitoring top-level manager’s strategic decisions),
executive compensation (use of salary, bonuses, and long term incentives
to align managers’ interests with shareholders’ interests)
and complex organization structure (e.g., creation of individual
business divisions) and management control systems and managerial
processes are the major internal governance mechanisms used to perform
the above activities effectively.
2.6
Core Logic Guiding Corporate Strategy
At the heart of a corporate strategy must be a clear logic of how
the corporate objectives, both profit as well as non-profit, will
be achieved. Most of the strategic choices of successful corporations
have a central economic logic that serves as the fulcrum for profit
creation. Some of the major economic rationale for the choice of
corporate strategy elements as identified by decades of research
are - a) exploiting operational economies of scope (shared activities,
core competencies), b) exploiting financial economies of scope (internal
capital allocation, risk reduction, obtaining tax advantages), c)
exploiting anticompetitive economies of scope (cross-subsidizing
multipoint competition, market power advantages), d) uncertainty
avoidance and efficiency, e) possession of general management skills
that help create corporate advantage, f) overcoming the inefficiency
in factor markets, and g) long term profit potential of a business.
The rationale is driven by the fundamental corporate objective of
creating greater shareholder value. Some of the non-economic rationale
for the choice of corporate strategy elements are - a) dominant
logic of the top management, b) inertia and commitment owing to
corporate history, c) employee incentives to diversify (maximizing
management compensation), d) desire for more power and management
control, e) ethical considerations and f) corporate social responsibility.
The core economic logic that drives General Electric’s choice
of business is market power advantage. Therefore it enters and remains
only in those businesses where it can have a dominant market position,
either having the highest or second highest market share. On the
other hand the core economic logic that drove Reliance Industries
for a series of vertical integration moves was to overcoming the
inefficiency in the factor markets. This is evident from the following
statement of Dirubhai Ambani as quoted by Ghoshal and Ramachandran
(2001):
“I was a buyer of this product (Polyester Fiber Yarn) all over
the world and I was observing what was going on…I went to a
major company in the West and saw how inefficient they were…and
the cost of all these inefficiencies were loaded on to the product
and was being passed onto me. I knew that we could manage the business
lot better, make more money than them, and yet supply better and
cheaper products to our mills.”
3.
Conclusions
Strategy formulation is a reiterative exercise. At every stage,
the strategist has to move back and forth to ensure the logical
consistency across different strategy elements. Once a set of logically
consistent elements of strategy is arrived at, commitment of the
whole organization is needed to implement the same. Structure, systems
and processes, and functional strategies, policies and action plans
are put in place that fit with, rather than contradict, different
elements of strategy. Achieving an internal fit of the organization
with strategy, getting all the resources channeled towards a given
direction and winning the commitment of people does not happen instantaneously.
They take time and investment. Therefore, though large investments,
knee jerk reactions and short-term tactical moves can often be camouflaged
as strategy, they are not the right ways of devising strategy. The
claim of an executive does not make any corporate move a strategy,
unless it fits into a broader, integrated and a consistent game
plan of the company.
Doing a good job of managing an enterprise inherently requires a
good dose of strategic thinking and actions. It is that evident
strategy is a multidimensional concept having an internally consistent
set of elements. Surprisingly, most strategists emphasize one or
two of the elements without giving any consideration to the others.
However, development of a strategy without attention to all these
elements leaves critical omissions and caveats. The better conceived
a company’s strategy and more proficient its execution, the
greater are the chances that the company will be a leading performer
in its markets. High-achieving enterprises are nearly always the
product of astute, proactive management, rather than the result
of lucky breaks or a long run of good fortune.
Strategic management in a dynamic environment is fascinating and
challenging because it is akin to managing a paradox. On one hand,
effective strategy implementation requires high degree of commitment
of the entire organization towards a set of interrelated strategy
elements fitting with the environment; on the other hand, good strategy
making demands flexibility to be in tune with the changing mood
of the environment and adjust continuously. The need for managing
this duality simultaneously by continuous
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