Post Graduate Diploma in Management

Batch 2024-26

Course Code: ST509 [B]

Course Title: Strategic Management II

Module 1: Introduction to Corporate Strategy

Module 1: Introduction to Corporate Strategy

1. What is Corporate Strategy?

Corporate Strategy refers to the highest level of strategic decision-making within an organization. It
defines the overall direction and scope of the firm by determining which industries or markets the
company should operate in, and how corporate value is created across different business units.
While business-level strategy focuses on how to compete in a specific market, corporate strategy
addresses the broader question of where to compete and how to manage a portfolio of businesses
to achieve long-term value creation.
For diversified firms operating across multiple industries, corporate strategy is critical in allocating
resources, setting investment priorities, and fostering synergies between different business units. It
acts as a guiding framework that aligns vision, mission, and execution across all subsidiaries.

2. Rationale for Corporations

Why Do Corporations Exist?
Corporations exist as an organizational form to enable value creation at scale. By operating under a
unified governance structure, corporations can coordinate activities, reduce transaction
inefficiencies, and pursue multi-industry operations that would be difficult to manage through
market-based transactions alone.
Some of the core purposes served by corporations include:
 Operating in multiple industries and geographies simultaneously.
 Achieving economies of scale and economies of scope.
 Reducing risk through business diversification.
 Creating value via internal coordination, cross-unit collaboration, and optimized resource
allocation.

Key Theoretical Rationales for Corporate Strategy

A. Transaction Cost Economics (Coase, Williamson)
According to transaction cost economics, firms internalise certain activities when the cost of
executing these transactions in the open market becomes too high. Such costs may arise due to
opportunistic behaviour, asset specificity, contractual complexity, or enforcement difficulties. In such
cases, organizing within a firm becomes more efficient than relying on external suppliers.
Example: Reliance Industries’ decision to backward-integrate into petrochemicals allows it to control
supply, reduce margin leakage, and eliminate coordination issues that would be difficult to manage
through independent contractors.

B. Resource-Based View (Barney, Wernerfelt)

The Resource-Based View (RBV) posits that firms should expand into new markets or industries if
they possess valuable, rare, inimitable, and non-substitutable (VRIN) resources. These resources may
include technology, brand equity, supply chain capabilities, or managerial expertise. The rationale for
corporate diversification, in this view, is to leverage internal strengths to generate competitive
advantage across multiple contexts.

Example: The Tata Group capitalizes on its strong brand, ethical reputation, and managerial
competence to operate across unrelated sectors like steel, software, automobiles, and hospitality.

C. Agency Theory (Jensen & Meckling)

Agency theory highlights the conflict of interest between owners (principals) and managers (agents).
While the corporate form enables separation of ownership and control, it also introduces the risk of
managerial opportunism. Managers may engage in excessive diversification, empire-building, or
projects that benefit themselves at the cost of shareholder value.
Implication: Corporate governance mechanisms such as board oversight, performance-based
incentives, and shareholder activism are essential to align managerial actions with value creation
goals. Diversification should be strategically justified and not merely a result of managerial ambition.

D. Strategic Leadership View

The strategic leadership perspective emphasizes the role of visionary leaders in shaping corporate
strategy. According to this view, strategy is not just an analytical outcome but a product of
entrepreneurial insight, long-term vision, and purpose-driven leadership. Leaders identify
opportunity domains, set priorities, and mobilize resources toward innovation and transformation.

Example: Elon Musk’s decision to expand Tesla into AI chips and robotics stems not from
conventional synergy analysis but from a larger strategic vision of technological convergence and
vertical integration.

Goals of Corporate Strategy

The fundamental goals of corporate strategy are:
 To maximise long-term shareholder value across all business units.
 To achieve synergies by enabling cooperation and knowledge sharing between units.
 To optimize the investment portfolio by allocating capital to the most promising
opportunities.
 To balance risks across geographies, product lines, and customer segments.

3. Diversification Strategy: Rationale and Levels

What is Diversification?
Diversification is a corporate-level strategy in which a firm enters new markets or industries that are
different from its existing core business. The aim of diversification is to spread business risk, capture
new growth opportunities, utilize underused resources, or exploit operational and financial
synergies.
Types of Diversification:
Type Description Example

Related Entering businesses similar Maruti Suzuki adding financial

Diversification to the core business services for vehicle buyers

Unrelated Entering entirely different ITC moving from tobacco into

Diversification industries FMCG, hotels, and agribusiness

Strategic Rationale for Diversification

A. Growth Opportunity
Firms may diversify to overcome saturation in their core markets and drive future growth. This is
especially common in emerging markets where conglomerates pursue multi-industry growth.
Example: Reliance Industries expanded from petrochemicals into telecom and retail to capitalize on
growth potential.

B. Risk Reduction
By diversifying into unrelated or uncorrelated industries, firms can reduce revenue volatility and
protect against industry-specific downturns.
Example: Tata Group operates across multiple sectors like steel, software, and hospitality, reducing
its reliance on any single industry.

C. Synergy Creation
When the combined value of businesses is greater than the sum of their parts, synergy is achieved.
Synergies can be:
 Operational: Shared R&D, supply chain, or branding (e.g., P&G).
 Financial: Internal capital markets and tax efficiencies.
 Managerial: Transfer of best practices and leadership talent.

D. Utilization of Excess Resources

Companies often diversify to make better use of underutilized assets such as brand equity,
distribution infrastructure, or proprietary technologies.
Example: Amazon’s AWS leveraged its internal IT infrastructure into a major cloud computing
business.
E. Market Power
Diversified firms may gain greater bargaining leverage with suppliers, regulators, or customers. They
may also cross-subsidize business units to strengthen their competitive position.

Risks and Challenges of Diversification

While diversification offers strategic benefits, it also comes with several risks:
 Overstretching resources and diluting managerial focus.
 Integration difficulties, particularly with acquisitions in unfamiliar industries.
 Cultural misalignment across diverse business units.
  Potential destruction of shareholder value, especially when diversification lacks strategic
coherence.
 Conglomerate discount in capital markets, where investors undervalue firms with complex,
opaque structures.

Levels of Diversification Strategy

Level Description Strategic Implication
90%+ revenue from Focused strategy,
Single Business
one business operational excellence
70-90% revenue from Moderate diversification
Dominant Business
one business risk
Multiple businesses
High synergy potential,
Related Business with shared
complex coordination
competencies
Portfolio of
Diversified risk, limited
Unrelated Business independent
synergy
businesses

Portfolio Analysis: BCG Matrix

The BCG Matrix helps in assessing a company’s diversified business units based on market growth
and relative market share.
Category Implication
Stars High growth, high market share – invest for future
Cash Cows Low growth, high market share – fund other units
Question Marks High growth, low market share – selective investment
Dogs Low growth, low market share – divest or restructure

Illustrative Examples of Diversification

Company Core Diversified Into Type

Tata Steel Software, Auto, Power, Hotels Related & Unrelated
Aditya Birla Textiles Cement, Financial Services Related
ITC Tobacco FMCG, Hotels, Agri-Business Unrelated
Amazon E-commerce Cloud (AWS), Video, Groceries Related (tech synergy)
Related (core tech, managerial
GE Engineering Aviation, Finance, Healthcare
systems)

Summary
 Corporate Strategy defines where a firm competes and how it creates value across
businesses.
 Corporations are structured to overcome market inefficiencies, allocate resources efficiently,
and scale capabilities.
 Diversification can be a powerful tool for growth, risk management, and synergy realization
—but must be guided by strategic fit and execution capability.
 Related diversification often provides synergy, while unrelated diversification spreads risk but
may dilute focus.
 Effective corporate strategy requires rigorous evaluation, disciplined execution, and
alignment with firm capabilities and leadership vision.
HBR Reading: Organisational Transformation
From Competitive Advantage to Corporate Strategy by Michael E. Porter

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